SEC Chair Gary Gensler instructed staff to seek certain disclosures from China-based operating companies and offshore issuers associated with such companies.
In a public statement, Mr. Gensler explained that the government of the People's Republic of China recently provided "new guidance to and placed restrictions on China-based companies raising capital offshore." He noted that this is relevant to U.S. investors because many China-based operating companies circumvent restrictions on foreign investments by using Variable Interest Entities ("VIEs"), which are offshore shell companies that issue stock to public shareholders. He stated that "this arrangement creates 'exposure' to the China-based operating company, though only through a series of service contracts and other contracts."
Mr. Gensler expressed concern that U.S. investors may not realize that they hold stock in a shell company rather than a China-based operating company. He asked staff to ensure that such issuers "prominently and clearly" disclose:
- that investors are buying shares of a shell company issuer (and, accordingly, to ensure that the issuer "clearly distinguish" between the description of the shell company and the China-based operating company);
- that investors face uncertainty because the government of China may take actions that significantly affect the operating company; and
- the financial relationship between the VIE and the issuer.
Additionally, Mr. Gensler asked staff to ensure that China-based operating companies seeking to register with the SEC directly or through a shell company disclose:
- whether Chinese authorities gave approval to the operating company and issuer to be listed on a U.S. exchange, the likelihood that an approval could be denied or rescinded, and the duty to disclose if approval was rescinded; and
- that the operating company may be delisted in the future if the Public Company Accounting Oversight Board is unable to inspect the firm within three years, pursuant to the Holding Foreign Companies Accountable Act.
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