On 17 February 2023, the China Securities Regulatory Commission (CSRC) published new regulations relating to overseas offerings and listing by PRC companies. The new regulations authorise the CSRC to accept and review the filings of applications for overseas offerings and listings to ensure they are in line with Chinese regulations and policy. Under the new system, PRC companies can choose any overseas listing venue but are required to make certain filings with the CSRC and complete a review process. The CSRC will retain the authority to accept or reject the filings of any overseas offering and listing application after a review process. The new regulations take effect on 31 March 2023.
The new regulations largely follow the draft regulations that have been circulating in the market for over a year with adoption delayed in part due to the pandemic response. During this time, market participants have had adequate time to prepare for adoption. Market commentators have speculated that such new regulations could streamline overseas listings by centralising the approval mechanism and offering greater certainty regarding PRC approvals while others have expressed concern about potential timing delays. The CSRC’s timing provisions below should give comfort on the timing issue. Of course, implementation efficiency and how the standards are applied will be important to monitor as market participants and potential overseas listing candidates encounter the new regulations.
The newly released set of regulations consists of six documents, including the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (境内企业境外发行证券和上市管理试行办法) (the “Trial Measures”) and five supporting guidelines. Key aspects of the Trial Measures are set out below.
1. Direct and Indirect Overseas Listings of Securities by PRC Issuers
The Trial Measures regulate both (a) direct overseas offerings and listings by domestic PRC companies and (b) indirect overseas offering and listing by a foreign company with major business operations and/or assets located in the PRC.
An indirect offering and listing is determined by set of quantifiable standards. For example, any overseas offering and listing by an issuer that meets both of the following standards will be deemed to be indirect:
- 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by domestic PRC companies; and
- the issuer's principal business activities are conducted in Mainland China, or its principal places of business are located in Mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in Mainland China.
The Trial Measures indicate that the determination as to whether or not an overseas offering and listing by domestic PRC companies is indirect, shall be made on a substance over form basis.
2. Securities Subject to the New Rules
The securities subject to the Trial Measures include equity shares, depository receipts, corporate bonds convertible to equity shares, and other equity securities.
3. Security Review
PRC companies in certain business sectors are required to undergo national security review or obtain clearance from relevant authorities if necessary before making any filings with the CSRC. Also, PRC companies must comply with national secrecy and data security laws with respect to any data disclosure. In addition, the CSRC has the authority to and may block offshore listings that: (1) are explicitly prohibited by laws; (2) may endanger national security; (3) involve criminal offenses such as corruption, bribery, embezzlement, misappropriation of property by the issuer, its controlling persons (with a three-year lookback); (4) involve the issuer under investigations for suspicion of criminal offenses or major violations of laws and regulations; or (5) involve material ownership disputes.
4. Filing and Review Timelines
The filing and review timeline for CSRC filings for the various scenarios addressed by the rules is summarised below.
- CSRC filings relating to any offering in an overseas market must be submitted to the CSRC within three working days after the relevant overseas offering application is submitted to the relevant overseas regulator or listing venue. Subsequent securities offerings of an issuer in the same overseas market where it has previously offered and listed securities shall be filed with the CSRC within three working days after the offering is completed.
- Where the filing documents submitted to the CSRC are complete and in compliance with the relevant requirements, the CSRC has 20 working days to conclude the filing procedure and publish the filing results on the CSRC website. To the extent the filing documents are incomplete or do not conform to stipulated requirements, the CSRC has five working days to request supplementation and amendment to the filing. The issuer has 30 days to prepare any requested supplemented/amended filing.
- The issuer is required to submit a report to the CSRC within three working days after the occurrence and public disclosure of the following events after listing in an overseas market: (1) change of control; (2) investigations or sanctions imposed by overseas regulators; (3) change of listing status; and (4) voluntary or involuntary delisting.
- International securities firms that engage in sponsoring or lead underwriting for offshore listings are required certain filings with the CSRC within 10 working days after signing its first engagement agreement with the issuer. In addition, they must file an annual report no later than January 31 each year detailing business activities in the previous year related to overseas offerings and listings by PRC companies.
5. Issuer Filing Requirements
The CSRC filing requirements for the various scenarios are summarised below.
- Where a PRC issuer applies for an overseas offering and listing, the filing entity should submit to the CSRC the following filing documents: (1) a filing report and associated undertaking. The filing report (form now available on the CSRC website), effectively summarises the information about the issuer including its corporate history, substantial shareholders, subsidiaries, share capital, business, industry, financials, tax, corporate governance and the listing proposals; (2) relevant regulatory opinions, filings or approval issued by competent industry regulators (if applicable); (3) opinions issued by competent regulators on security assessment and review of the issuer (if applicable); (4) PRC legal opinions, which typically cover the issuer's incorporation, history, promoters, substantial shareholders, business, corporate governance and legal compliance; and (5) prospectus or listing document.
- Where a PRC issuer makes subsequent offerings after having been listed in an overseas market or its shareholders plan to convert their unlisted shares into overseas-listed shares under the CSRC "Full Circulation" program, the filing entity shall submit to the CSRC the following filing documents: (1) a filing report and associated undertaking; and (2) PRC legal opinions.
6. VIE Structures
The Trial Measures grant the CSRC the authority to regulate the overseas offering and listing of PRC companies with variable interest entity (VIE) structures and allow filings by VIE-structured companies insofar as they comply with the relevant regulations. Numerous regulators in China regulate VIEs and the CSRC will be another regulator added to the mix. In practice, issuers should consult with other relevant authorities in respect of its VIE structure before filing with the CSRC.
7. Consequences of Non-compliance
Non-compliance with the new rules could result in regulatory action by the CSRC and fines for PRC issuers, controlling shareholders and persons and underwriters. Fines could be up to RMB 10 million (approximately US$1.5 million).
8. Effective Date and Transition
The new rules are effective on 31 March 2023.
PRC companies that are already listed on overseas exchanges by or before 31 March 2023 are not required to make any filings with CSRC unless they raise additional equity financing.
A six-month compliance transition will be given to PRC companies that have obtained the approval of overseas regulators or exchanges since implementation date of the new regulations but have not completed the indirect overseas listing.
The documentation requirements under the new CSRC filing regime are similar to those of the previous application process for direct overseas offerings and listings by domestic PRC companies (H share listing), except for the addition of national secrecy and data security review. The new CSRC filing regime does streamline both the direct and indirect overseas listings of securities by PRC issuers and clear up certain uncertainties facing by the PRC issuers and professionals involved. Regulators have indicated that they intend to provide a streamlined process to minimise delays, but it is hard to see how these additional layers of on-shore regulatory review and compliance burden will not impact the overall deal timeline. Although it remains to see how this will play out in practice, these new rules represent an encouraging step in the right direction for development of the capital markets for PRC issuers.