Sample Letter to Companies Regarding China-Specific Disclosures[1]
In the last several years, the Division of Corporation Finance has been issuing
guidance regarding the disclosure obligations of companies based in or with a
majority of their operations in the People’s Republic of China (China-based
Companies[2]).[3] The guidance addresses an array of disclosure issues, including those related
to the variable interest entity structure, the reliability of financial reporting,
the regulatory environment in China, and corporate governance matters. Recently, the
Division noted, in the context of the Commission’s rules under the Holding Foreign
Companies Accountable Act (HFCAA),[4] that it is monitoring disclosures by certain China-based Companies and may
provide additional guidance.[5] As part of its filing review process, the Division also issues comments to
China-based Companies to enhance their compliance with disclosure obligations under
the federal securities laws. The Division continues to believe that companies should
provide more prominent, specific, and tailored disclosures about China-specific
matters so that investors have the material information they need to make informed
investment and voting decisions.
In this regard, the Division is focused on three areas of disclosure related to
China-specific matters.
First, we remind companies of their disclosure obligations under the HFCAA. More
particularly, public companies identified as Commission-Identified Issuers (CIIs)
under the HFCAA must comply with the submission and disclosure requirements under
the HFCAA and Commission rules for each year in which they are identified.[6] CIIs are listed on the SEC website at www.sec.gov/HFCAA. For CIIs that
are foreign issuers, the required disclosures include, among other matters, the
percentage of shares owned by foreign government entities, whether government
entities in the foreign jurisdiction have a controlling financial interest with
respect to the issuer, identification of all Chinese Communist Party (CCP) officials
who are on the board of the issuer or the operating entity for the issuer, and
whether the issuer’s articles of incorporation (or any equivalent organizing
document) contain any “charter” of the CCP. The Division will review the relevant
filings for compliance with these submission and disclosure requirements.
Second, the Division continues to issue comments seeking more specific and prominent
disclosure about material risks related to the role of the government of the
People’s Republic of China (the PRC) in the operations of China-based Companies.[7] In particular, the Division is seeking disclosures about any material impacts
that intervention or control by the PRC in the operations of these companies has or
may have on their business or the value of their securities. We remind companies
that there are other ways in which a government or any person can exercise control
over a company beyond appointing members to the board or having formal powers under
the company’s organizational documents. The federal securities laws and regulations
generally define the term “control” (including the terms “controlling,” “controlled
by,” and “under common control with”) more broadly. For purposes of the Commission’s
rules under the Securities Act of 1933 and the Securities Exchange Act of 1934,
control “means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise.”[8]
Third, we note that companies may need to make disclosures related to material
impacts of certain statutes. On December 23, 2021, the Uyghur Forced Labor
Prevention Act (UFLPA) became law in the United States.[9] The UFLPA, among other matters, prohibits the import of goods from the
Xinjiang Uyghur Autonomous Region of the PRC. In light of the UFLPA, companies
should evaluate their disclosures with a view towards providing investors with
tailored disclosure about the material impacts of the provisions of this statute on
their business. These impacts may include material compliance risks or material
supply chain disruptions that companies may face if conducting operations in, or
relying on counterparties conducting operations in, the Xinjiang Uyghur Autonomous
Region.
The following illustrative letter contains sample comments that, depending on the
particular facts and circumstances, the Division may issue to companies. These
sample comments do not constitute an exhaustive list of the issues that companies
should consider. The Division urges companies to consider these sample comments and
additional developments in this area as they prepare their disclosure documents.
Companies should contact the industry office responsible for review of the company’s
filings with any questions regarding the company’s proposed disclosure.
July 2023
Name
ABC Corporation
Address
Dear Issuer:
We have reviewed your filing and have the following comments.
Please revise or update your disclosure in response to our
comments.
Item 9C of Form 10-K - Commission-Identified
Issuers[10]
1. We note your statement that you reviewed public
filings in connection with your required submission
under paragraph (a) of Item 9C of Form 10-K. Please
supplementally describe any additional materials that
were reviewed and tell us whether you relied upon any
legal opinions or third-party certifications, such as
affidavits, as the basis for your submission. In your
response, please provide a similarly detailed discussion
of the materials reviewed and legal opinions or
third-party certifications relied upon in connection
with the required disclosures under paragraphs (b)(2)
and (3) of Item 9C of Form 10-K.
2. In order to clarify the scope of your review, please
supplementally describe the steps you have taken to
confirm that none of the members of your board or the
boards of your consolidated foreign operating entities
are officials of the Chinese Communist Party. For
instance, please tell us how the board members’ current
or prior memberships on, or affiliations with,
committees of the Chinese Communist Party factored into
your determination. In addition, please tell us whether
you have relied upon third-party certifications, such as
affidavits, as the basis for your disclosure.
3. With respect to your disclosure pursuant to
paragraph (b)(5) of Item 9C of Form 10-K, we note that
you have included language that such disclosure is “to
our best knowledge.” Please supplementally confirm
without qualification, if true, that your and your
consolidated foreign operating entities’ articles of
incorporation do not contain wording from any charter of
the Chinese Communist Party.
Risk of Intervention or Control by the PRC Government
(Risk Factors)
4. Given the significant oversight and discretion of
the government of the People’s Republic of China (PRC)
over the operations of your business, please describe
any material impact that intervention or control by the
PRC government has or may have on your business or on
the value of your securities. We remind you that,
pursuant to federal securities rules, the term “control”
(including the terms “controlling,” “controlled by,” and
“under common control with”) means “the possession,
direct or indirect, of the power to direct or cause the
direction of the management and policies of a person,
whether through the ownership of voting securities, by
contract, or otherwise.”[11]
Uyghur Forced Labor Prevention Act (Management’s
Discussion and Analysis of Financial Condition and
Results of Operations)
5. We note that you appear to conduct a portion of your
operations in, or appear to rely on counterparties that
conduct operations in, the Xinjiang Uyghur Autonomous
Region. To the extent material, please describe how your
business segments, products, lines of service, projects,
or operations are impacted by the Uyghur Forced Labor
Prevention Act (UFLPA), that, among other matters,
prohibits the import of goods from the Xinjiang Uyghur
Autonomous Region.
We remind you that the company and its management are
responsible for the accuracy and adequacy of their
disclosures, notwithstanding any review, comments, action,
or absence of action by the staff.
Sincerely,
Division of Corporation Finance
|
Footnotes
[1]
The statements in this guidance represent the views of the staff of the Division
of Corporation Finance. This guidance is not a rule, regulation, or statement of
the Securities and Exchange Commission (“Commission”). The Commission has
neither approved nor disapproved its content. This guidance, like all staff
guidance, has no legal force or effect: it does not alter or amend applicable
law, and it creates no new or additional obligations for any person.
[2]
In prior guidance we have referred to companies based in or with a majority
of their operations in the People’s Republic of China as “China-based
Issuers.”
[3]
See Division of Corporation Finance, CF Disclosure Guidance: Topic No.
10, Disclosure Considerations for China-Based Issuers (Nov. 23,
2020), available at https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuers
and Division of Corporation Finance, Sample Letter to China-Based
Companies (Dec. 20, 2021), available at https://www.sec.gov/corpfin/sample-letter-china-based-companies.
Commission Chair Gary Gensler also issued a Statement on Investor
Protection Related to Recent Developments in China (July 30, 2021),
available at https://www.sec.gov/news/public-statement/gensler-2021-07-30.
[4]
See Holding Foreign Companies Accountable Act, Pub. L. 116-222, 134
Stat. 1063 (Dec. 18, 2020), Holding Foreign Companies Accountable Act
Disclosure, Release No. 34-93701 (Dec. 2, 2021).
[5]
See Division of Corporation Finance and Division of Trading and
Markets, Staff Statement on the Holding Foreign Companies Accountable Act
and the Consolidated Appropriations Act, 2023 (Apr. 6, 2023),
available at https://www.sec.gov/news/statement/statement-hfcaa-040623.
[6]
The HFCAA, as amended, requires that, every year, the SEC identify any public
companies that file annual reports with financial statements audited by an
auditor located in a foreign jurisdiction where the Public Company
Accounting Oversight Board (PCAOB) has determined it is unable to inspect or
investigate completely because of a position taken by a foreign authority.
Under the amended HFCAA, once a company is identified as a
Commission-Identified Issuer (CII) for two consecutive years, the Commission
must apply certain trading prohibitions to that CII’s securities.
[7]
Comments about the need to provide disclosure regarding the risk of Chinese
government intervention or control apply equally to China-based companies
and CIIs under the HFCAA, as these disclosure obligations arise under
Securities Act and Securities Exchange Act rules other than those
implementing the HFCAA.
[8]
17 CFR § 230.405 and 17 CFR § 240.12b-2.
[9]
Pub. L. 117–78, 135 Stat. 1525 (Dec. 23, 2021).
[10]
Similar disclosure is required by Item 16 of Form
20-F.
[11]
17 CFR § 230.405 and 17 CFR § 240.12b-2.