Analysis on Supervision Issues of Chinese-funded Enterprises' Overseas Listing

There are differences in the regulatory policies of the regulatory authorities for different listing models, which may lead to regulatory failure

For domestic enterprises, there are great differences in the regulatory methods faced by different overseas listing methods. The reason why the "small red chip" model came into being is to avoid the approval of various regulatory authorities. For example, the establishment of a special purpose company overseas by individual shareholders can circumvent the regulations of the Ministry of Commerce and the National Development and Reform Commission on the need for approval and filing for the establishment of a special purpose company overseas; Regulations that the company needs to be approved for direct overseas listing; controlled by the VIE agreement, to avoid the approval requirements of the Ministry of Commerce for related mergers and acquisitions and the restrictions on foreign investment access in some industries in my country.

At present, most of the regulatory authorities in my country have adopted a tacit attitude towards the overseas listing of the "small red chip" model, and there are no clear prohibitive regulations and corresponding normative management regulations. The only existing supporting policies are the “Notice of the State Administration of Foreign Exchange on Issues Concerning the Administration of Overseas Investment and Financing and Return Investment of Domestic Residents through Special Purpose Companies” (Huifa [2014] No. 37) issued by the foreign exchange bureau in 2014. The registration of individual special-purpose companies allowed by the foreign exchange bureau is generally regarded as a "pass" for the regulatory authorities to acquiesce in the overseas listing of "small red chips". In fact, the foreign exchange bureau does not have the power to determine whether the overseas listing of enterprises is legal and compliant.

At present, foreign exchange supervision focuses on the direct overseas listing of enterprises, and there are still many regulatory blind spots for indirect listing.

At present, a relatively complete data collection and registration management model has been formed for the direct overseas listing of Chinese-funded enterprises, and the entire process of supervision and coverage has been achieved for the overseas listing of enterprises, cross-border receipts and payments, and use. However, for indirect overseas listing, there are only the registration requirements for special purpose companies and information disclosure requirements on whether foreign-invested enterprises are return-invested enterprises. There are many regulatory blind spots for specific overseas listing information.

First, the registration information of special purpose companies lacks specific information on overseas listings. Although the current special purpose company registration information includes whether the special purpose company itself is a listed company, it lacks specific information such as the listed exchange, the scale of fundraising, and the plan for the use of the raised funds. Moreover, the listed entities that usually adopt the special purpose company structure are not the first-tier special purpose companies, and the collected information on whether they are listed overseas does not accurately reflect the actual scale and situation of overseas listings.

Second, foreign direct investment (FDI) registration and special purpose company registration information have not been effectively linked. For companies that adopt indirect listing, although they will apply for special purpose company registration and FDI registration respectively, but the two belong to the foreign direct investment (ODI) and FDI business modules in the system, and the registered information is also independent of each other and cannot be related to each other. , has not established and formed a complete management closed loop, which is not conducive to grasping the overall structure of overseas listing from the whole picture.

Third, there are blind spots in the supervision of cross-border funds involved in indirect listing. Although the listed entities are usually overseas under the indirect listing model, the overseas companies are only shell companies, and their actual assets and interests and production and operation activities are generated by domestic companies. Dividends, repurchases, and shareholdings all need to remit funds from relevant domestic entities. . However, at present, there is a lack of effective management of the flow of funds raised by overseas listed entities. Enterprises have a large choice in the selection of the scale, duration and method of listing funds to avoid supervision and facilitate themselves. It is not excluded that some enterprises use this to transfer assets. Possibility of transferring the liabilities overseas while keeping the liabilities onshore.

There are new changes in the issuance methods of overseas stock markets, and domestic policy support needs to be improved and updated

In terms of market environment and regulatory rules, foreign stock markets are more relaxed, so they are also faster in terms of innovation. New listing models such as SPACs have emerged, and there is a tendency to develop into the mainstream. At present, although domestic enterprises can merge and list with SPACs through the establishment of special purpose companies, there is still a lack of relevant support policies for domestic entities to participate in the establishment of SPACs, and there are certain operational difficulties in practice.

For domestic individuals, if a SPAC is established overseas for listing, it will not necessarily be merged with a domestic entity or its affiliates, so it may not necessarily have a return investment structure or potential investment structure, and the registration with the existing special purpose company must have a return journey. The requirements of the investment structure are inconsistent.

At the same time, the SPAC also requires the founder to pay a certain amount of cash at the beginning of the establishment, which is also in conflict with the current prohibition of domestic individuals to directly remit funds for the establishment of special-purpose companies. For domestic institutions, in theory, in accordance with the ODI management requirements, under the premise of approval and filing by the upstream competent authority, it is possible to set up a SPAC company overseas. However, my country has relatively strict approval requirements for overseas investment of quick-set, quick-release, mother-kid-child and limited partnership types, and it will also face many obstacles in actual operation. Judging from the current situation, although SPAC companies are in full swing in the US stock market, there are few cases of direct establishment by domestic entities.

The legality of the protocol control is doubtful, and there is still a "grey" management area in the indirect listing using the VIE structure

As a common structure under the indirect listing model, the VIE structure provides convenience for some companies to avoid regulatory approvals and bypass overseas listings. However, because WFOE controls actual domestic operating entities only through signing a series of agreements, rather than direct equity control, so in practice There are still many problems in the determination of its legitimacy and effectiveness in operation.

The Ministry of Industry and Information Technology and the Press and Publication Administration have clearly stipulated that foreign investors are prohibited from directly or indirectly participating in domestic value-added telecommunications and online game business operations. In 2011, the Ministry of Commerce issued the "Regulations of the Ministry of Commerce on the Implementation of the Security Review System for Foreign Investors' Mergers and Acquisitions of Domestic Enterprises", which stipulates that, "For foreign investors' mergers and acquisitions of domestic enterprises, it is necessary to judge whether an M&A transaction is a M&A security review based on the substance and actual impact of the transaction. foreign investors shall not substantially evade M&A security review in any way, including but not limited to entrusted holdings, trusts, multi-level reinvestment, leasing, loans, agreement control, overseas transactions, etc. The Measures for the Administration of Payments by Non-Financial Institutions stipulates that the scope of foreign-invested payment business, the qualifications and capital contribution ratios of overseas investors shall be separately prescribed by the People's Bank of China and reported to the State Council for approval. In 2011, Alipay dismantled the VIE agreement control structure between itself and Alibaba in order to obtain a payment license from the People's Bank of China.

On the whole, the regulatory authorities take a more cautious attitude towards the legitimacy of indirect control through protocol control. In specific practice, there are many precedents in which the regulatory authorities or judicial adjudication agencies have determined that the structure is illegal, although the VIE structure is listed overseas. It is widely used in China, but there is no exact basis for its legality. In addition, since the control relationship formed by agreement control is realized based on a series of agreements signed by both parties, its actual control in legal relationship is significantly weaker than equity control. Once there is a conflict of interest between foreign investors and domestic founders, Foreign investors may face the predicament that their rights and interests cannot be realized.

The political risk of Chinese concept stocks listed in the United States is heating up, and the potential risk of targeted strikes is worthy of attention

In recent years, competition between China and the United States has become increasingly fierce in various fields. The US government's suppression of the Chinese government and enterprises has become the norm in the economic, trade and financial fields. The political risks faced by Chinese stocks listed in the United States are on the rise. In May 2020, the U.S. Senate passed the Foreign Company Accountability Act, which stipulates that any foreign company that fails to comply with the audit requirements of the U.S. Public Company Accounting Oversight Board for three years will be barred from listing in the U.S., and certain securities issuers will be required to certify. It is not owned or controlled by a foreign government. The bill conflicts with the regulatory rules that audit manuscripts must be retained in my country during the issuance of securities in China.

In August 2020, the U.S. Department of the Treasury's official website released the "Report on Protecting U.S. Investors from Major Risks of Chinese Companies" and put forward five audit recommendations for Chinese companies listed in the United States, including raising the issue of Chinese companies planning to list in the United States. The listing threshold requires Chinese concept stocks listed in the United States to submit audit working papers to the American Public Company Accounting Oversight Committee, otherwise they will face delisting penalties.

In the future, if the Sino-US game confrontation intensifies, it cannot be ruled out that the US government will launch a crackdown policy on Chinese concept stocks listed in the United States, and Chinese concept stocks may face multiple risks. The first is the risk of severe stock price fluctuations. According to incomplete statistics, since 2010, a total of 106 Chinese concept stocks listed in the United States have been shorted by institutions, accounting for nearly 40% of the listed Chinese concept stocks.

In the future, if the U.S. government intensifies its crackdown on Chinese concept stocks and cooperates with institutions to sell shorts on a large scale, it will cause violent fluctuations in the stock prices of Chinese concept stocks. The second is the risk of international payments imbalance. Under the circumstance that the US-listed Chinese concept stocks have reached a certain scale, if the US government cracks down on a large number of repurchase and delisting behaviors of Chinese concept stocks in a short period of time, there will be a huge demand for remittance of funds from China to overseas. May lead to the risk of international balance of payments imbalance. The third is the risk of damage to the image of the capital market. If the U.S. government continuously introduces policies to crack down on Chinese concept stocks, it may lead to a large-scale delisting of Chinese concept stocks and a sharp drop in stock prices, which will have a negative impact on the image of Chinese companies in the global capital market. In the future, Chinese companies plan to list in overseas capital markets. Financing will also become difficult.