In the News: VIE Disclosures; SPC "996" Cases; and Algorithm Draft Rules

U.S. Securities and Exchange Commission seal in Washington, D.C.  January 5, 2019.  Photo: Diego M. Radzinschi/ALM

SEC demanding more disclosures from Chinese companies

The United States Securities and Exchange Commission (SEC) has begun issuing new disclosure requirements to Chinese companies wanting to go public in the U.S. On August 24, Reuters reported that the SEC has instructed some Chinese companies to make additional disclosures regarding their use of variable interest entities (VIEs) to list in the U.S.

According to the report, one of the SEC letters sent out to a Chinese company asked for details surrounding the implications of the VIE structure for investors, including reasons why it may be less effective than direct ownership. The SEC also asked Chinese companies to disclose that “investors may never directly hold equity interests in the Chinese operating company.”

Chinese companies with plans to list in the U.S. are already complying with the SEC’s additional disclosure requests. On August 23, Huake Holding Biology, a camellia-seed oil producer, updated its filing to emphasize that it has an offshore corporate structure, which uses a VIE to conduct operations in China. The same day, Iczoom Group Inc., an electronic components seller, filed for its New York IPO and stated that it operates in China through a VIE. Huake’s previous filing, submitted in June, mainly addresses the VIE structure in the “risks” section. The updated filing makes the issue more prominent.