December 21, 2021

Corp Fin Publishes Sample Letter to China-Based Companies

Yesterday, the Staff of the Division of Corporation Finance published a sample letter highlighting comments issued to companies that are based in, or that have the majority of their operations in, the People’s Republic of China. The lead-in to the sample letter notes:

[T]he Division is issuing comments to China-based companies seeking more specific and prominent disclosure about the legal and operational risks associated with China-based companies. The Division’s comments focus on the need for clear and prominent disclosure regarding the structure of the company, including the relationship between the entity conducting the offering and the entities conducting the operating activities, risks associated with a company’s use of the VIE structure, and the potential impact on the company’s operations and investors’ interests if such structure were disallowed or the contracts were determined to be unenforceable. The Division’s comments also focus on additional legal, regulatory, and enforcement risks that may apply to investments in China-based companies, such as the potential impact of the Holding Foreign Companies Accountable Act and related rules and any necessary PRC permissions a China-based company may need to operate its business or offer securities to foreign investors.

The Staff goes on to point out that for a SPAC with sponsors based in China, executive offices in China, a majority of its executive officers and/or directors that are located in or have significant ties with China, or that is contemplating a merger with a company incorporated in China, “specific disclosure about these circumstances is warranted to meet the company’s disclosure obligations.” The Staff indicates that the disclosure should address the risks associated with the SPAC’s operations, as outlined in the sample letter. Also, for China-based companies with ongoing SEC periodic reporting obligations or that are engaged in capital raising transactions via takedowns from an effective shelf registration statement, the Staff expects prospectus supplements or incorporated periodic or current reports (and future periodic reports) to disclose the information and risks discussed in the Staff’s sample letter.

– Dave Lynn