On December 20, 2021, the Division of Corporation Finance of the United States Securities and Exchange Commission (“Division”) issued the model letter (“Letter”) to companies based in or having the majority of their operations in the People’s Republic of China (“China-Based Companies”). The letter requires China-based companies to disclose in their public filings the “most material, specific and appropriate” risks associated with investing in these companies in accordance with their disclosure obligations under federal securities laws and to allow investors to make informed investment decisions.
In the letter, the division provided a sample comment letter to a China-based company identifying the types of disclosures that should be addressed, including relevant risks and potential impacts on that company’s operations. These matters include, (i) the corporate structure of the China-based company, (ii) the relationship between the entity making the offer and the entities performing the operating activities, (iii) the operations carried out by the subsidiaries and through contractual arrangements with a China-based variable interest entity (“VIE”), (iv) the potential impact if the VIE structure is declined or the contracts are deemed unenforceable, (v) the potential impact of the Foreign Holding Company Liability Act and related rules in the listing and trading of its securities, (vi) the required authorization or approval from Chinese authorities to operate its business or offer securities to foreign investors, (vii) how cash is transferred within the organization and (viii) the Chinese government’s significant oversight and discretion over the conduct of the company’s affairs.
For SPACs, the Division also requires them to disclose (i) whether their sponsor(s) or executive office(s) are in China or have significant ties to China, (ii) whether they are considering merging with a company incorporated in China, (iii) what challenges SPAC investors might face in asserting their rights under SPAC’s control agreements with the VIE, (iv) any impact that Chinese laws or regulations may have on SPAC’s ability to complete a business combination with an operating company in China and (v) the cash flows associated with the business combination.
A copy of the letter can be viewed here.