(continued)
Impact of SAFE Circular 75 on VIE structure acquisition
In 2006, China government promulgated SAFE Circular 75 which is intended to regulate the round-trip investment by PRC natural person or company. Under SAFE Circular 75, when a PRC founder intends to establish offshore company and then this offshore company set up a WFOE in China, the PRC founder should file this round-trip investment with SAFE.
As VIE structure acquisition involve round-trip investment (namely, PRC founder will set up SPV, and the SPV establish a SPV), SAFE Circular 75 filing become an issue. Under VIE structure acquisition, two SAFE filing are required under SAFE 75 regime. When the SPV, which is established by the PRC founder, set up a WFOE, PRC founder need to carry out initial SAFE 75 registration; when the foreign investor acquire PRC founder’s share in the SPV, and therefore make investment in the SPV, and SPV then increase capital of WFOE, PRC founder also need to conduct SAFE 75 alteration registration.
China government control VIE acquisition by restraining or loosening up SAFE Circular 75 registration process. In Shanghai and Beijing, local SAFE usually take stricter attitude than other regions towards application of SAFE 75 registration. They typically have some internal rules to deal with such kind of application. For example, in late 2011, Beijing SAFE did not accept SAFE 75 registration application if PRC founder reorganize SPV by the way of share repurchasing.
In May 2011, China government promulgated SAFE Circular 19 providing more detailed specifics for round-trip investment filing, which, at a certain point, make registration process more clearly.
Adam Li