Risk & Compliance

SEC Issues Risk Disclosure Guidance for Chinese Issuers

“Recent events have highlighted the risks associated with investing in companies that are based in or that have the majority of their operations" i...
Matthew HellerDecember 22, 2021

In another move to step up its oversight of China-based companies, the U.S. Securities and Exchange Commission has issued new guidance on how they should disclose legal and operational risks to investors.

The guidance issued on Monday in a sample comment letter covers both Chinese companies that seek to register securities directly in the U.S. and those that use so-called variable interest entities, or VIEs, a form of shell company.

“Recent events have highlighted the risks associated with investing in companies that are based in or that have the majority of their operations in the People’s Republic of China,” the SEC said.

“The division of corporation finance believes that more prominent, specific, and tailored disclosure about these risks, and companies’ use of the variable interest entity structure specifically, is warranted to provide investors with the information they need to make informed investment decisions and for companies to comply with their disclosure obligations under the federal securities laws,” it added.

SEC Chairman Gary Gensler had directed staff in July to look into beefing up disclosure requirements for Chinese companies, saying such disclosures were “crucial to informed investment decision-making and are at the heart of the SEC’s mandate to protect investors in U.S. capital markets.”

In the new guidance, the commission focuses on “the need for clear and prominent disclosure” regarding corporate structure of a company, risks associated with a company’s use of the VIE structure, and the potential impact of Chinese regulatory actions on a company’s operations and investors’ interests.

“Your disclosure should acknowledge that Chinese regulatory authorities could disallow [the VIE] structure, which would likely result in a material change in your operations and/or a material change in the value of the securities you are registering for sale, including that it could cause the value of such securities to significantly decline or become worthless,” the sample letter states.

The SEC also said Chinese special-purpose acquisition companies (SPACs) “should address the risks associated with the SPAC’s operations, as well as the challenges that investors in the SPAC might face in enforcing their rights under the SPAC’s controlling agreements.”