IPOs for China-based companies Structures and Approaches

Transcription

1 IPOs for China-based companies Structures and Approaches Thomas M. Shoesmith Pillsbury Winthrop Shaw Pittman LLP - Shanghai Pillsbury Winthrop Shaw Pittman LLP

2 Agenda Everybody wants to go IPO What does go IPO mean? Become publicly traded in the US Be listed on a major exchange not only OTCBB Achieve meaningful trading volume Usually refers to a financing in which a private company goes public (even though it is possible for a company to go public without ever doing a public offering, and therefore a public company can also do an initial public offering) IPO can mean many things The wisdom of our parents Chinese saying: It doesn t matter if the cat is black or white, as long as it catches mice. American saying: There is more than one way to skin a cat. Both sayings mean: Don t be too concerned about how you achieve your objective, as long as you achieve your objective Different ways to catch mice traditional methods and NextGen methods 1 Approaches to IPOs

3 Pieces of an IPO Offshore restructuring you can t avoid this Different structures for different situations New developments Going public this is not the same as listing (being publicly traded on the OTCBB means you are public but not yet listed ) Becoming a reporting company filing regular reports with the SEC (essential to attracting investors) Raising money from a private placement (PIPE) or a public offering (usually underwritten by an investment bank) Listing on a major exchange NASDAQ, NYSE/AMEX IPO means doing Items 2 ~ 5 all at once but you don t have to (and maybe you don t want to) 2 Approaches to IPOs

4 Offshore Restructuring First step in all cases is to establish an offshore holding company structure You must have an offshore vehicle to access international public capital markets The offshore vehicle must acquire, or acquire control over, the PRC operating company Principal issue is PRC restrictions on round trip investments Circular 10 (M&A Regs) Other issues are raised by SAFE Circular 75 (registration of offshore holdings) and SAFE Notice 106 (implementation of Circular 10) Further issues: Double tax in VIE structures the impact of business tax versus enterprise income tax How to move money to the operating company in a VIE structure New developments that complicate matters SAFE Circular 142 new restrictions on conversion of registered capital SAT Circular 601 calls into question the preferential withholding tax when using a HK holdco SAT Circular 698 raises questions as to whether PRC withholding must be paid at the time of the share exchange The implications of Circulars 601 and 698 are not yet clear 3 Approaches to IPOs

5 Round Trip Investments What is a round trip investment and why do you care? Circular 10 MOFCOM Beijing approvals required for any round trip investment a related-party foreign acquisition of a PRC company (equity or assets) Preview: using a VIE structure avoids an acquisition and therefore also avoids any round trip investment SAFE Circular 75 establishment of an offshore entity (an SPV ) for purposes of engaging in a stock right financing followed by any investment in China by the SPV, including setting up a WFOE to acquire ownership or control over a PRC business Registration with local SAFE of offshore shareholding required Preview: using an offshore option (slow walk) postpones ownership of offshore shares and therefore Circular 75 registration Note: SAFE 75 definition is broader than Circular 10 definition MOFCOM approvals are very difficult; SAFE registration is generally fairly straightforward 4 Approaches to IPOs

6 Restructuring Alternatives Objectives Major Objective: avoid round-trip investment as defined by Circular 10 Minor Objective: postpone SAFE Circular 75 registration Three principal methods Legacy companies PRC companies offshored before September 8, 2006 Most straight IPOs have been legacy structures VIE structures Well understood and commonly used see internet companies and many others WFOE used to capture most of the economic benefit of PRC operations, while protecting the economic interests of the offshore investors Objections: investors do not directly own the operating assets risk of additional layer of tax (business tax on management/consulting fee paid to WFOE) Slow walk or offshore option structures PRC entrepreneurs have an option to acquire the offshore entity over time Objections: PRC founders are sometimes resistant and prefer the forbidden trust some PRC lawyers do not believe slow walk alone is sufficient to avoid Circular 10 approvals New structures VIE + EJV Slow walk + VIE Heavy WFOE + creeping acquisition 5 Approaches to IPOs

7 Restructuring Do s and Don'ts DO DON T Advance planning (don t give your advisors a fait accompli) Comply with PRC law at all times Confer with authorities in advance Ensure all transactions have economic substance Make full and honest disclosure to US and PRC authorities Don t hide the ball Don t use a trust Don t engage in sham transactions Don t fail to respect PRC regulations and authorities Don t be greedy (this is a recurring theme) REMEMBER: in China everything is possible but nothing is easy 6 Approaches to IPOs

8 NextGen public offerings Traditional RTO Restructure to offshore holdco Share exchange with OTCBB shell PIPE + PIPE + PIPE Underwritten follow-on if desired Up-list to NASDAQ or NYSE Traditional IPO Restructure to offshore holdco No share exchange with OTCBB shell Initial public offering of ADS Listing on NASDAQ or NYSE Foreign private issuer CSRC approvals? WRASP sm Restructure to offshore holdco Share exchange with US public shell Shell is fully reporting but not on OTCBB Small private placement (PIPE) + primary public offering and listing on NASDAQ or NYSE Form 10 Restructure to offshore holdco Share exchange with US newco File Form 10 as an operating company wait 60 days Private placement if desired Underwritten or self-underwritten public offering (IPO) + listing on NASDAQ or NYSE RTO2IPO sm Restructure to offshore holdco Share exchange with OTCBB shell or a prepared Form 10 shell Underwritten or self-underwritten public offering (IPO) + listing on NASDAQ or NYSE 7 Approaches to IPOs

9 Bottom Line: Pigs Get Fat Straight line to IPO in the United States (SPV + share swap + IPO) is directly regulated by CSRC and MOFCOM under Circular 10 and you can t do it But, China s growth economy needs the international public capital markets And, China s regulators are watching but likely to remain tolerant, but not if the players get greedy So: the value of the well-worn path, or, don t be a pioneer In closing, the wisdom of our parents (again): English saying: Pride goeth before the fall. American saying: Pigs get fat, and hogs get slaughtered. Japanese saying: The nail that sticks up gets pounded down. Universal meaning: don t be greedy and boastful, or you will be punished; be smart, respectful and modest, and you will succeed 8 Approaches to IPOs

10 IPOs for China-based companies Structures and Approaches Thomas M. Shoesmith Pillsbury Winthrop Shaw Pittman LLP - Shanghai Pillsbury Winthrop Shaw Pittman LLP