SEC Division of Corporation Finance: Topic 10

Saturday, December 5, 2020

On November 23, the Division of Company Finance (the Division) of the Securities and Trade Fee issued CF Disclosure Steering: Matter No. 10 (the Steering), offering the Division’s views concerning disclosure issues for corporations primarily based in or with the vast majority of their operations within the Folks’s Republic of China (known as “China-based” corporations).

The Division has recognized that, though China-based corporations that entry the US public capital markets typically have the identical disclosure obligations and authorized duties as different non-US issuers, there are limitations on the SEC’s capacity to advertise and implement high-quality disclosure requirements for China-based issuers. Consequently, the Division identifies within the Steering, there’s considerably larger danger that the disclosures of China-based issuers shall be incomplete or deceptive and that buyers could have considerably much less entry to recourse than as pertains to different non-US issuers.

The Steering identifies the next particular dangers related to China-based issuers:

Dangers Associated to Excessive-High quality and Dependable Monetary Reporting. The Public Firm Accounting Oversight (PCAOB) is restricted in its capacity to examine audit work and practices of PCAOB-registered public accounting companies in China. Congress has proposed laws that, if handed, might end result within the delisting of corporations that use auditors that the PCAOB just isn’t capable of examine; nonetheless, so far, no such laws has been handed.

Dangers Associated to Entry to Data and Regulatory Oversight. China has usually restricted US regulators entry to info and their capacity to analyze or pursue treatments with respect to China-based issuers.

Dangers Associated to a Firm’s Organizational Construction. As a result of Chinese language legislation might restrict or prohibit international funding in Chinese language corporations working in sure industries, corresponding to telecommunications, many China-based issuers kind non-Chinese language holding corporations that enter into contractual preparations meant to imitate direct possession in a construction often called a variable curiosity entity (VIE). These VIE buildings might pose a danger to US buyers, as a result of, amongst different causes, exerting management via these contractual preparations could also be much less efficient than direct possession. Additionally, the Chinese language authorities might decide that the VIE construction doesn’t adjust to Chinese language legislation and topic the issuer to penalties.

Dangers Associated to Regulatory Setting. The Information notes that China’s authorized system is considerably totally different than the US authorized system and will increase dangers and uncertainties regarding the intent, impact and enforcement of its legal guidelines, guidelines and rules.

The Information addresses variations in shareholder rights and recourse, governance and reporting with China-based issuers. Authorized claims, together with federal securities legislation claims, could also be troublesome or inconceivable to pursue in US courts in opposition to China-based issuers, and buyers could also be unable to implement any US court docket judgements in opposition to China-based issuers. As well as, many China-based issuers are organized in jurisdictions outdoors each the USA and China, such because the Cayman Islands and the British Virgin Islands. There are substantial company legislation and company governance variations between these non-US jurisdictions and the USA. Amongst others, the Information notes fiduciary duties that administrators owe buyers could also be narrower in scope or much less developed. Lastly, to the extent that China-based issuers qualify as international personal issuers, they’re exempt from sure reporting necessities underneath the federal securities legal guidelines relevant to US home issuers, that means that they’re permitted to supply lowered disclosures in some areas.

The Steering additional addresses particular disclosure issues for China-based issuers. The Division states that China-based issuers should absolutely disclose materials dangers associated to their operations in China. Such disclosure ought to think about the next:

Does the China-based firm present clear and outstanding disclosure of PCAOB inspection limitations and lack of enforcement mechanisms, in addition to the dangers referring to the standard of the monetary statements?

Does the China-based firm use VIEs in its organizational construction? If that’s the case, does the corporate embrace enough disclosure in regards to the associated get together transactions within the VIE construction and warning buyers in regards to the dangers related to the VIE construction employed in China?

Does the China-based firm disclose dangers referring to the regulatory setting in China, together with dangers associated to a much less developed authorized system, which can lead to inconsistent and unpredictable interpretation and enforcement of legal guidelines and rules?

Does the China-based firm present danger disclosure about differing shareholder rights and treatments within the firm’s nation of group and/or primarily based on the place an organization’s operations are positioned?

The statements within the Steering signify the views of the Division. The Steering just isn’t a rule, regulation or assertion of the SEC.

The total textual content of the Steering is accessible right here.