On December 24th, 2021, the China Securities Regulatory Commission (“CSRC”) proposed two draft rules regarding domestic companies’ overseas securities issuance and listing (“overseas listing”), the Measure for Filing Administration of Overseas Securities Issuance and Listing by Domestic Enterprises (“Measure”) and the Regulation of the State Council for Administration of Overseas Securities Issuance and Listing by Domestic Enterprises (“Regulation”).
Overseas Listing
Pursuant to the drafted Regulation, overseas listings are divided into direct and indirect overseas listings. Direct overseas listings are related to a company registered in China who is listed overseas while indirect overseas listing refers to companies whose main business activities are in China but issue or list securities overseas in the name of overseas companies based on the equity, assets, income or other similar rights and interests of domestic companies.
However, if any of the following situations occur, companies are not allowed to be listed overseas regardless of whether the overseas listing is direct or indirect:
(1) Situations where listings and financing are explicitly prohibited by Chinese laws, regulations and relevant provisions;
(2) After being examined and determined by the relevant competent department of the State Council according to law, such overseas listing will threaten or endanger national security;
(3) There are major ownership disputes over equity, main assets, core technology, etc.;
(4) Domestic enterprises and their controlling shareholders and actual controllers have committed crimes of corruption, bribery, encroachment of property, misappropriation of property or undermining the order of the socialist market economy within the past three years, or are being investigated by a judicial authority because of suspected crimes or suspected major violations of laws and regulations;
(5) Directors, supervisors and senior managers have been subject to administrative punishment within the past three years with serious circumstances, or are being investigated by a judicial authority because of suspected crimes or suspected major violations of laws and regulations;
(6) Other circumstances recognized by the State Council.
Record Filing
To evaluate whether companies are allowed to be listed overseas, such companies shall file registration with the CSRC to record and report the relevant information.
The record filing procedure shall start within 3 days upon which the company submits documentation for overseas initial public offering and listing, including but not limited to:
(1) Filing report and relevant commitments;
(2) Regulatory opinions, filing or approval documents issued by industry competent departments (if applicable);
(3) Safety assessment review opinions issued by relevant departments (if applicable);
(4) Domestic legal opinions;
(5) Prospectus.
Meaning
Before the draft rules, companies indirectly listed overseas were not regulated by CSRC at all, and such a loophole could cause problems should they violate regulatory rules in a foreign market, as Luckin Coffee did. In addition to which, such a violation may seriously damage foreign investors’ confidence in Chinese companies with the reputation of Chinese companies as a whole damaged as well.
Luckin Coffee, a chain coffee store listed on NASDAQ in 2019, was fined $180 million to settle U.S. Securities and Exchange Commission’s (SEC) accounting fraud civil charges. During the investigation, the SEC asked CSRC for assistance as all of Luckin Coffee’s operations were on the Chinese mainland. However, the Cayman Island-registered company was not under the jurisdiction of the Chinese securities regulator and its listing didn’t go through the CSRC.
With the application of the new rules, it will provide companies with a formal process to follow and give overseas regulators assurances when dealing with Chinese companies,
Conclusion
As still currently in the draft stages, the Regulation and the Measure are both not finalized yet, which means that some clauses may still be altered. In addition, the draft rules are not detailed enough for companies to directly follow, as more correspondingly detailed rules will also be promulgated in the future, so as to ensure that overseas listings can be properly supervised by CSRC.
Our Group will continue following the updates of the rules. If you want to know more about the rules related to overseas listing, don’t hesitate to contact us: info@dandreapartners.com.
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