Chinese Law Firms Tone Down Risk Warnings in IPO Documents

Law firms in China have rushed to tone down the words used to describe China-related business risks in documents for companies that want to list on foreign stock exchanges, sources say.

But, four sources conceded that the changes sought by Chinese officials could trigger queries from the US Securities and Exchange Commission, because the US regulator has warned companies of insufficient China-risk disclosures.

The moves come after China’s securities regulator told domestic law firms to refrain from using negative descriptions of China’s policies or its business and legal environment in IPO prospectuses.

The instruction from Beijing was given in a closed-door meetings in July and earlier this month.

A failure to do so could mean their listings are not able to get a regulatory nod, the China Securities Regulatory Commission (CSRC) warned, several weeks ago, sources said.

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The law firms are now racing to change the wording in listing prospectuses that were already submitted and applications yet to be filed, according to five sources, who declined to be identified due to sensitivity of the matter.

New offshore listing rules

Some potential issuers, which have yet to be given the green light from the CSRC, were asked by the regulator earlier this month to tweak the risk factors in their prospectuses to comply with the new offshore listing rules, one of the sources said.

China’s new listing rules, which came into effect in March, stipulate that any “distortion or misinterpretation” on China’s laws and policy, business environment, and judiciary was prohibited.

All major markets require listing aspirants to disclose to prospective investors risks related to the companies themselves, their business sectors, and the countries where they are headquartered in their offering prospectuses.

Beijing’s demand for companies to tone down China business-related risks comes amid the country’s stuttering economy, heightened geopolitical tensions and the government’s sharpened focus on national security.

References cut to ‘Covid lockdowns’, forex ‘controls’

As part of the changes demanded by the regulator, lawyers are replacing descriptions of “Covid lockdown measures” in IPO applications with “the Covid-19 pandemic” to avoid references to harsh and controversial travel and business curbs during the pandemic, said the second source said.

Also, instead of mentioning “foreign exchange control” in some IPO applications, local lawyers in China are proposing to use more neutral phrasing such as “foreign exchange management”, the source added.

Prospective Chinese equity issuers in offshore markets, including the United States, are required to file to the CSRC days after they submit listing applications offshore and need China’s green light to proceed with their fundraisings.

Some of the offshore IPO prospectuses, in which the changes on China risk disclosures are being made, are yet to be filed with the CSRC, the sources said.

The CSRC did not respond to a faxed request for comment.

‘Policies can be adjusted’, Judicial system is ‘different’

Since the CSRC’s meeting with law firms late last month, at least two IPO applications have tweaked the ways they describe how China makes policy changes, the first source and a third person said.

Those documents now say Chinese policies and regulations can be amended or adjusted from time to time, the two sources said, a marked shift in tone from previous wording that said the government and other local authorities can order rule changes randomly or without prior notice.

Other changes include removing a statement that entails the enforcement of arbitral awards in China is difficult, the first source said, adding, lawyers have instead put a description that China’s judicial system is different from other jurisdictions.

Reference to ‘uncertainties’ removed

For one prospective Hong Kong listing, lawyers have removed references to uncertainties around China’s regulatory, political and economic environments and foreign exchange control in the prospectus, according to a fourth source.

In revised listing application rules that came into effect on August 1, Hong Kong’s bourse removed a section on China risks previously required specifically for mainland-incorporated companies, a move it said would align disclosure rules for all IPO-aspirants.

In response to a request for comment, the Hong Kong Stock Exchange said on Tuesday that all listing applicants from all jurisdictions are required under Hong Kong’s listing rules to disclose all material risks, including jurisdictional risks.

“There has been no change to this requirement.”