SEC Imposes New Disclosure Requirements on Chinese Companies Seeking IPOs in the U.S.

2021-07-31 09:40:08

On July 30, 2021, the U.S. Securities and Exchange Commission ("SEC") issued a statement on investor protection, which imposes further disclosure requirements on Chinese companies seeking to list in the U.S. in light of recent guidelines and restrictions issued by the Chinese government regarding overseas fundraising by Chinese companies. In the statement, SEC Chairman Gary Gensler stated that he has directed staff to require additional disclosures from foreign issuers associated with Chinese operating companies before their registration statements become effective, and to conduct targeted additional reviews of applications submitted by companies with significant operations in China.

The statement highlights that the Variable Interest Entity (VIE) structure, a common arrangement used by many Chinese operating companies, poses potential risks to U.S. investors. The VIE structure typically involves setting up an offshore shell company in another jurisdiction (e.g., the Cayman Islands) and issuing shares to the public. According to the statement, this arrangement, which relies on contractual agreements with the operating company rather than direct equity ownership, creates a "connection" between U.S. investors and Chinese companies. However, ordinary investors may not realize that they are holding shares in a shell company rather than in the Chinese operating company itself.