Comparison of Regulatory Policies for Chinese-funded Enterprises' Overseas Listing Models (2)

indirect listing model

The indirect listing model refers to a model in which a Chinese domestic company establishes a holding company overseas, injects the assets and interests of a Chinese domestic enterprise into the overseas holding company, and raises funds by listing overseas in the name of the overseas holding company.

"Big Red Chip" Model

The "big red chip" model refers to the operation mode in which domestic companies or institutions establish holding companies overseas, inject assets or interests of domestic operating entities into overseas holding companies, and then conduct financing and listing through overseas holding companies. Most of the overseas listings using the "big red chip" model are state-owned enterprises, such as China Mobile, CNOOC, Beijing Enterprises, Shanghai Industrial Holdings, etc.

Under the "big red chip" model, there are many regulatory departments and approval links involved, and the operation is relatively complicated. If a domestic enterprise establishes an overseas BVI company, according to the Measures for the Administration of Overseas Investment of Enterprises (Decree No. 11 of 2017 of the National Development and Reform Commission) and the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Decree No. 10 of the Ministry of Commerce in 2006), It should be approved and filed by the National Development and Reform Commission and the Ministry of Commerce.

For the listing process of overseas special-purpose companies, according to the "Notice of the State Council on Further Strengthening the Administration of Issuance of Stocks and Listing Overseas" (Guo Fa [1997] No. 21, also known as "97 Red Chip Guidelines") and the Ministry of Commerce 2006 Order No. 10 Provisions shall be approved by the SFC. In terms of return investment, according to the 2006 Decree No. 10 of the Ministry of Commerce, domestic companies, enterprises or natural persons should report to the Ministry of Commerce for approval when they acquire and acquire domestic companies that are related to them in the name of companies legally established or controlled overseas.

Due to the large number of approval procedures under the "big red chip" model, there have been few cases of listing in the "big red chip" model in recent years. Powerful large state-owned enterprises or private enterprises tend to choose overseas direct listings, while start-ups Emerging private enterprises tend to choose the "small red chip" model.

"Little Red Chip" Model

The "small red chip" model refers to the establishment of companies overseas by individual shareholders of domestic enterprises (controlled by domestic natural persons), and the assets or interests of domestic operating entities are directly or indirectly injected into overseas companies, and the overseas companies are listed for financing. model.

Different from the "big red chip" model, the "small red chip" makes full use of the convenience of individuals to set up special purpose companies in offshore centers such as the Cayman Islands, and avoids the Ministry of Commerce and the National Development and Reform Commission's management requirements for institutional overseas investment to be filed and approved. It greatly reduces the difficulty of overseas listing of enterprises.

Since the 2006 Decree No. 10 of the Ministry of Commerce stipulates that the merger and acquisition of domestic affiliated enterprises by the return investment enterprises shall be subject to the approval of the Ministry of Commerce, and my country still has foreign investment access restrictions in the fields of media, education, and the Internet. For private enterprises entering the industry, the use of variable interest entity (Variable Interest Entity) VIE agreement control has become a common choice. Under the VIE model, the Wholly Foreign Owned Enterprise (WFOE) investing in the return journey realizes the control and financial consolidation of the actual operating company by signing various agreements with the domestic company instead of direct equity control. The adoption of the VIE model not only avoids the regulatory requirements of the commercial department for related mergers and acquisitions to be approved, but also avoids the management restrictions on the access of foreign capital in some industries, so it has become the structure adopted by many companies under the "small red chip" model. .

"SPAC" mode

Special Purpose Acquisition Company (SPAC), as a listing method emerging in the US capital market in recent years, is widely popular due to its low listing threshold, high efficiency and low cost. At the beginning of the establishment of SPAC companies, there is often only cash but no specific business. After the promoters rely on their own market influence and appeal to help the SPAC company go public and raise funds, they then look for and acquire one or more target companies with high growth and development prospects, which will be listed on the market. The identity is "transferred" to the target company to achieve the purpose of financing and listing of the target company.

From the perspective of specific practice, it is relatively rare for domestic entities to directly set up SPAC companies overseas for listing. However, some domestic enterprises choose to set up a "small red chip" framework to establish overseas entities, and then achieve this through special-purpose mergers with already established and listed SPACs. Overseas listing, the usual structure is shown in Figure 3. Compared with other overseas listing methods, under the SPAC model, only the company planning to go public and the management of the listed “cash shell” SPAC company can reach an agreement on the merger and acquisition, so that the listing can be realized. There are significant advantages in terms of completion time and cost.

Due to the many advantages and conveniences of listing in the SPAC model, and since the outbreak of the epidemic in 2020, the world's major economies have adopted large-scale monetary easing policies in response to the epidemic, resulting in excess global capital liquidity. Therefore, the scale of SPACs has grown rapidly in 2020. According to statistics from the SPACInsider website, SPAC companies listed on the US stock market in 2020 showed explosive growth. A total of 248 companies went public through SPAC, a year-on-year increase of 320%, accounting for 52.7% of the number of US stock IPOs that year. The amount of funds raised was 83.042 billion US dollars, a year-on-year increase of 510%, accounting for 53.5% of the US stock IPO funds raised that year. Since 2021, as of April 20, there have been 308 SPAC companies listed on the U.S. stock market, raising a total of US$99.995 billion, and the number and scale of listed companies have exceeded that of 2020.

In addition to the United States, other financial centers in the world are also actively exploring the establishment of a SPAC listing mechanism to attract more capital and enterprises. The London Stock Exchange's SPAC listing system is relatively mature. In the near future, it plans to further relax regulatory requirements and cancel some investor protection policies to attract more SPAC companies to list. There is no precedent for a SPAC company listing in Hong Kong, China, but the person in charge of the Hong Kong Stock Exchange has also expressed his intentions recently.

From the perspective of specific practice, it is relatively rare for domestic entities to directly set up SPAC companies overseas for listing. However, some domestic enterprises choose to set up a "small red chip" framework to establish overseas entities, and then achieve this through special-purpose mergers with already established and listed SPACs. Listed overseas. Compared with other overseas listing methods, under the SPAC model, only the company planning to go public and the management of the listed “cash shell” SPAC company can reach an agreement on the merger and acquisition, so that the listing can be realized. There are significant advantages in terms of completion time and cost.

Due to the many advantages and conveniences of listing in the SPAC model, and since the outbreak of the epidemic in 2020, the world's major economies have adopted large-scale monetary easing policies in response to the epidemic, resulting in excess global capital liquidity. Therefore, the scale of SPACs has grown rapidly in 2020. According to statistics from the SPACInsider website, SPAC companies listed on the US stock market in 2020 showed explosive growth. A total of 248 companies went public through SPAC, a year-on-year increase of 320%, accounting for 52.7% of the number of US stock IPOs that year. The amount of funds raised was 83.042 billion US dollars, a year-on-year increase of 510%, accounting for 53.5% of the US stock IPO funds raised that year. Since 2021, as of April 20, there have been 308 SPAC companies listed on the U.S. stock market, raising a total of US$99.995 billion, and the number and scale of listed companies have exceeded that of 2020.

In addition to the United States, other financial centers in the world are also actively exploring the establishment of a SPAC listing mechanism to attract more capital and enterprises. The London Stock Exchange's SPAC listing system is relatively mature. In the near future, it plans to further relax regulatory requirements and cancel some investor protection policies to attract more SPAC companies to list. There is no precedent for a SPAC company to go public in Hong Kong, China, but the person in charge of the Hong Kong Stock Exchange is also recently studying the feasibility of the SPAC mechanism. SINGAPORE plans to list its first SPAC company in 2021. It is foreseeable that in the future, there will be more and more cases of Chinese-funded enterprises going public overseas using the SPAC model. However, at present, domestic regulatory agencies still lack corresponding supporting policies for the SPAC listing model, and operational problems may be encountered in specific practice.