Taking Stock of the New Regulatory Landscape for US and Hong Kong Listings
- Published
- in Industry Updates
The triumphant listing of Luyuan Group Holding (Cayman) Limited (“Luyuan”) on The Stock Exchange of Hong Kong Limited (“HKSE”) and the jubilant ringing of the opening bell on the NASDAQ Global Market (“NASDAQ”) for Adlai Nortye Ltd. (“Adlai”), signifies a momentous occasion for China capital markets. These landmark listings represent the first Cayman Islands companies, both to be listed on the HKSE, in the case of Luyuan, and a US stock exchange (NASDAQ), in the case of Adlai, following the recent filing and reporting requirements promulgated by the China Securities Regulatory Commission (中国证券监督管理委员会) (“CSRC”) of the People’s Republic of China (PRC or China), pursuant to the respective company’s filing with the CSRC under the CSRC’s Trial Measures.
Maples Group is delighted to have advised Adlai and Luyuan on Cayman Islands and British Virgin Islands (“BVI”) laws for each listing. The hope is that these listings will bring with them a much needed stimulus, and an element of certainty, to all stakeholders operating in the China listing space.
Regulatory Changes on Listings
The Cayman Islands is the leading jurisdiction of choice for listings on the HKSE and Cayman Islands companies represent a significant contributor to the number of listings in the United States (“US”) on both NASDAQ and the New York Stock Exchange (“NYSE”). It is therefore not a surprise that the role of Cayman counsel, with respect to any changes in the regulatory space that may impact such listings is pivotal.
We have seen much activity on the regulatory front emanating from both China and the US. In China, this has ranged from:
(a) the Special Administrative Measures (Negative List) for Access of Foreign Investment and Catalogue of Industries for Encouraging Foreign Investment (外商投资准入特别管理措施（负面清单）) which governs investment activities in China by foreign investors, classifying businesses into three categories: “encouraged”, “restricted”, “prohibited”; and
(b) measures for Cybersecurity Review (Review Measures) (网络安全审查办法). The Review Measures extends the scope of cybersecurity reviews to data processors engaging in data processing activities that affects or may affect national security, including listings in a foreign country. The Review Measures provides, among other things, that “Operators” listing in a foreign country with more than one million users’ personal information data must apply for a cybersecurity review with the Cybersecurity Review Office; and
(c) measures for Cross-Border Data Security Assessment (数据出境安全评估办法), which requires infrastructure and online platform operators to be subject to cybersecurity review if they carry out data processing activities that affect or may affect national security; and
(d) provisions on strengthening confidentiality and archives management of overseas securities issuance and listing by domestic enterprises, or the Confidentiality and Archives Management Provisions (Confidentiality and Archives Management Provisions) (关于加强在境外发行证券与上市相关保密和档案管理工作的规定). The Confidentiality and Archives Management Provisions deal with the scope of the provision of documents and materials to securities services providers during the process of their overseas offering and listing, where such documents and materials contain, among other things, any state secrets and the requirement to obtain the approval from certain competent governmental authorities.
In the US, the principle regulatory change is found under the Accelerating Holding Foreign Companies Accountable Act, (“AHFCAA”), under which the Securities Exchange Commission (“SEC”), is required to prohibit a company’s securities from trading on any US stock exchange if the company’s auditor is not subject to the Public Company Accounting Oversight Board, (“PCAOB”) inspections for two consecutive years, and PCAOB is unable to inspect auditors or their affiliates that are located in mainland China, following which a company may be delisted.
Perhaps the most impactful of the present wave of regulations in the PRC, relating to listings, occurred in February 2023, when CSRC released regulations relating to the filing requirements for overseas offerings and listings by PRC domestic companies, including the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (境內企業境外發行證券和上市管理試行辦法) (together with five supporting guidelines (Trial Measures)), effective from 31 March, 2023. In short, the regulations implemented a filing-based regulatory system for direct and indirect overseas listings by PRC domestic companies – structurally, such companies are typically structured through a Cayman Islands company where the preferred exit is on the HKSE or through a US initial public offering.
Under the Trial Measures, PRC domestic companies seeking a listing on the HKSE or in the US are required to comply with certain filing requirements and to report relevant information to the CSRC. If a domestic company fails to comply with the filing requirements such PRC domestic company may be subject to administrative penalties.
Cayman Islands Structures on Implementing Trial Administrative Measures
We were closely involved with meeting CSRC’s requirements under the Trial Measures to ensure regulatory approval by CSRC pursuant to the respective listing, in relation to Luyuan’s application for a listing of shares on the HKSE and Adlai’s filing of its registration statement relating to the offering of American depositary shares (“ADSs”) representing the company’s shares on NASDAQ, as Cayman counsel to each company. From a Cayman Islands perspective, this involved, among other things, advising on:
(a) the company’s establishment and existence;
(b) power and authority of the company to give effect to the listing;
(c) the company’s ability to consummate the listing and related transaction documents;
(d) particulars of the listed shares, and, in the context of a US listing, ADSs;
(e) disclosure on shareholdings;
(f) authorisations required under Cayman Islands law to consummate the listing;
(g) statements made in the respective listing documents;
(h) applicable Cayman Islands legal proceedings the company may be subject to;
(i) applicable Cayman Islands taxes; and
(j) the jurisdictional integrity of the Cayman Islands.
The last point is an important one. The fact that these transactions were structured through Cayman Islands companies highlights the importance of the jurisdiction. Regulatory changes such as the Trial Measures test the robustness of the Cayman structure – having effectively been approved by each of the HKSE, NASDAQ, NYSE and now the CSRC is testimony to the Cayman Islands’ universal acceptance as a leading jurisdiction for listings.
Renewed Momentum: Embracing a Fresh Chapter
There has, undoubtedly, been a cloud that has hung over the PRC venture capital (“VC”) and private equity (“PE”) markets of late that has permeated through to overseas listing exits. In light of our recollection of the vibrant epoch of Chinese venture capital in 2014, characterized by the dominating presence of Baidu, Alibaba, and Tencent, collectively known as the surging BAT, and the subsequent years of substantial market offerings such as Xiaomi, Kuaishou, and Meiutan, emblematic of an era brimming with technological advancements, it becomes challenging, in the current landscape, to conceive a regression to those earlier times. The present reflects a market tinged with uncertainty, wresting with geo-political issues, and daily reports of the demise of China VC/PE. Although by no means an end to the present chapter of China VC/PE inactivity, the Luyuan and Adlai listings, coupled with the recent listing on NASDAQ of Cheche Technology Inc., representing the first overseas listing involving a VIE structure filed with the CSRC under the Trial Measures, the new listings is clear evidence that listings remain alive and well.
The importance of the two new listings cannot be underestimated. They provide a boost to the confidence of all stakeholders – a clear message that listings, or more importantly, exits are now back on track.
Conclusion
What each of the Luyuan and Adlai listing has provided is an effective road map to the hitherto unchartered and somewhat uncertain path of public offerings under the new PRC and SEC regulatory listing landscape. The dynamic and unpredictable regulatory landscape is here to stay however, one thing that is clear, Cayman Islands structures persist as the foremost choice for navigating these challenging times. With a hopeful outlook towards the promising year of Jixiang, we anticipate continued resilience and prosperity: 願吉祥龍帶給我們運氣與吉祥.