The U.S. House Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets considered oversight and disclosure legislation concerning China-based corporate issuers.

In the Majority Memorandum, staff described the use of variable interest entity structures by China-based companies. Staff explained that the VIE structure involves the creation of an offshore shell company that enters into contractual arrangements with a China-based operating company with which it shares a name. This creates the impression that the China-based company and shell company are the same firm. The shell company issues stock to public shareholders. However, the shell company is connected to the China-based operating company only through contractual agreements. Subcommittee staff estimated that two-thirds of U.S.-listed China-based companies use a VIE structure, potentially misleading U.S. investors who think they are investing in the operating company.

The Subcommittee considered:

• H.R. ____, the "Accelerating Holding Foreign Companies Accountable Act," which would prohibit trading with issuers that retain a public accounting firm not subject to inspection by the Public Company Accounting Oversight Board ("PCAOB") for two consecutive years; and

• H.R. 2072, the "Uyghur Forced Labor Disclosure Act," which would require the SEC to mandate issuer disclosure of activities connected to the Xinjiang Uyghur Autonomous Region.

The following experts testified:

• Karen M. Sutter, Specialist in Asian Trade and Finance at the Congressional Research Service, who recommended disclosure requirements such as (i) a 10K equivalent regarding ownership, shareholding and corporate ties, (ii) quarterly reports and (iii) separate financial statements for VIE contracts;

• Samantha Ross, Founder of AssuranceMark, who commended the SEC's and PCAOB's implementation of the Holding Foreign Companies Accountable Act, and called for vigilance to prevent China-based companies prohibited from U.S. trading from accessing public markets;

• Claire Chu, Senior Analyst at RWR Advisory Group, who recommended (i) cross-debarment authorities for U.S. economic and financial sanctions, (ii) expanding U.S. sanctions to Chinese companies related to the military, intelligence and securities sectors, (iii) a regulatory framework for index providers, and (iv) public reporting of activities connected to human rights violations; and

• Eric B. Lorber, Senior Director at the Foundation for Defense of Democracies, who testified that the U.S. must strike a balance between prohibiting Chinese issuers who do not comply with U.S. standards and raising reporting obligations to the point that they "chill the attractiveness of those very financial markets we aim to protect and foster."