Subsequent to the taking effect of the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Measures”) released by China Securities Regulatory Commission (the “CSRC”), as of 29^th June 2023, 44 domestic companies who seek to launch overseas securities offering and listing activities(the “Overseas Offering and Listing”), either in direct or indirect form, have received the request from CSRC for supplementary and/or amended material in respect of Overseas Offering and Listing. Therefore, we closely and consistently observe the principle by which and the tendency of CSRC supervises and regulates the Overseas Offering and Listing.

We notice that the major issues in course of CSRC’s review for the filing of issuer could be generally concluded and categorized into eight aspects as follows:

(1) Shareholder structure and shareholding entrustment, paid-in registered capital and corporate history

(2) VIE controlling and the registration requirements under SAFE Circular 37

(3) Compliance of business

(4) Connected transaction and business independence

(5) Previous offering and listing

(6) Significant fluctuation of financial statistics

(7) Future plan and use of proceeds of offering

(8) Proprietary assets

This article will briefly summarize the vital aspects on which the CSRC exert the attention in course of its reviewing the filing of issuer pursuant to the Measures as well as the Guidelines on the Application of Regulatory Rules – Overseas Issuance and Listing Category No. 1 (the “Guidelines 1”), Guidelines on the Application of Regulatory Rules – Overseas Issuance and Listing Category No. 2: Guidelines on the Content and Format of Filing Material(the “Guidelines 2”) and Guidelines on the Application of Regulatory Rules – Overseas Issuance and Listing Category No. 3: Guidelines on Content of filling report (the “Guidelines 3”).

Shareholding Structure and the Effectiveness of Controlling Corporate

As of 29^th June 2023, 36 domestic companies who seek to Overseas Offering and Listing (the “Issuer”) have received the request from CSRC to file amended materials and further demonstration upon compliance in respect of share transferring, paid-in capital, shareholding entrustment, price of equity, differential voting rights arrangements etc. For both direct and indirect offering, as stipulated in Guidelines 2, CSRC requests for complete disclosure upon the facts in respect of set-up procedure, paid-in capital, share capital evolution and etc., for the purpose of judging whether the domestic company is equipped with sufficient capital to carry out main business and ensuring the domestic company is compliant in course of historical evolution of share capital.

Specifically, given that most of issuers who seek to launch Overseas Offering and Listing may consummate with other financial activities through numerous financing round until finally entering into the phase of IPO, the shareholding structure may be changed due to additional capital financing, share/equity transferring or any other arrangement. Therefore, it will resulted problems listed follow:

(1) special shareholder rights may exert adverse impact upon the effectiveness of controlling corporate, based on the differences as agreed upon the diverse rights of A-class preferred share, B-class preferred share (if any) and ordinary share;

(2) interest transferring may occur in light of transaction arrangement in respect of the price, time, transaction method and other transaction conditions under which the connected parties may be the beneficiaries arising from and relating to the non-compliant evolution of share capital; and

(3) the solvency may be adversely affected from non-compliant evolution of share capital. Besides, tax compliance of share transfer and the conversion of capital reserves into share capital will also be scrutinized by CSRC.

Accordingly, the shareholding compliance of issuer is obviously the upmost important affair, for recognition over authenticity, integrity, accurateness of issuer’s domestic entity to avoid the risk of fraudulent offering of new securities.

VIE Controlling and the Registration Requirements under Applicable Law and Regulation

Contractual controlling by VIE agreements is inevitable for issuer who adapts the indirect form for Overseas Offering and Listing. Nevertheless, such contractual arrangement may result in several problems that the CSRC focus on. The CSRC will review the effectiveness of controlling by contractual arrangement, the necessity of adapting VIE contractual agreements and any other compliance issues based on the stipulation of State Administration of foreign Exchange (the “SAFE”), Ministry of Commerce of the People’s Republic of China (the “MOFCOM”) and National Development and Reform Commission of the PRC (the “NDRC”).

1. Disclosure of VIE Contractual Arrangement

The disclosure requested by the CSRC for issuer is to demonstrate and illustrate the necessity of adapting the VIE contractual agreements and whether the main business of issuer is subject to any relevant law or regulations, with perspectives of Foreign Investment Law of the People’s Republic of China (the “Foreign Investment Law”), Regulations for Implementation of Foreign Investment Law (the “Implementation Regulations”), and PRC Special Administrative Measures for Foreign Investment Access (Negative List) (2021 Edition).

For instance, in the case of Nicefilm Entertainment Holdings Limited who seeks to IPO in Hong Kong Exchanges (the “HKEX”), CSRC requests the issuer to completely analyze and disclose the compliance of

(1) the set-up of VIE structural arrangements;

(2) the content of VIE contractual agreements with respect to the timeline, price, route and method in fund transfer and profit transfer arrangement; and

(3) the nature of BVI shareholders of Cayman special purpose vehicle (the “SPV”) .

We will closely observe the material scrutinization given by the CSRC over the files for record to judge if the actual controller of offshore entity can effectively control the domestic company and if the Issuer is in compliance with regulations.

2. Stipulation under SAFE, MOFCOM and NDRC

The PRC government imposes controls over the exchanges of RMB into foreign currencies and the remittance of currency out of China. For the domestic resident (including domestic organization and resident individual) who is the shareholder of offshore entity of Issuer whose nationality is PRC, Notice of the State Administration of Foreign Exchange on Issues Relating to Foreign Exchange Control for Overseas Investment and Financing and Round-tripping by Chinese Residents through Special Purpose Vehicles (the “37 Notice”) shall be applied.

Prior to making capital contribution in an oversea SPV using legitimate assets or interests in China or overseas, such domestic resident shall apply to the foreign exchange bureau for completion of foreign exchange registration formalities for overseas investments. The domestic resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, any changes in the Overseas SPV’s PRC resident shareholders, name of the Overseas SPV, term of operation, any increase or reduction of the contributions by the PRC residents, share transfer or swap, and merger or division. The CSRC focuses on the compliance of round-tripping investments, merger and acquisition in respect of foreign exchanges, payment of tax and the fulfillment of supervision procedure.

For domestic resident who carries out the overseas direct investment (the “ODI”), the procedure of ODI filing or approval shall be subject to regulation stipulated by MOFCOM, NDRC and SAFE. Generally, Issuer who hasn’t consummate any financing activities may not be subject to ODI filing or approval. Based on the practice in ODI filing or approval, qualified domestic institutional investor (the “QDII”), who generally acts the role of financial investor for the purpose of future IPO, is the common entity who shall be subject to the regulation of ODI filing or approval. Accordingly, the shareholding component shall be taken into consideration at the time of the set-up of VIE shareholding structure.

Compliance of Business

Most Issuers’ main business operation focus on industries including, among other thing, biotech, computer science, healthcare, advanced technology, advanced equipment and new energy. The supervisory institution generally stipulates relevant law and regulation to regulate the business activities with all aspects.

Pursuant to the stipulation of Cybersecurity Law of the People’s Republic of China, Cybersecurity Review Measures, Personal Information Protection Law of the People's Republic of China, Data Security Law of the People's Republic of China, State Security Law of the People’s Republic of China, personal information, cybersecurity, data security and stat security are aspects that CSRC scrutinizes the most in course of reviewing the files of Issuer. For instances of Guoquan Food (Shanghai) Co., LTD., Dida Inc, XXF Group Holdings Limited, LC Logistics, Inc. etc., CSRC requests the Issuers analyze and demonstrate in details (1) whether the website and app researched, developed, operated by Issuers are involved with providing personal information to any third party, if any, the type and nature of such personal information shall be disclosed; (2) the measures applied to cybersecurity and data security; (3) to disclose the scale of collected and stored personal information, and the detailed information of data collection and usage; (4) the arrangements and measures of personal information, cybersecurity and data security subsequent to IPO.

The CSRC may also exert scrutinization on some particular industry. For instance of Lu DaoPei Medical Group Holding Limited, CSRC requests Issuer to analyze and demonstrate in details: (1) whether the Issuer’s main business is associated with or involved in the development and application of human stem cells, genetic diagnosis and treatment technologies which may be forbidden and subject to the Notice of the National Development and Reform Commission and the Ministry of Commerce on the Promulgation of Negative List for Market Access (Edition 2022); (2) whether the Issuer’s main business is compliant with regulations of competent supervisory institution.

Preliminary Conclusion

The above-mentioned three aspects preliminarily reveal some general standards and principles by which the CSRC carries out the review on files of Overseas Offering and Listing and with which domestic Issuer may take as reference for Overseas Offering and Listing. What could be concluded is that, compared with that of domestic registration-based IPO system and procedure, the scrutinization and supervision of filing for Overseas Offering and Listing by CSRC appear to be more loose. If the filing documents are complete and in compliance with stipulated requirements, the CSRC will, within 20 working days after receiving the filing documents, conclude the filing procedure and publish the filing results on the CSRC website.

With the implement of Measures and supporting guidelines, the reform of the regulatory system for Overseas Offerings and Listings signify the new phase for overseas security offering. The new system provides a much more methodical and transparent guidance for domestic companies who go overseas for financing of international investors while simplifing the domestic regulatory and review procedure compared with previous system. With the continuous practice concerning Overseas Offering and Listing, we are committed to facilitating the domestic enterprises to operate their business and keep updated with the latest alteration in respect of practice and regulation of filing for Overseas Offerings and Listings.