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Statement on investor protection related to recent developments in China

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Jul 30, 2021

On July 30, 2021, SEC Chair Gary Gensler issued a statement highlighting disclosure concerns with China-based companies. In a number of sectors in China, companies are not allowed to have foreign ownership and cannot directly list on exchanges outside of China. To raise money on such exchanges, many China-based operating companies are structured as Variable Interest Entities (VIEs).

In light of the recent developments in China and the overall risks with the China-based VIE structure, he asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective. In particular, he asked staff to ensure that these issuers prominently and clearly disclose:

  • That investors are not buying shares of a China-based operating company but instead are buying shares of a shell company issuer that maintains service agreements with the associated operating company. Thus, the business description of the issuer should clearly distinguish the description of the shell company’s management services from the description of the China-based operating company;
  • That the China-based operating company, the shell company issuer, and investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements; and
  • Detailed financial information, including quantitative metrics, so that investors can understand the financial relationship between the VIE and the issuer.

Review the statement on the SEC’s website.

Correction list for hyphenation

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