On July 4, 2014, the State Administration of Foreign Exchange (SAFE) promulgated the Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing and Return Investment by Domestic Residents Utilizing Special Purpose Vehicles (Circular 37), which became effective July 14, 2014.

Replacing an earlier circular published by SAFE in 2005 (Circular 75), Circular 37 further simplifies the registration process for Chinese residents seeking the round-trip investment transactions where Chinese companies (Domestic Entities) are re-organized to create an offshore holding company (the SPV) that will control the Domestic Entities and seek offshore financing. Also, for the first time overseas investments by Chinese individuals are formally legalized under Circular 37.

Circular 37 features the following significant changes from Circular 75:

• Contribution of Offshore Assets. Contrary to Circular 75 under which Chinese residents were only permitted to use their domestic assets to establish the SPV, Circular 37 allows Chinese investors to contribute their legally-held offshore assets into the SPV.

• Initial Registration. Under Circular 75, Chinese residents must register the SPV with SAFE before the SPV undertakes any substantial capital change (e.g. equity financing, equity transfer or round-trip investment). However, under Circular 37, SAFE registration is only required prior to the Chinese residents’ contribution of assets into the SPV—implying that the SPV are permitted to solicit offshore financing prior to the SAFE registration.

• Scope of Amendment Registration. Circular 37 narrows the scope of events that requires an amendment SAFE registration. Under Circular 37, in the event of a change to any basic information of the SPV (e.g. identity or name of the Chinese investor and the term of operation) or a change in the Chinese investor’s shareholding in the SPV, an amendment SAFE registration is required. The requirements under Circular 75 for an amendment SAFE registration for any equity financing, establishment of subsidiaries and material change in the capital structure by the SPV have been eliminated.

• Employee Stock Options Plan. Under Circular 37, the employees of the Domestic Entities are now permitted to file with SAFE any stock or option incentives received from the SPV. Prior to Circular 37, Chinese employees were not able to pay for stocks of the SPV unless the SPV was already listed on an offshore stock exchange.

• Makeup Registration. Circular 37 clarifies that if the Chinese residents have contributed into the SPV without registration, they are required to file for a makeup registration with SAFE. Notably, Circular 37 removes the language in Circular 75 requiring the Chinese residents to submit evidence that there was no violation of SAFE regulations and a special audit report listing capital flows between the SPV and the Domestic Entities for such makeup registration. These stringent requirements have been cited to discourage makeup registrations.