On December 24, 2021, China Securities Regulatory Commission (“CSRC”) issued draft rules and measures on the direct and indirect offshore listings of onshore companies for public comments.  The deadline for submitting public comments is January 23, 2022.

Applicable to VIE Companies

The draft rules and measures consist of general management rules on offshore listings of onshore companies (“Management Rules”), and implementation measures related to the filing of such offshore listings (“Filing Measures”, together with the Management Rules, the “Draft Rules”).  The Draft Rules require onshore companies to file certain reports and information with the CSRC and other competent governmental authorities prior to seeking either direct or indirect offshore listings.  In addition to direct offshore listing (as defined by the Draft Rules) which includes traditional initial public offering and bond issuance,  the Draft Rules also define indirect offshore listings as offshore public offering by offshore companies which are controlled by onshore companies or beneficial owners through the variable interest entity (VIE) arrangements, also known as “red chip companies”.  The filing requirements under the Draft Rules are applicable to both the direct and indirect offshore listings.

The Draft Rules define “indirect offshore listing” to include the offshore listings of companies whose principal business operations are conducted within the PRC, even though they are incorporated in other jurisdictions.  The determination of whether a company’s principal business operations are conducted within the PRC will mostly be based on facts, including consideration of factors such as whether the revenue, gross profit, total assets and net assets of the PRC domestic entities in the issuer group account for more than 50% of those for the whole issuer group, the citizenship and residency of the senior management personnel of the issuer, and the location of the issuer’s headquarters.

Listings and Events that Would Require Filing

The listings that would require filing under the Draft Rules include initial public offering, issuance of publicly listed securities (including without limitation re-financing), SPAC and De-SPAC transactions, full circulation transactions (applicable in offerings on Hong Kong Stock Exchange), etc.  There are concerns heard that to provide filings for some of these transactions may not be practical and it may be very difficult to complete such filing within the prescribed time frame, and it remains to be seen whether the actual promulgated rules in the future would address these concerns.  In addition to the initial filing, in the event that certain material changes listed in the Filing Measures (e.g., material change in the issuer’s principal business, equity structure, or listing plan) occur after the filing is completed, but prior to the actual listing takes place, the issuer needs to prepare updated filing materials.  If certain material events enumerated in the Filing Measures (e.g., change of control, material non-compliance of laws, governmental investigations, voluntary or mandatory termination of listing) occur after the listing has taken place, the issuer has obligation to report details of such events to the CSRC in accordance with the Filing Measures.

Review and Prohibited Listings

According to the Draft Rules, the CSRC will not engage in substantive review to determine whether such issuer has satisfied applicable listing requirements.  Instead the Draft Rules set forth the bottom line and negative list for the offshore listings.  Specifically, the Draft Rules prohibit offshore listings that would fall into the following broad categories: listings which are prohibited by other applicable laws and regulations of the PRC, or may endanger national security as determined by the State Council, or involve material disputes relating to the ownership of the issuer’s equity, major assets, or core technology, or that involve violations of laws or criminal activities, etc.  The Draft Rules require the issuer and its controlling shareholders, actual controlling persons, directors and officers to ensure the accuracy and completeness of the filed information and materials, and also require the intermediaries involved in the listing process to ensure the accuracy and completeness of the documents produced or issued by them.

It is also noteworthy that the Management Rules have linked the filing of offshore listing to the security review for cross-border transfer of personal information and important data under the PRC laws and regulations related to cybersecurity and privacy protection.  The relevant official regulations for such security review have not been promulgated but the Management Rules have specified that if, based on the information filed, such a security review should be conducted, then the authorities involved should ensure that such security review takes place