F-1 1 formf-1.htm

As filed with the U.S. Securities and Exchange Commission on January 18, 2022.

 

Registration No. 333-      

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

HENGGUANG HOLDING CO., LIMITED

(Exact name of registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   6411   Not Applicable

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number) 

 

(I.R.S. Employer

Identification Number)

 

1666 Chenglong Road,

Section 2, Building 2, 5th Floor

Longquanyi District,

Chengdu, Sichuan Province,

China 61000

c/o Jiulin Zhang

+86 (400) 028-1990

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 31st Floor

New York, New York 10036

(212) 930-9700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Jay Kaplowitz, Esq.

Huan Lou, Esq.

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 31st Floor

New York, New York 10036

Telephone: (212) 930-9700

Fang Liu, Esq.

VCL Law LLP

1945 Old Gallows Road, Suite 630

Vienna, VA 22182

Telephone: (703) 919-7285

 

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company [X]

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class

of Securities to Be

Registered

  Amount
to Be Registered
   Proposed
Maximum
Offering
Price per
Share
  

Proposed

Maximum Aggregate

Offering

Price(1)

  

Amount of Registration

Fee(2)

 
Class A Ordinary Shares, par value US$0.001 per share(3)                 $              $18,400,000   $1,705.68 
Underwriter’s warrants(3) (4)       $-   $-   $- 
Class A Ordinary Shares underlying Underwriter’s warrants (3) (5)       $   $

1,150,000

   $

106.60

 
Total       $   $

19,550,000

   $

1,812.28

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act, including the offering price attributable to additional [*] ordinary shares, par value US$0.001 per share (“Ordinary Shares”), that the underwriter has the option to purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(o) under the Securities Act, based on an estimate of the proposed maximum aggregate offering price.
(3) In accordance with Rule 416(a), we are also registering an indeterminate number of additional Class A Ordinary Shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.
(4) We have agreed to issue to the Underwriter warrants (the “Underwriter Warrants”) to purchase Class A Ordinary Shares (the “Underwriter Warrants”) in the aggregate amount equal to 5% of the Class A Ordinary Shares sold at closing of the offering, including any shares that may be sold as result of the Underwriter exercising its over-allotment option. The Underwriter Warrants will be exercisable from time to time from six months after the effective date of the registration statement and will expire after five years from the effective date of this registration statement, in whole or in part, but may not be transferred nor may the shares underlying the warrants be sold until 180 days from the effective date of the offering. The exercise price of the Underwriter Warrants is equal to 125% the public offering price per share sold in the offering.
(5) No fee required pursuant to Rule 457(g) under the Securities Act.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION  
PRELIMINARY PROSPECTUS DATED January 18, 2022

 

[              ] Class A Ordinary Shares

 

HENGGUANG HOLDING CO., LIMITED

 

cc06ba430dfe5f0688d1aebf62c915e

 

This is an initial public offering of the Class A Ordinary Shares of Hengguang Holding Co., Limited (“Heng Guang Cayman”), a holding company incorporated in the Cayman Islands. Prior to this offering, there has been no public market for Heng Guang Cayman’s Class A ordinary shares, par value $0.001 per share (the “Class A Ordinary Share”). This offering is being made on a firm commitment basis. We expect the initial public offering price will be in the range of $[     ] to $[      ] per share. We reserved the symbol “HGIA” for purposes of listing the Class A Ordinary Shares on the Nasdaq Stock Market (“NASDAQ”) and applied to list the Class A Ordinary Shares on the Nasdaq Capital Market. The initial public offering is contingent upon receiving authorization to list the Class A Ordinary Shares on a national exchange. There is no guarantee or assurance that the Class A Ordinary Shares will be approved for listing on NASDAQ or any other national stock exchange.

 

There are 6,500,000 Class A Ordinary Shares and 3,500,000 Class B ordinary shares (the “Class B Ordinary Shares”) issued and outstanding immediately prior to this offering. In respect of matters requiring the votes of shareholders, each Class A Ordinary Share is entitled to one vote, and each Class B Ordinary Share is entitled to ten (10) votes and is convertible into one Class A Ordinary Share at any time requested by the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. The holder of our Class B Ordinary Shares will be able to exercise approximately [*]% of the total outstanding voting power immediately following the completion of this offering, assuming the sale of [*] Class A Ordinary Shares, and excluding the effects of any exercise of the Underwriter Warrants and the over-allotment option.

 

Our officers and directors of Heng Guang Cayman own and will continue to own at least 50% of the voting power of our Company after the closing of this offering, therefore we are a “controlled company” as defined under NASDAQ Listing Rules. However, even if we qualify as a “controlled company,” we do not intend to rely on the controlled company exemptions provided under NASDAQ Listing Rules.

 

Investing in our Class A Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” starting on page 22 to read about factors you should consider before buying the Class A Ordinary Shares.

 

Heng Guang Cayman is not a Chinese operating company but a holding company incorporated in the Cayman Islands. This is an offering of the ordinary shares of Heng Guang Cayman, the offshore holding company. You are not investing in any of our Affiliated Entities. “Heng Guang Insurance” shall hereinafter refer to Sichuan Heng Guang Insurance Agency Co., Ltd., a company organized under the laws of the PRC and our operating entity ultimately controlled by Heng Guang Cayman. “Heng Guang BVI” shall hereinafter refer to Heng Guang Shun Da Co., Ltd., a company formed under the laws of British Virgin Islands and a wholly-owned subsidiary of Heng Guang Cayman. “Heng Guang Hong Kong” shall hereinafter refer to Heng Guang Holdings Co., Ltd., a company formed under the laws of Hong Kong and a wholly-owned subsidiary of Heng Guang BVI. “WFOE” shall hereinafter refer to Chengdu Jiulin Kefu Technology Co., Ltd., a Chinese company and wholly-owned subsidiary of Heng Guang Hong Kong. “We,” the “Company” or the “Group” shall refer to the group of Heng Guang Insurance, Heng Guang Cayman, Heng Guang BVI, Heng Guang Hong Kong, WFOE, and the subsidiaries of Heng Guang Insurance. “Affiliated Entities” shall refer to Heng Guang BVI, Heng Guang Hong Kong, WFOE, and Heng Guang Insurance and its subsidiaries.

 

As a holding company with no material operations of our own, Heng Guang Cayman conducts substantially all of its operations through Heng Guang Insurance and its subsidiaries, the operating entities established in the People’s Republic of China controlled by Heng Guang Cayman via a series of variable interest entity agreements. Neither we nor our subsidiaries own any share in Heng Guang Insurance or its subsidiaries, hereinafter referred to as the “VIEs.” Instead, the Company controls and receives the economic benefits of its VIEs’ business operations through certain contractual arrangements. Heng Guang Cayman’s Class A Ordinary Shares offered in this prospectus are shares of the company incorporated in Cayman Islands, not the shares of its operating entities. Because of the Group’s corporate structure, the Company or Group is subject to the risks due to uncertainty of the interpretation and the application of the PRC laws and regulations. As of the date of this prospectus, there is no laws, regulations or other rules require its China based operating entities to obtain permission or approvals from any Chinese authorities to list its or its affiliate’s securities on U.S. stock exchanges, and neither Heng Guang Cayman nor Heng Guang Insurance has received or were denied such permission. However, there is no guarantee that Heng Guang Cayman or Heng Guang Insurance will receive or not be denied permission from Chinese authorities to list on U.S. exchanges in the future. For a description of our corporate structure and VIE contractual arrangements, see “Business - Corporate History and Structure.” See also “Risk Factors - Risks Related to Our Corporate Structure.” 

 

The Company is also subject to the legal and operational risks associated with being based in and having the majority of the Company’s operations in China. These risks may result in material changes in operations, or a complete hindrance of Heng Guang Cayman’s ability to offer or continue to offer its securities to investors, and could cause the value of Heng Guang Cayman’s securities to significantly decline or become worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. On July 10, 2021, the PRC State Internet Information Office issued the Measures of Cybersecurity Review, which requires cyberspace companies with personal information of more than one (1) million users that want to list their securities on a non-Chinese stock exchange to file a cybersecurity review with the Office of Cybersecurity Review of China. On December 28, 2021, a total of thirteen governmental departments of the PRC, including the PRC State Internet Information Office issued the Measures of Cybersecurity Review, which will become effective on February 15, 2022. Furthermore, the Chinese insurance sector is going through a series of reforms and new laws and guidelines have been recently promulgated and released to regulate our industry, including the new upper limit expense rate of certain auto insurance products. As of the date of this prospectus, the Measures of Cybersecurity Review have not impacted the Company’s ability to conduct its business, accept foreign investments, or list on a U.S. or other foreign exchange; however, there are uncertainties in the interpretation and enforcement of these new laws and guidelines, which could materially and adversely impact the Company’s overall business and financial outlook. See “Risk Factors - Risks Relating to Doing Business in China.” Heng Guang Insurance, our PRC operating entity, receives substantially all of the Company’s revenue in RMB. Under our current corporate structure, to fund any cash and financing requirements we may have, Heng Guang Cayman may rely on dividend payments from its subsidiaries. See “Prospectus Summary- Dividend Distribution.” Our independent registered public accounting firm is subject to laws in the United States pursuant to which the Public Company Accounting Oversight Board (United States) (the “PCAOB”) conducts regular inspections to assess its compliance with the applicable professional standards. Our independent registered public accounting firm has been inspected by the PCAOB on a regular basis and as such, it is not affected by the PCAOB report dated December 16, 2021.

 

We are an “emerging growth company” as used in the Jumpstart Our Business Startups Act of 2012, and as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings. See “Risk Factors” and “Prospectus Summary— Implications of Our Being an Emerging Growth Company”.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

  

Per Class A Ordinary

Share

  

Total

 
Initial public offering price (1)  US $                  US $             
Underwriter’s discounts (2)  US $   US $ 
Proceeds to our company before expenses(3)  US $   US $ 

 

(1) Assumed an initial public offering price of $[             ] per share, the midpoint of the range set forth on the cover page of this registration statement
(2) See “Underwriting” in this prospectus for more information regarding our arrangements with the underwriter.
(3) The total estimated expenses related to this offering are set forth in the section entitled “Expenses Related to This Offering”.

 

We expect our total cash expenses for this offering (including cash expenses payable to our underwriter for its out-of-pocket expenses) to be approximately $[                ], exclusive of underwriting discounts and non-accountable expense allowance. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

 

This offering is being conducted on a firm commitment basis. The underwriter is obligated to take and pay for all of the Ordinary Shares if any such shares are taken. We have granted the underwriter an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of our Ordinary Shares to be offered by us pursuant to this offering (excluding shares subject to this option), solely for the purpose of covering over-allotments, at the initial public offering price less the underwriting discount. Based on an offering price between $[         ] and $[         ] per Class A Ordinary Share, (i) If the underwriter does not exercise the option in full, the total underwriting discounts payable will be between $[         ] and $[         ] based on an offering price between $[         ] and $[          ] per Class A Ordinary Share, and the total gross proceeds to us, before underwriting discounts and non-accountable expense allowance, will be between $[          ] and $[         ]; (ii) if the underwriter exercises the option in full, the total underwriting discounts payable will be between $[         ] and $[         ], and the total proceeds to us, before underwriting discounts and non-accountable expense allowance, will be between $[           ] and $[         ]. If we complete this offering, net proceeds will be delivered to us on the closing date. We will not be able to use such proceeds in China, however, until we complete capital contribution procedures which require prior approval from each of the respective local counterparts of China’s Ministry of Commerce, the State Administration for Industry and Commerce, and the State Administration of Foreign Exchange. See remittance procedures in the section titled “Use of Proceeds” beginning on page 42.

 

The underwriter expects to deliver the Class A Ordinary Shares against payment in New York, New York on [*], 2022.

 

Network 1 Financial Securities, Inc.

 

 

 

Prospectus dated [*], 2022

 

 
 

 

About this Prospectus

 

This prospectus is part of a registration statement we filed with the SEC. We and the underwriter have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Ordinary Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Other Pertinent Information

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

  “Affiliated Entities” are to Heng Guang BVI, Heng Guang Hong Kong, WFOE, and Heng Guang Insurance and its subsidiaries;
  “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
  “Class A Ordinary Shares” are to our Class A ordinary shares, par value US$0.001 per share;
  “Class B Ordinary Shares” are to our Class B ordinary shares, par value US$0.001 per share;
  “Heng Guang Insurance” are to Sichuan Heng Guang Insurance Agency Co., Ltd., a company organized under the laws of the PRC and our operating entity ultimately controlled by Heng Guang Cayman;
  “Heng Guang Insurance Shareholders” or “HG Shareholders” are to Chunlin Mao, Haibo Bai, and Xuefeng Huang, collectively, who have constituted all of the shareholders of Heng Guang Insurance as of the date of this prospectus.
  “Heng Guang Cayman” or the “Company” are to the registrant Hengguang Holding Co., Limited., an exempted company incorporated under the laws of Cayman Islands;
  “Heng Guang BVI” are to Heng Guang Shun Da Co., Ltd., a company formed under the laws of British Virgin Islands and a wholly-owned subsidiary of Heng Guang Cayman;
  “Heng Guang Hong Kong” are to Heng Guang Holdings Co., Ltd., a company formed under the laws of Hong Kong and a wholly-owned subsidiary of Heng Guang BVI;
  “shares”, “Shares” or “Ordinary Shares” as of the date hereof refer to our Class A and Class B ordinary shares, par value US$0.001 per share;
  “VIEs” are to the variable interest entities including Heng Guang Insurance and its subsidiaries;
  “WFOE” are to Chengdu Jiulin Kefu Technology Co., Ltd., a Chinese company and wholly-owned subsidiary of Heng Guang Hong Kong;
  “we”, “us”, the “Company” or the “Group” are to Heng Guang Insurance, Heng Guang Cayman, Heng Guang BVI, Heng Guang Hong Kong, WFOE, and the subsidiaries of Heng Guang Insurance set forth in Exhibit 21.1, as a group.

 

Our business is conducted by Heng Guang Insurance, our VIE entity in the PRC, and its subsidiaries and branch offices, using Chinese dollars (the “RMB”), the legal currency of China. Our consolidated financial statements are presented in United States dollars. In this prospectus, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations and the value of our assets, including accounts receivable.

 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
SUMMARY CONSOLIDATED FINANCIAL DATA 14
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 21
RISK FACTORS 22
USE OF PROCEEDS 42
DIVIDEND POLICY 43
CAPITALIZATION 43
DILUTION 44
ENFORCEABILITY OF CIVIL LIABILITIES 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 46
INDUSTRY 61
BUSINESS 64
REGULATIONS 80
MANAGEMENT 88
EXECUTIVE COMPENSATION 91
PRINCIPAL SHAREHOLDERS 92
RELATED PARTY TRANSACTIONS 93
DESCRIPTION OF SHARE CAPITAL 94
SHARES ELIGIBLE FOR FUTURE SALE 106
TAXATION 107
UNDERWRITING 112
EXPENSES RELATING TO THIS OFFERING 118
LEGAL MATTERS 118
EXPERTS 118
WHERE YOU CAN FIND MORE INFORMATION 118
INDEX TO FINANCIAL STATEMENTS F-1

 

We are responsible for the information contained in this prospectus and any free writing prospectus we prepare or authorize. We have not, and the underwriter has not, authorized anyone to provide you with different information, and we and the underwriter take no responsibility for any other information others may give you. We are not, and the underwriter is not, making an offer to sell our Ordinary Shares in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or the sale of any Ordinary Shares.

 

For investors outside the United States: Neither we nor the underwriter have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Ordinary Shares and the distribution of this prospectus outside the United States.

 

We are incorporated under the laws of PRC as an exempted company with limited liability and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or the SEC, we currently qualify for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the Securities and Exchange Commission, or the SEC, as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

All dealers that buy, sell or trade our Ordinary Shares, whether or not participating in this offering, may be required to deliver a prospectus 25 days after this registration agreement is declared effective. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 
 

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Ordinary Shares, discussed under “Risk Factors,” before deciding whether to buy our Ordinary Shares.

 

Overview

 

Heng Guang Cayman is a holding company incorporated in the Cayman Islands, controlling the national insurance agency operations based in China via variable interest contractual arrangements (the “VIE Arrangement”) with our operating entities, Heng Guang Insurance and its subsidiaries. As a holding company with no material operations of our own, we conduct substantially all of our operations through our operating entities established in the People’s Republic of China, including our variable interest entities, or VIEs, in China. Heng Guang Cayman receives the economic benefits and exercises control of Heng Guang Insurance’s business operations through such VIE Arrangement, which will be described in details in the “Prospectus Summary- Contractual Arrangements Between Heng Guang Insurance And WFOE.” Our Class A Ordinary Shares offered in this prospectus are shares of Heng Guang Cayman, our holding company incorporated in Cayman Islands, not the shares of Heng Guang Insurance, our operating entities.

 

The following diagram illustrates our current corporate structure and existing shareholders of each corporate entity listed herein as of the date of this prospectus:

 

 

 

For a detailed description of our corporate structure and VIE contractual arrangements, see “Business - Corporate History and Structure” and “Principal Shareholders.” See also “Risk Factors - Risks Related to Our Corporate Structure.

 

Heng Guang Insurance, controlled by Heng Guang Cayman through a set of variable interest entity agreements was established in 2004 and has developed a successful business strategy in the City of Guangan, Sichuan Province during its first ten years. In 2015, Heng Guang Insurance relocated its headquarters to Chengdu, the capital city of Sichuan and a business center in southwest China. In 2016, Heng Guang Insurance was granted with its Chinese national insurance agency qualification and Internet insurance agency license, and formally established its corporate strategy of expanding its digital insurance agency services. In 2019, Heng Guang Insurance accelerated its digitalization process and began to develop a digital sales application platform- “Heng Kuai Bao (meaning fast insurance agency)”, aiming to enhance the insurance service efficiency, improve user experiences, and empower its agents with new technologies. In September 2020, after the auto insurance reform in China, Heng Guang Insurance was a pioneer insurance intermediary in launching the auto insurance one-click system in Heng Kuai Bao, which gained its popularity in the auto-insurance market. As of May 2021, Heng Guang Insurance grew from one branch office in Guangan City to forty-eight (48) locations sprawling in fifteen (15) provinces and municipalities in the Southwest and Northeast of the PRC.

 

Heng Guang Insurance distributes a variety of insurance products, which are categorized into two major groups: (1) property and casualty insurance, such as automobile insurance, commercial property insurance, casualty and accident insurance, construction and engineering insurance, and liability insurance; and (2) life and health insurance. As an insurance agency firm, Heng Guang Insurance has limited underwriting capacity and primarily provides sales, distribution and ancillary services of insurance products underwritten by the insurance companies Heng Guang Insurance represents. Heng Guang Insurance derives its revenue primarily from commissions and fees paid by the partner insurance companies, typically calculated as a percentage of premiums paid by its customers to the insurance companies. As of the date of this report, Heng Guang Insurance has relationships with over 70 insurance companies in the PRC. Heng Guang Insurance helps consumers select the right insurance products for purchase, but represent the partner insurance companies in the transactions. For the six months ended June 30, 2021, 61.38% of our total revenue were attributed to our top five insurance company partners, each accounted for 24.83%, 13.78%, 12.13%, 6.69% and 3.95%, respectively. For the six months ended June 30, 2020, 67.44% of our total revenues were attributed to our top five insurance company partners, each accounted for 33.99%, 18.44%, 7.90%, 3.99% and 3.12%, respectively. Please see Section “Business-Customers” for details about our top insurance partners. We sell insurance products primarily through our sales force who are individual sales agents in our distribution and service network. As of the date of this prospectus, we had 48 locations (branch offices) throughout China to sell the insurance products. A large component of our cost of revenues is commissions paid to our individual sales agents. For the year ended December 31, 2020, 70.61% of Heng Guang Insurance’s total revenue were attributed to our top five insurance company partners, each accounted for 30.07%, 22.26%, 6.88%, 6.29% and 5.11%, respectively. For the year ended December 31, 2019, 66.88% of our total revenue were attributed to our top five insurance company partners, accounted for 23.37%, 22.64%, 7.23%, 7.13% and 6.51%, respectively. Heng Guang Insurance established eight (8) new branch offices in the years of 2020 and 2019 to further grow our sales and market share. Heng Guang Insurance has its Chinese national insurance agency license granted by the China Bank and Insurance Regulatory Commission (the “CBIRC”), valid as of June 13, 2023 and subject to further extension. Each of Heng Guang Insurance’s current operating branch office has the valid insurance agency license issued by the applicable Chinese governmental agencies.

 

The Chinese insurance industry has grown substantially in the past decade. Historically, insurance companies in the PRC relied primarily on their exclusive individual sales agents and direct sales force to sell their products. However, in recent years, as a result of increased competition and consumers’ demand for more options, insurance companies gradually expanded their distribution channels to include insurance intermediaries, such as commercial banks and insurance intermediaries. In addition, because of the increasingly high costs for establishing and maintaining distribution networks of their own, more insurance companies choose to rely primarily on insurance intermediaries to distribute the insurance products and in return provide attractive monetary incentives to the insurance intermediaries.

 

Heng Guang Insurance intends to grow its business by expanding its distribution network through opening additional brick and mortar offices and branches in China, expanding its online operations, and training and recruiting additional skilled professional sales agents in the life and health insurance sector. Heng Guang Insurance will also continue to seek opportunities to offer innovative and premium services and products to its customers. In 2018, Heng Guang Insurance started the development of the mobile app Heng Kuai Bao, which provides sales support, training, agents’ commission management and instant insurance quotes to our agents. Heng Guang Insurance plans to further develop and enhance its mobile app and online platform to extend the digital services to its insurance purchasers, with the goal of allowing them to shop, compare and purchase insurance products, process insurance claims, and manage policies all through Heng Kuai Bao as the one-stop application. In addition, Heng Guang Insurance diversified its insurance products by tapping into the health and life insurance sector in 2019. Furthermore, Heng Guang Insurance is allocating additional human and financial resources to its claim adjustment department in anticipation of future surging demand of its claim adjustment services as it sees more and more insurance companies choose to outsource claim adjustment functions to insurance agencies to minimize the costs of claim and risk management.

 

1
 

 

The following table illustrates the breakdown of our net commission revenues by insurance products for the years ended December 31, 2020 and 2019.

 

   Year ended December 31, 2020   Year ended December 31, 2019 
   Revenue   Percentage
of Total commission revenue
   Revenue   Percentage
of Total commission revenue
 
                 
Automobile insurance                    
Mandatory  $1,038,399    5.30%  $957,160    4.21%
Other   13,854,192    70.70%   18,712,485    82.35%
Commercial property insurance   90,770    0.46%   45,074    0.20%
Liability insurance   969,881    4.95%   453,538    2.00%
Casualty insurance   1,937,550    9.89%   1,749,342    7.70%
Construction and engineering insurance   691,709    3.53%   519,383    2.29%
Life and health insurance   901,389    4.60%   225,738    0.99%
Others   111,318    0.57%   60,448    0.27%
Total  $19,595,208    100.00%  $22,723,168    100.00%

 

The following table illustrates the breakdown of our total commission revenue by insurance products for the six months ended June 30, 2021 and 2020.

 

   Six Months ended June 30, 2021   Six Months ended June 30, 2020 
   Revenue   Percentage of Total commission revenue   Revenue   Percentage of Total commission revenue 
Automobile Insurance                    
Mandatory  $376,628    4.69%  $692,589    7.29%
Other   4,750,559    59.12%   7,075,826    74.44%
Property Insurance   25,631    0.32%   40,496    0.43%
Liability Insurance   494,805    6.16%   403,311    4.24%
Casualty Insurance   1,480,429    18.42%   844,600    8.89%
Construction and Engineering Insurance   415,644    5.17%   294,400    3.10%
Life and Health Insurance   315,289    3.92%   122,987    1.29%
Other   176,908    2.20%   30,862    0.32%
Total commission revenue, net  $8,035,893    100.00%  $9,505,071    100.00%

 

Contractual Arrangements Between Heng Guang Insurance And WFOE

 

Heng Guang Cayman does not own any equity interest in Heng Guang Insurance, either directly or indirectly. Instead, Heng Guang Cayman exercises control and obtains the economic benefits of Heng Guang Insurance’s business operation through a series of variable interest contractual arrangements. HG Shareholders (as defined below) and WFOE entered into a series of contractual arrangements, also known as VIE Agreements, on or about December 3, 2020. The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Heng Guang Insurance, including absolute control rights and the rights to the assets, property and revenue of Heng Guang Insurance.

 

According to the Exclusive Business Cooperation and Service Agreement, Heng Guang Insurance is obligated to pay service fees to WFOE approximately equal to the net income of Heng Guang Insurance after deduction of the required PRC statutory reserve.

 

The VIE Agreements include the following and are described in details below:

 

Exclusive Business Management and Service Agreement

 

Pursuant to the Exclusive Business Management and Service Agreement between Heng Guang Insurance and WFOE dated December 3, 2020, WFOE provides Heng Guang Insurance with technical support, consulting services, intellectual services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Heng Guang Insurance granted a fully-paid exclusive license to WFOE to use all of the intellectual properties of Heng Guang Insurance and WFOE will be the owner of any and all intellectual property to be developed in the future either by Heng Guang Insurance or WFOE from the date of this Exclusive Business Management and Service Agreement. For services rendered by WFOE to Heng Guang Insurance under this agreement, WFOE is entitled to collect a service fee calculated based on the time of services rendered multiplied by the corresponding rate, the plus amount of the services fees or ratio decided by the board of directors of WFOE based on the value of services rendered by WFOE and the actual income of Heng Guang Insurance from time to time, which is approximately equal to the net income of Heng Guang Insurance after deduction of the required PRC statutory reserve.

 

The Exclusive Business Management and Service Agreement shall remain in effect for ten (10) years with an automatic renewal of another ten (10) years, and can only be terminated earlier if one of the parties defaults or WFOE enters into a bankruptcy or liquidation process (either voluntary or involuntary). WFOE is entitled to terminate this agreement by providing a written 30-day notice to Heng Guang Insurance.

 

2
 

 

The CEO of WFOE, Mr. Jiulin Zhang, who is also the CEO of Heng Guang Insurance, is currently managing Heng Guang Insurance pursuant to the terms of the Exclusive Business Management and Service Agreement. WFOE has absolute authority relating to the management of Heng Guang Insurance, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. Upon establishment of the Company’s audit committee at the consummation of this offering, the Company’s audit committee will be required to review and approve in advance any related party transactions, including transactions involving WFOE or Heng Guang Insurance.

 

Equity Pledge Agreement

 

Under the Equity Pledge Agreement among WFOE, Heng Guang Insurance and each of the Heng Guang Insurance Shareholders, each Heng Guang Insurance Shareholder pledged all of his or her equity interests in Heng Guang Insurance to WFOE to guarantee the performance of Heng Guang Insurance’s obligations under the Exclusive Business Management and Service Agreement. Under the terms of the Equity Pledge Agreement, in the event that Heng Guang Insurance or any of Heng Guang Insurance Shareholders breaches its respective contractual obligations under the Exclusive Business Management and Service Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends distributed from the pledged equity interests. All of the Heng Guang Insurance Shareholders also agreed that upon occurrence of any event of default, as set forth in the Equity Pledge Agreement, WFOE is entitled to dispose the pledged equity interest in accordance with applicable PRC laws. Each Heng Guang Insurance Shareholder further agreed not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

 

The Equity Pledge Agreement is effective until all payments due under the Exclusive Business Management and Service Agreement have been paid by Heng Guang Insurance. WFOE shall cancel or terminate the Equity Pledge Agreement upon Heng Guang Insurance’s full payment of the fees payable under the Exclusive Business Management and Service Agreement.

 

The purposes of the Equity Pledge Agreement are to (1) guarantee the performance of Heng Guang Insurance’s obligations under the Exclusive Business Management and Service Agreement, (2) make sure any Heng Guang Insurance Shareholder does and will not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice WFOE’s interests without WFOE’s prior written consent, and (3) provide WFOE de facto control over Heng Guang Insurance. In the event that Heng Guang Insurance breaches its contractual obligations under the Exclusive Business Management and Service Agreement, WFOE will be entitled to foreclose on and dispose all of Heng Guang Insurance’s issued and outstanding equity interests, have the right to (1) exercise its option to purchase or designate third parties to purchase part or all of Heng Guang Insurance’s equity interests and (2) terminate the VIE Agreements after acquisition of all equity interests in Heng Guang Insurance or form a new VIE structure with the third parties designated by WFOE.

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement dated December 3, 2020, each Heng Guang Insurance Shareholder irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of its equity interests in Heng Guang Insurance. The option price is equal to the lowest price legally permitted by applicable PRC laws and regulations.

 

The Exclusive Option Agreement shall remain effective for a term of ten (10) years from the date of the Agreement, may be extended for another ten (10) years at the choice of the WFOE, and can only be terminated if one party defaults or by the WFOE unilaterally.

 

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Proxy Agreement

 

Under the Proxy Agreement dated December 3, 2020, each Heng Guang Insurance Shareholder authorized WFOE to act on its behalf as its exclusive agent and attorney with respect to all rights as shareholders of Heng Guang Insurance, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all of the shareholders’ rights that the shareholders are entitled to under PRC laws and the articles of association of Heng Guang Insurance, including but not limited to voting, the sale or transfer or pledge or disposition of shares of Heng Guang Insurance in part or in whole; and (c) designating and appointing on behalf of Heng Guang Insurance Shareholders the legal representative, the executive directors, supervisors, the chief executive officer and other senior management members of Heng Guang Insurance.

 

The Proxy Agreement shall remain effective for a term of ten (10) years from the date of the Agreement, can be automatically renewed in an increment of one (1) year each time after the end of the initial 10-year term unless terminated earlier by WFOE. The Proxy Agreement is irrevocable and continuously valid from the date of execution of the Proxy Agreement, so long as any of the Heng Guang Insurance Shareholders is the shareholder of Heng Guang Insurance. The sale or transfer of one Heng Guang Insurance Shaholder’s equity interest in Heng Guang Insurance shall not interfere with or affect the force and validity of the Proxy Agreement as to the remaining Heng Guang Insurance Shareholders.

 

The Exclusive Business Management and Service Agreement, together with the Equity Pledge Agreement, Share Disposal and Exclusive Option Agreement, and the Proxy Agreement, enable WFOE to exercise effective control over Heng Guang Insurance. As a result of these VIE agreements, Heng Guang Cayman is currently the beneficiary of Heng Guang Insurance and its subsidiary, and the Company as a group of corporate entities accordingly treats Heng Guang Insurance as its VIE under U.S. GAAP. We consolidate the financial results of Heng Guang Insurance and its subsidiary in our consolidated financial statements in accordance with U.S. GAAP.

 

Summary of challenges and risks involved in the VIE Arrangements and enforcing the VIE Agreements

 

Because we do not hold equity interests in our VIEs, we are subject to risks due to the uncertainty of the interpretation and application of the PRC laws and regulations, including but not limited to regulatory review of oversea listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the contractual arrangement with our VIEs. We are also subject to the risks of the uncertainty that the PRC government could disallow our VIE structure, which would likely result in a material change in our operations, or a complete hindrance of our ability to offer or continue to offer our securities to investors, and the value of our Class A Ordinary Shares may depreciate significantly. The VIE Arrangements are less effective than direct ownership due to the inherent risks of the VIE structure and that Heng Guang Cayman may have difficulty in enforcing any rights we may have under the VIE Agreements with the Heng Guang Insurance, its founders and shareholders in the PRC because all of our VIE Agreements are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, where the legal environment is uncertain and not as developed as in the United States, and where the Chinese government has significant oversight and discretion over the conduct of Heng Guang Insurance’s business and may intervene or influence Heng Guang Insurance’s operations at any time with little advance notice, which could result in a material change in our operations and/or the value of your Class A ordinary shares. Furthermore, these VIE Agreements may not be enforceable in China if the PRC authorities or courts take a view that such VIE Agreements contravene with the PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these VIE Agreements, we may not be able to exert effective control over our VIE, Heng Guang Insurance, and Heng Guang Insurance’s ability to conduct its business may be materially and adversely affected. See “Risk Factors — Risks Related to Our Corporate Structure”, “Risk Factors — Risks Related to Doing Business in China” and “Risk Factors — Risks Relating to This Offering and The Trading Market” for more information.

 

Dividend Distribution

 

Heng Guang Insurance, our PRC operating entity, receives substantially all of the Company’s revenue in RMB. Under our current corporate structure, to fund any cash and financing requirements we may have, Heng Guang Cayman may rely on dividend payments from its subsidiaries. Our WFOE receives payments from Heng Guang Insurance, and then remits payments to Heng Guang Hong Kong in accordance with its registration with the Chinese authority under the “Notice of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies” and pursuant to the VIE Agreements. Then Heng Guang Hong Kong may make distribution of such payments directly to Heng Guang Cayman as dividends to the holding company.

 

4
 

 

Under the existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (the “SAFE”) by complying with certain procedural requirements. Therefore, Heng Guang Insurance is allowed to pay dividends in foreign currencies to WFOE without prior approval from the SAFE, subject to the condition that the remittance of such dividends outside of the PRC shall comply with certain procedures under the PRC foreign exchange regulations, such as the overseas investment registrations by our HG Shareholders who are PRC residents. Approval from or registration with appropriate government authorities is, however, required where RMB is to be converted into a foreign currency and remitted out of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for Heng Guang Insurance’s accounts with little advance notice.

 

Current PRC regulations permit Heng Guang Insurance to pay dividends to Heng Guang Cayman only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, in accordance with Article 167 of the PRC Company Law, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of Heng Guang Insurance’s board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

As of the date of this prospectus, Heng Guang Insurance has not made any dividends or distributions to Heng Guang Cayman, and no dividends or distributions have been made by Heng Guang Cayman. We intend to keep any future earnings to re-invest in and finance the expansion of our business in China, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Under the Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business.

 

Cash dividends, if any, on our Class A Ordinary Shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.  Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC project. The 5% withholding tax rate, however, does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to any dividends paid by the WFOE to its immediate holding company, Heng Guang Hong Kong. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Heng Guang Hong Kong may apply for the tax resident certificate if and when the WFOE and Heng Guang Insurance intend to declare and pay dividends to Heng Guang Hong Kong.

 

5
 

 

Industry Background

 

In recent years, the global insurance industry developed rapidly, with premium rising from $4.7 trillion in 2016 to $6.1 trillion in 2020, according to China Insurance Yearbook. The average insurance density in China, calculated as the ratio of total insurance premiums divided by the entire Chinese population, has risen from $387 in 1999 to approximately $687 in 2020, as indicated in China Insurance Yearbook. While the competition in the insurance industry worldwide has been intensive, the insurance companies in China have gained substantial market shares and established its significant position in the global insurance market. In 2020, Brand Finance, a leading brand valuation and strategy consulting agency, announced the “Top 100 Most Valuable Insurance Brands in the World in 2020” which assigned a total value of the top 100 insurance brands on the list US$463.2 billion. Among the companies on the top 100 list, 12 brands from the Greater China region (including mainland, Hong Kong and Taiwan) were on the list, valued at approximately $151.5 billion dollars, accounting for 32.7% of the total value of the 100 companies on such list. As per a report from Statista, insurance density is a used as an indicator for the development of insurance within a country and is calculated as ratio of total insurance premiums to whole population of a given country. Our reference to insurance density is in terms of reflecting to the number of insurance premiums sold in China in contrast to the number of people living in China.

 

Despite this substantial growth and scale, the development of China’s insurance market still lags behind certain developed countries, leaving Chinese insurance companies and insurance intermediaries huge market potential. For instance, the statistics from the Chinese National Bureau of Statistics showed that the insurance depth (the original insurance premium income / total GDP in a country) in China was 4.45% compared to 7.3% of the worldwide average insurance depth in the year of 2020, reflecting Chinese insurance depth being 64% lower than the world average as of December 2020. The low insurance depth rate relative to those of developed economies and world average rate in 2020 suggest that China’s insurance market has significant growth potential. We believe that continued economic growth and the aging of the Chinese population, among other factors, will drive the future growth of China’s insurance industry. In particular, we expect that changing demographics will generate substantial demand for life insurance products.

 

Within China’s insurance industry, independent insurance agencies, serving insurance carriers, and insurance brokers, serving policy holders, are referred to as “professional insurance intermediaries,” to differentiate them from entities that distribute insurance products as an ancillary business, such as commercial banks, postal offices and automobile dealerships. The professional insurance intermediary sector in China has also grown significantly in recent years. According to data released by the CIRC, total insurance premiums generated by independent insurance institutions increased from RMB 147.2 billion in 2014 to RMB 482.8 billion in 2018, with a four-year compound growth rate of 34.5% and the total premiums generated by independent insurance institutions in 2019 reached approximately RMB 540 billion, showing an annual increase of 10.91% compared to the total premiums in 2018. We believe that the professional insurance intermediary sector will continue to offer substantial growth opportunities for the following reasons:

 

  China’s insurance industry as a whole has significant growth potential due to its relatively low penetration rate compared to more developed countries;
     
  as competition among insurance companies intensifies, insurance companies will probably focus more on their core competencies and should increasingly outsource distribution of their products;
     
  as Chinese consumers become more sophisticated, they should increasingly seek a greater selection of insurance products and services from different insurance companies with the benefit of independent professional advice; and
     
  a favorable regulatory environment should benefit professional insurance intermediaries.

 

Despite rapid growth in recent years, we believe that the professional insurance intermediary sector in the PRC is still at the development stage. As of June 2020, there were 2,645 professional insurance intermediary firms in China, including 496 professional insurance agencies, as reported by Jinri Toutiao, a Chinese news and information content platform and subsidiary of ByteDance, on January 29, 2021.

 

6
 

 

Our Strengths

 

We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

 

  Value added one stop shop services;
     
  Innovative digital marketing, operation and management;
     
  National distribution network;
     
  Experienced management team; and
     
  Rigorous training and human capital development.

 

Summary of Our Challenges and Risks

 

We are, and expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent to a development-stage business and in a heavily regulated industry in China. As a result, we must establish many functions necessary to operate our insurance intermediary business, including expanding our managerial and administrative structure, assessing and implementing our marketing program, conducting risk management and compliance, implementing financial systems and controls and personnel recruitment. Please read the Risk Factors section for the descriptions of the risks we face. These risks and challenges are, among other things:

 

Risks Related to Our Business and Industry

 

  We operate in an industry that is heavily regulated by relevant governmental agencies in China, and our business could be negatively impacted if we are unable to adapt our services to regulatory and policy changes in China.
     
  We may require additional capital to develop and expand our operations which may not be available to us when we require it.
     
  Our insurance products marketing and growth strategy may not be successful.
     
  Our business may be subject to significant fluctuations in operating results due to factors beyond our control, such as health epidemics, natural disasters or terrorist attacks.
     
  Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers or insurance carrier partners and our financial results may be negatively affected.
     
  If our investments in our online platforms are not successful, our business and results of operations may be materially and adversely affected.
     
  A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition.
     
  We face risks related to health epidemics, such as the COVID-19 outbreak, and other outbreaks, which could disrupt our business operations and adversely affect our business, financial condition and results of operations.
     
  Increases in labor costs or commission costs for sales agents in the PRC may adversely affect our business and our profitability.

 

7
 

 

Risks Related to Our Corporate Structure and Operation

 

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

If the PRC government deems that the VIE Agreements in relation to our VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those Chinese operations, which are substantially all of our business operations.

 

We rely on contractual arrangements among WFOE and our VIE entity Heng Guang Insurance and HG Shareholders, which may not be as effective in providing operational control as direct ownership and whereby Heng Guang Cayman may have difficulty in enforcing its rights under the VIE Agreements.

 

The HG Shareholders may have potential conflicts of interest with Heng Guang Cayman which may adversely affect our consolidated business and financial condition.

 

We rely on the business licenses, insurance agency business permit and certification for the State Graded Protection of Information Security held by Heng Guang Insurance and any deterioration of the relationship between Heng Guang Insurance and Heng Guang Cayman could materially and adversely affect our overall business operations.

 

Risks Related to Doing Business in China

 

U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.

 

Adverse regulatory developments in China may subject us to additional regulatory review and expose us to government interference, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements, and/or suspend or terminate our future securities offerings, making capital-raising more difficult.

 

The approval of the China Securities Regulatory Commission (the “CSRC”) and other compliance procedures may be required in connection with this offering, and, if required, we cannot predict whether we will be able to obtain such approval.

 

8
 

 

Uncertainties with respect to the PRC legal system could adversely affect us, the rules and regulations in China can change quickly with little advance notice, and such uncertainties materially and adversely affect our business and impede our ability to continue our operations in China.

 

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities and we conduct offerings outside China. We are currently not required to obtain approval from Chinese authorities to list our Ordinary Shares on Nasdaq, however, if the Chinese authorities exert more stringent requirements on Heng Guang Insurance or our Cayman holding company regarding our offering, we may not be able to list or continue listing on Nasdaq, offer securities to investors, or such Chinese restrictions may significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to decline significantly or become worthless.

 

Governmental control of currency conversion may affect the value of your investment.

 

We are a holding company and we rely for funding on dividend payments from our subsidiaries and VIE, which are subject to restrictions under PRC laws.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in our securities, especially if such matter cannot be addressed and resolved favorably.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.

 

PRC regulation of loans and direct investments by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

Risks Related to an Investment in Our Ordinary Shares and This Offering

 

The recent joint statement by the SEC and The Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by The Nasdaq Stock Market LLC (“NASDAQ”), and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. On September 22, 2021, the PCAOB adopted a final rule implementing the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years. Pursuant to the HFCAA and AHFCAA, our Class A Ordinary Shares may be prohibited to trade on a national exchange if the PCAOB is unable to inspect or fully investigate our auditor for two consecutive years beginning in 2022. These developments could add uncertainties to our offering.

 

Investors purchasing Class A Ordinary Shares in this offering will experience immediate dilution.

 

We have no plans to pay dividends on our Ordinary Shares.

 

There has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you pay for them, or at all.

 

We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against us.

 

9
 

 

Our Strategy

 

Our goal is to become a leading independent insurance agency in China and further develop our distribution network. To achieve this goal, we intend to capitalize on the growth potential of China’s insurance industry and insurance intermediary sub-sector, leverage our competitive strengths and pursue the following strategies:

 

  expand into the fast-growing life insurance sector while continuing to grow our property and casualty business;
     
  further expand our distribution network through opening new brick and mortar branches;
     
  further expand our online distribution channels;
     
  grow our managed general agency model;
     
  consolidate insurance products offered by different insurance companies to build a comprehensive insurance AI system;
     
  seek strategic acquisition targets; and
     
  continue to strengthen our relationships with leading insurance companies.

 

Corporate Information

 

Our principal executive office is located at 1666 Chenglong Road, Section 2, Chengdu Economic and Technological Development Zone, Building 2, 5th Floor, Longquanyi District, Chengdu, Sichuan Province, China. Our telephone number at this address is (400) 028-1990. Our registered office is at Ogier Global (Cayman) Limited, 89 Nexus Way, Camana Bay Grand Cayman KY1-9009, Cayman Islands. Our legal name of Heng Guang Cayman is Hengguang Holding Co., Limited and we operate our business under the commercial name “Heng Guang Bao Dai” or “HG-Insurance Agency.”

 

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website address is http://qy.hgbaoxian.com. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is Sichenzia Ross Ference LLP.

 

10
 

 

Recent Regulatory Development

 

Permissions from the PRC Authorities to Issue Our Class A Ordinary Shares to Foreign Investors

 

As of the date of this prospectus, we, our subsidiaries and VIE and VIE’s subsidiary, (1) are not required to obtain permissions from any PRC authorities to offer to sell or issue our Class A Ordinary Shares to non-Chinese investors, (2) are not covered by the permission requirements from the China Securities Regulatory Commission (the “CSRC”), Cyberspace Administration of China (the “CAC”), the China Bank and Insurance Regulatory Commission (the “CBIRC”) or any other entity that is required to approve of Heng Guang Insurance’s operations, and (3) have not received nor been denied such permissions by any PRC authorities. Nevertheless, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the July 6, 2021 Opinions, which were made available to the public on July 6, 2021. The July 6, 2021 Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Given the current PRC regulatory environment, it is uncertain whether and when we, our subsidiaries or VIE, will be required to obtain any permission from the PRC government to list on a U.S. stock exchanges in the future, and even when we obtain such permission, whether it will be denied or rescinded.

 

The Holding Foreign Companies Accountable Act

 

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. In June 2021, the Senate passed the AHFCAA, which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years

 

Our auditor, an independent registered public accounting firm that issues the audit report incorporated by reference by this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in the State of California, and has been inspected by the PCAOB on a regular basis. The recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.

 

Implications of Our Being an “Emerging Growth Company”

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company, we:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A;
     
  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
     
  are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
     
  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting until our second annual report on Form 20-F following the effectiveness of our initial public offering.

 

11
 

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a prospectus declared effective under the Securities Act of 1933, as amended, herein referred to as the Securities Act, or such earlier time that we no longer meet the definition of an emerging growth company. The JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Ordinary Share held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Foreign Private Issuer Status

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
     
  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Controlled Company

 

Upon completion of this offering, our CEO and chairman of the board of directors, Jiulin Zhang, will beneficially own approximately [*] % of the aggregate voting power of our outstanding Ordinary Shares assuming no exercise of the over-allotment option, or [*]% assuming full exercise of the over-allotment option. As a result, we will be deemed a “controlled company” for the purpose of the Nasdaq listing rules. As a controlled company, we are permitted to elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements, including:

 

  the requirement that our director nominees be selected or recommended solely by independent directors; and
     
  the requirement that we have a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees.

 

Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules, we could elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

THE OFFERING

 

Class A Ordinary Shares offered by us   [              ] Ordinary Shares, or [         ] Ordinary Shares if the underwriter exercises the over- allotment option in full.
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be between US$[      ] and US$[      ] per Ordinary Share.
     
Over-Allotment   We have granted to the underwriter the option, exercisable for 45 days from the date this registration statement is declared effective, to purchase up to an additional 15% of the total number of Class A Ordinary Shares to be offered  by the Company.
     
Authorized Capital   As of the date of this prospectus, our authorized share capital is US$50,000 divided into 38,000,000 Class A Ordinary Shares of US$0.001 par value per share and 12,000,000 Class B Ordinary Shares of US$0.001 par value per share. See “Description of Share Capital.
     
Ordinary Shares outstanding prior to completion of this offering   As of the date of this prospectus, we have 6,500,000 Class A Ordinary Shares and 3,500,000 Class B Ordinary Shares outstanding, prior to completion of this offering.

 

12
 

 

Ordinary Shares outstanding immediately after completion of the Offering  

[*] Class A Ordinary Shares or [*] Class A Ordinary Shares if the underwriter exercises the over-allotment option in full; 3,500,000 Class B Ordinary Shares.

 

The numbers do not include any of the Class A Ordinary Shares underlying the Underwriter Warrants. Our authorized share capital as of this offering is US$50,000 divided into 38,000,000 Class A Ordinary Shares of US$0.001 par value per share and 12,000,000 Class B Ordinary Shares of US$0.001 par value per share. See “Description of Share Capital.

     
Voting Rights  

Each Class A Ordinary Share is entitled to one (1) vote per share and each Class B Ordinary Share is entitled to ten (10) votes per share.

 

Holders of Class A and Class B ordinary shares will vote together as a single class, unless otherwise required by law or our amended and restated memorandum and articles of association. Our CEO, Mr. Jiulin Zhang, is the sole holder of our Class B Ordinary Shares and will hold [*]% to [*]% of the total outstanding voting power, depending on whether the Underwriter exercises its over-allotment option in full or not, following the completion of this offering and will have the ability to control the outcome of matters submitted to our shareholders for votes, including the election of our directors and the approval of any change in control transaction. See the sections titled “Principal Shareholders” and “Description of Share Capital” for additional information.

     
Concentration of  Ownership   Upon completion of this offering, our executive officers and directors, and their affiliates, will beneficially own, in the aggregate, approximately [*]% of the total votes for our issued and outstanding Ordinary Shares, assuming the underwriter does not exercise its over-allotment option.
     
Lock-up period  

We, our directors and executive officers, and certain shareholders of the Ordinary Shares, have agreed with the underwriter not to sell, transfer or dispose of any Ordinary Shares for 180 days after the effective date of this registration statement, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.

     
Listing   We intend to apply to have our Ordinary Shares listed on Nasdaq Capital Market.
     
Nasdaq Capital Markets Symbol   We have reserved “HGIA” as our ticker symbol.
     
Transfer Agent   [                     ]
     
Use of proceeds   We intend to use the proceeds from this offering for working capital and general corporate purposes, including digital expansion of our operations, branding and marketing, and additional recruitment. See “Use of Proceeds” for more information.
     
Risk factors   Investing in our Class A Ordinary Shares involves a high degree of risk and purchasers of our Class A Ordinary Shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our Class A Ordinary Shares beginning on Page 22.

 

13
 

 

SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following historical statements of operations for the fiscal years ended December 31, 2020 and 2019, and six months ended June 30, 2020 and June 30, 2021, and balance sheet data as of December 31, 2020 and 2019, and six months ended June 30, 2020 and June 30, 2021, which have been derived from our audited financial statements for those periods. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in the prospectus.

 

Selected Balance Sheet Information

 

   As of June 30, 2021   As of June 30, 2020 
Total current assets  $5,994,817   $6,298,492 
Total non-current assets   1,483,175    1,023,306 
Total Assets   7,477,992    7,321,798 
Total current liabilities   2,146,804    1,727,371 
Total Liabilities   2,220,892    1,780,287 
Total Shareholders’ Equity   5,257,100    5,541,510 

 

Selected Statements of Operations Information

 

   SIX MONTHS ENDED JUNE 30, 
   2021   2020 
         
Revenues  $8,878,424   $11,101,665 
Gross profit   1,532,056    1,722,067 
Total operating expenses   2,380,421    1,641,845 
(Loss) income from operations   (848,365)   80,222 
Income (loss) before income tax   (647,023)   441,875 
Net income   (493,918)   329,300 

 

Selected Balance Sheet Information

 

   AS OF DECEMBER 31, 
   2020   2019 
Total current assets  $7,243,469   $4,933,424 
Total non-current assets   1,352,187    1,178,832 
Total Assets   8,595,656    6,112,256 
Total current liabilities   2,819,905    760,406 
Total Liabilities   2,903,897    822,952 
Total Shareholders’ Equity   5,691,759    5,289,304 

 

Selected Statements of Operations Information

 

   YEARS ENDED DECEMBER 31, 
   2020   2019 
         
Revenues  $21,883,400   $23,479,380 
Gross profit   3,492,310    4,341,794 
Total operating expenses   3,915,151    1,876,095 
(Loss) income from operations   (422,841)   2,465,699 
Income before income tax   72,392    3,755,352 
Net income   45,718    2,812,730 

 

14
 

 

Consolidated Balance Sheets Information

 

    As of December 31, 2020 (Restated)  
    Parent     Non-VIE subsidiaries     The VIE     Elimination     Consolidated Total  
ASSETS                                        
CURRENT ASSETS                                        
Cash & equivalents   $ -     $ -     $ 807,380      $ -     $ 807,380  
Accounts receivable                     129,061               129,061  
Prepaid expenses             3,410       129,507               132,917  
Other receivables             1,533       192,911       (8,736 )     185,708  
Prepaid commission cost                     1,002,497               1,002,497  
Due from related parties                     4,985,906               4,985,906  
Total current assets     -       4,943       7,247,262       (8,736 )     7,243,469  
NONCURRENT ASSETS                                        
Restricted cash                     766,284               766,284  
Right-of-use assets, net             48,145       90,259               138,404  
Deferred tax assets                     251,708               251,708  
Investment in non-VIE subsidiaries     5,691,759                       (5,691,759 )     -  
Equity in the VIE through the VIE Agreements             5,695,552               (5,695,552 )     -  
Property and equipment, net                     114,550               114,550  
Intangible assets, net                     81,241               81,241  
Total non-current assets     5,691,759       5,743,697       1,304,042       (11,387,311 )     1,352,187  
TOTAL ASSETS   5,691,759      $ 5,748,640     $ 8,551,304     (11,396,047 )   $ 8,595,656  
                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                                        
CURRENT LIABILITIES                                        
Accounts payable    $      $ -     $ 820,135      $ -     $ 820,135  
Advance from customers                     48,347               48,347  
Accrued sales return liability                     1,207,828               1,207,828  
Taxes payable                     73,696               73,696  
Accrued liabilities and other payables             8,736       455,649       (8,736 )     455,649  
Operating lease liabilities             13,870       40,542               54,412  
Due to related parties                     159,838               159,838  
Total current liabilities     -       22,606       2,806,035       (8,736 )     2,819,905  
NONCURRENT LIABILITIES                                        
Operating lease liabilities             34,275       49,717               83,992  
Total non-current liabilities     -       34,275       49,717       -       83,992  
                                         
TOTAL LIABILITIES     -       56,881       2,855,752       (8,736 )     2,903,897  
                                         
COMMITMENTS AND CONTINGENCIES                                        
                                         
STOCKHOLDERS’ EQUITY                                        
Common stock     50,000                               50,000  
Additional paid in capital     7,136,489                               7,136,489  
Share capital             7,186,489       7,186,489       (14,372,978 )     -  
Accumulated deficit     (1,956,794 )     (1,956,794 )     (1,953,209 )     3,910,003       (1,956,794 )
Accumulated other comprehensive income     462,064       462,064       462,272       (924,336 )     462,064  
TOTAL STOCKHOLDERS’ EQUITY     5,691,759       5,691,759       5,695,552       (11,387,311 )     5,691,759  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 5,691,759     $ 5,748,640     $ 8,551,304     $ (11,396,047 )   $ 8,595,656  

 

 

15
 

 

    As of December 31, 2019 (Restated)  
    Parent     Non-VIE subsidiaries     The VIE     Elimination     Consolidated Total  
ASSETS                                        
CURRENT ASSETS                                        
Cash & equivalents   $ -     $ -     $ 444,266     $ -     $ 444,266  
Accounts receivable                     127,891               127,891  
Prepaid expenses                     45,163               45,163  
Other receivables                     18,900               18,900  
Prepaid commission cost                     78,784               78,784  
Due from related parties                     4,218,420               4,218,420  
Total current assets     -       -       4,933,424       -       4,933,424  
NONCURRENT ASSETS                                        
Restricted cash                     718,205               718,205  
Right-of-use assets, net                     108,659               108,659  
Deferred tax assets                     262,368               262,368  
Investment in non-VIE subsidiaries     5,289,304                       (5,289,304 )     -  
Equity in the VIE through the VIE Agreements             5,289,304                (5,289,304 )     -  
Property and equipment, net                     40,079               40,079  
Intangible assets, net                     49,521               49,521  
Total non-current assets     5,289,304       5,289,304       1,178,832       (10,578,608 )     1,178,832  
TOTAL ASSETS   $ 5,289,304     $ 5,289,304     $ 6,112,256     $ (10,578,608 )   $ 6,112,256  
                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                                        
CURRENT LIABILITIES                                        
Accounts payable   $ -     $ -     $ 239,132     $ -     $ 239,132  
Advance from customers                     737               737  
Accrued sales return liability                     97,265               97,265  
Taxes payable                     58,445               58,445  
Accrued liabilities and other payables                     175,999               175,999  
Operating lease liabilities                     46,114               46,114  
Due to related parties                     142,714               142,714  
Total current liabilities     -       -       760,406       -       760,406  
NONCURRENT LIABILITIES                                        
Operating lease liabilities                     62,546               62,546  
Total non-current liabilities     -       -       62,546       -       62,546  
                                         
TOTAL LIABILITIES     -       -       822,952       -       822,952  
                                         
COMMITMENTS AND CONTINGENCIES                                        
                                         
STOCKHOLDERS’ EQUITY                                        
Common stock     50,000                               50,000  
Additional paid in capital     7,136,489                               7,136,489  
Share capital             7,186,489       7,186,489       (14,372,978 )     -  
Accumulated deficit     (2,002,512 )     (2,002,512 )     (2,002,512 )     4,005,024       (2,002,512 )
Accumulated other comprehensive income     105,327       105,327       105,327       (210,654 )     105,327  
TOTAL STOCKHOLDERS’ EQUITY     5,289,304       5,289,304       5,289,304       (10,578,608 )     5,289,304  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 5,289,304     $ 5,289,304     $ 6,112,256     $ (10,578,608 )   $ 6,112,256  

 

 

16
 

 

Consolidated Statements of Operations Information

 

    For the Year Ended December 31, 2020 (Restated)
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
Revenues                         
Commission  $-   $-   $19,595,208   $-   $19,595,208 
Claim adjusting             2,288,192         2,288,192 
Total revenues, net   -    -    21,883,400    -    21,883,400 
Cost of revenues             18,391,090         18,391,090 
Gross profit   -    -    3,492,310    -    3,492,310 
                          
Operating expenses                         
Selling             2,446,244         2,446,244 
General and administrative        3,585    1,465,322         1,468,907 
Total operating expenses   -    3,585    3,911,566    -    3,915,151 
                          
(Loss) income from operations   -    (3,585)   (419,256)   -    (422,841)
                          
Non-operating income (expenses)                         
Interest income             69,481         69,481 
Other income             426,752         426,752 
Other expenses             (1,000)        (1,000)
Share of income from subsidiaries   45,718         -    (45,718)   - 
Share of income from VIE        49,303         (49,303)   - 
Non-operating income, net   45,718    49,303    495,233    (95,021)   495,233 
                          
Income before income tax   45,718    45,718    75,977    (95,021)   72,392 
Income tax expense             26,674         26,674 
Net income  $45,718   $45,718   $49,303   $(95,021)  $45,718 

 

17
 

 

   For the Year Ended December 31, 2019 (Restated) 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
Revenues                         
Commission  $-        $22,723,168   $-   $22,723,168 
Claim adjusting             756,212         756,212 
Total revenues, net   -    -    23,479,380    -    23,479,380 
Cost of revenues             19,137,586         19,137,586 
Gross profit   -    -    4,341,794    -    4,341,794 
                          
Operating expenses                         
Selling             934,612         934,612 
General and administrative             941,483         941,483 
Total operating expenses   -    -    1,876,095    -    1,876,095 
                          
(Loss) income from operations   -    -    2,465,699    -    2,465,699 
                          
Non-operating income (expenses)                         
Interest income             1,055         1,055 
Other income             1,289,035         1,289,035 
Other expenses             (437)        (437)
Share of income from subsidiaries   2,812,730              (2,812,730)   - 
Share of income from VIE        2,812,730         (2,812,730)   - 
Non-operating income, net   2,812,730    2,812,730    1,289,653    (5,625,460)   1,289,653 
                          
Income before income tax   2,812,730    2,812,730    3,755,352    (5,625,460)   3,755,352 
Income tax expense             942,622         942,622 
Net income  $2,812,730   $2,812,730   $2,812,730   $(5,625,460)  $2,812,730 

 

18
 

 

Consolidated Cash Flows Information

 

    For the Year Ended December 31, 2020 (Restated)  
    Parent     Non-VIE subsidiaries     The VIE     Elimination     Consolidated Total  
CASH FLOWS FROM OPERATING ACTIVITIES:                                        
Net income   $ 45,718     $ 45,718     $ 49,303     $ (95,021 )   $ 45,718  
Adjustments to reconcile net income to net cash provided by operating activities:                                        
Depreciation and amortization             -       31,717       -       31,717  
Non-cash sales return allowance             -       1,240,855       -       1,240,855  
Non-cash cost of sales return allowance             -       (1,029,910 )     -       (1,029,910 )
Deferred tax             -       26,673       -       26,673  
Share of income from subsidiaries     (45,718 )                     45,718       -  
Share of income from VIE             (49,303 )             49,303       -  
Changes in assets / liabilities:                     -       -       -  
Accounts receivable             -       6,985       -       6,985  
Other receivables             (1,448 )     (163,258 )     8,256       (156,450 )
Prepaid commission cost             -       161,913       -       161,913  
Prepaid expenses             (3,223 )     (76,855 )     -       (80,078 )
Accounts payable             -       533,963       -       533,963  
Taxes payable             -       10,716       -       10,716  
Advance from customers             -       44,948       -       44,948  
Accrued sales return liability             -       (197,438 )     -       (197,438 )
Accrued liabilities and other payables             8,256       253,157       (8,256 )     253,157  
                                         
Net cash provided by operating activities     -       -       892,769       -       892,769  
                                         
CASH FLOWS FROM INVESTING ACTIVITIES:                                        
Acquisition of fixed assets             -       (91,473 )     -       (91,473 )
Acquisition of intangible assets             -       (34,934 )     -       (34,934 )
Net cash used in investing activities     -       -       (126,407 )     -       (126,407 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES:                                        
Due (from) to related parties             -       (451,298 )     -       (451,298 )
Net cash used in financing activities     -       -       (451,298 )     -       (451,298 )
                                         
EFFECT OF EXCHANGE RATE CHANGE ON CASH     -       -       96,129       -       96,129  
                                         
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS     -       -       411,193       -       411,193  
                                      -  
CASH & EQUIVALENTS & RESTRICTED CASH, BEGINNING OF YEAR     -       -       1,162,471       -       1,162,471  
                                         
CASH & EQUIVALENTS & RESTRICTED CASH, END OF YEAR   $ -     $ -     $ 1,573,664     $ -     $ 1,573,664  

 

 

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   For the Year Ended December 31, 2019 (Restated) 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
CASH FLOWS FROM OPERATING ACTIVITIES:                         
Net income  $2,812,730   $2,812,730   $2,812,730   $(5,625,460)  $2,812,730 
Adjustments to reconcile net income to net cash provided by operating activities:                         
Depreciation and amortization   -         20,824    -    20,824 
Non-cash sales return allowance   -         1,673,531    -    1,673,531 
Non-cash cost of sales return allowance   -         (1,355,560)   -    (1,355,560)
Deferred tax   -         942,622    -    942,622 
Share of income from subsidiaries   (2,812,730)             2,812,730    - 
Share of income from VIE        (2,812,730)        2,812,730    - 
Changes in assets / liabilities:                         
Accounts receivable   -         (54,623)   -    (54,623)
Other receivables   -         489,447    -    489,447 
Prepaid commission cost   -         2,365,068    -    2,365,068 
Prepaid expenses   -         (21,754)   -    (21,754)
Accounts payable   -         42,238    -    42,238 
Taxes payable   -         (121,567)   -    (121,567)
Advance from customers   -         (66,960)   -    (66,960)
Accrued sales return liability   -         (2,971,543)   -    (2,971,543)
Accrued liabilities and other payables   -         (163,554)   -    (163,554)
                          
Net cash provided by operating activities   -         3,590,899    -    3,590,899 
                          
CASH FLOWS FROM INVESTING ACTIVITIES:                         
Acquisition of fixed assets   -         (36,189)   -    (36,189)
Net cash used in investing activities   -         (36,189)   -    (36,189)
                          
CASH FLOWS FROM FINANCING ACTIVITIES:                         
Due (from) to related parties   -         (3,868,523)   -    (3,868,523)
Net cash used in financing activities   -         (3,868,523)   -    (3,868,523)
                          
EFFECT OF EXCHANGE RATE CHANGE ON CASH   -         (16,079)   -    (16,079)
                          
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS   -         (329,892)   -    (329,892)
                        - 
CASH & EQUIVALENTS & RESTRICTED CASH, BEGINNING OF YEAR   -         1,492,363    -    1,492,363 
                          
CASH & EQUIVALENTS & RESTRICTED CASH, END OF YEAR  $-   $   $1,162,471   $-   $1,162,471 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statements are likely to address our growth strategy, financial results and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

  future financial and operating results, including revenue, income, expenditures, cash balances and other financial items;
     
  our ability to execute our growth, and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  our ability to compete in an industry with low barriers to entry;
     
  the future growth of the Chinese insurance industry as a whole and the professional insurance intermediary sector in particular;
     
  our ability to continue to operate through our VIE structure;
     
  our capital requirements and our ability to raise any additional financing which we may require;
     
  negative impact on our business and financial results due to the COVID-19 pandemic;

 

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  our ability to attract clients, further enhance our brand recognition; and
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in Chinese insurance industry; and
     
  other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

We describe material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance.

 

This prospectus contains statistical data that we obtained from various government and private publications. We have not independently verified the data in these reports. Statistical data in these publications also may include projections based on a number of assumptions. If any one or more of the assumptions underlying the statistical data turns out to be incorrect, actual results may differ from the projections based on these assumptions.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements except as required by applicable law.

 

RISK FACTORS

 

You should carefully consider the risks described below in conjunction with the other information and our consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. The trading price of our Class A Ordinary Shares could decline due to any of these risks, and as a result you may lose all or part of your investment. This prospectus also contains forward-looking statements relating to events subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements due to the material risks that we face described below.

 

Risks Related to Our Business and Our Industry

 

Our operating history and our experience in distributing insurance products, may not provide an adequate basis to judge our future prospects and results of operations.

 

Our operating company in China, Heng Guang Insurance, was founded in 2004 under the former name Sichuan Sunshine Insurance Agency Co., Ltd., by, among five founding members, Mr. Jiulin Zhang, our current Chief Executive Officer and Chairman of the Board of Directors. Originally, our insurance agent business focused on the distribution of automobile and liability insurance products in Southwest China and has developed a recognizable regional brand in that sector. We attempted to expand our business into the life insurance sector some years ago but did not continue such initiative due to various reasons. In January 2018, we resumed our efforts to grow the distribution of insurance products outside the auto insurance sector, such as life and health insurance, property, and casualty insurance products. Due to our limited experience in distributing certain new insurance products in the life, health and property sectors, we cannot assure you that we will be able to maintain our growth in the long-standing automobile insurance sector or generate substantial economic growth in the life, health and property insurance sectors in the future.

 

Unusual weather patterns, extreme weather conditions and natural disasters could adversely affect the operations of our system, in-person insurance services and results of our business operations.

 

We are vulnerable to unusual weather patterns, extreme weather conditions and natural disasters. Catastrophes, such as wild fires, floods, typhoons, earthquakes, power outage, telecommunication failures, break-ins, wars, riots, terrorist attacks or similar events, may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of our data or malfunctions of our physical system, software or hardware as well as adversely affect our ability to provide insurance services.

 

Due to climate changes, extreme weather conditions occur more frequently than they do in the past decades. The in-person insurance services provided by our insurance agents are susceptible to severe weather patterns. Individual customers tend not to interact with our insurance agents in our branch offices under extreme weather conditions, such as heavy rains or snows , sand storms, and extremely high or low temperatures. As a result, the frequent occurrence of extreme weather conditions could impact our business operations and adversely affect the results of our operations.

 

In addition, extreme weather patterns and natural disasters may cause our insurance partners to increase the premiums of certain insurance products that cover the extreme weather and natural disaster risks. Therefore, we may encounter the risks that existing customers would opt for different insurance products of agreeable prices which we may not have available.

 

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We are subject to all the risks and uncertainties in an industry which is still in development in China.

 

We are, and expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent to a development-stage business and in a developing industry in China. As a result, we must establish many functions necessary to operate a business, including expanding our managerial and administrative structure, assessing and implementing our marketing program, implementing financial systems and controls. These risks and challenges are, among other things:

 

  we operate in the insurance industry that is heavily regulated by relevant governmental agencies in China, such as Sichuan Provincial Bureau of China Banking and Insurance Regulatory Commission;
     
  we may require additional capital to develop and expand our operations which may not be available to us when we require it;
     
  our marketing and growth strategy may not be successful;
     
  our business may be subject to significant fluctuations in operating results; and
     
  we may not be able to attract, retain and motivate qualified professionals.

 

We have been fined by the provincial insurance regulatory authorities in the past and may be fined for non-compliance with Chinese insurance laws and regulations in the future.

 

The insurance agent industry is heavily regulated in China. We have had over forty branch offices all over China for the past few years and from time to time a local branch office may be fined by the local or provincial authorities due to its failure to comply with the applicable laws and regulations. For instance, in 2016, the China Bank and Insurance Regulatory Commission (the “CBIRC”) fined Heng Guang Insurance approximately 120,000 RMB (approximately $20,000 USD) for lack of supervision and proper management procedures relating to the conducts of its former branch manager in Nanchong City, Sichuan Province. In January 2021, our Zhejiang branch office was fined by CBIRC in the amount of RMB 150,000 (approximately $23,000 USD) for its misuse of accounting records. The regulatory investigations and proceedings may divert the management’s attention from our daily operations and the regulatory penalties may adversely affect our reputation and employees’ morale and confidence in our operations. Although we make our best efforts to improve the internal control over and supervision of the business activities of our local branches, there is no guaranty that we will not be fined by the insurance authorities in the future. Any regulatory proceeding and penalty will likely negatively affect our business operations and financial performance.

 

Because the commission revenue we earn on the sale of insurance products is based on premiums and commissions and fee rates set by insurance companies, any decrease in these premiums, commission or fee rates may have an adverse effect on our results of operation.

 

We are an insurance agency and derive revenue primarily from commissions paid by the insurance companies whose policies our customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation and competitive factors that affect insurance companies. These factors, which are not within our control, include the capacity of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of alternative insurance products, such as government benefits and self-insurance plans, to consumers and the tax deductibility of commissions. In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance that each automobile owner in the PRC is legally required to purchase, are tightly regulated by the CBIRC.

 

Because we do not determine, and cannot predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes may have on our operations. Since China’s entry into the WTO in December 2001, intense competition among insurance intermediary companies has led to a gradual decline in premium rate levels of some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our total sales volume, it also reduces the commissions we earned on each policy sold. Any decrease in premiums or commission and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures, dividend payments, loan repayments and other expenditures may be disrupted by unexpected decreases in revenue caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.

 

Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.

 

The insurance intermediary industry in China is highly competitive, and we expect competition to persist and intensify. We face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their products, from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal offices and automobile dealerships, and from other professional insurance intermediaries. We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial results may be negatively affected.

 

Quarterly and annual variations in our commission and fee revenue may have unexpected impacts on our results of operations.

 

Our income is subject to both quarterly and annual fluctuations as a result of the seasonality of our business, the timing of policy renewals and the net effect of new and lost business. These factors are not within our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future performance.

 

If our contracts with insurance companies are terminated or changed, our business and operating results could be adversely affected.

 

We primarily act as agents for our customers who seek insurance coverage from insurance companies. Our relationships with the insurance companies are governed by agreements between us and the insurance companies. Most of our contracts with insurance companies are entered into at a local level between their respective provincial, city and district branches and our local branches. Generally, each branch of these insurance companies has independent authority to enter into contracts with us, and the termination of a contract with one branch has no effect on our contracts with the other branches. See “Business—Customers—Collaboration with Insurance Companies.” These contracts establish, among other things, the scope of our authority, the pricing of the insurance products we distribute and our commission rates. These contracts typically have a term of one to three year and some of them can be terminated by the insurance companies with little advance notice. Moreover, before or upon expiration of a contract, the contracting insurance company may agree to renew it only with changes in its terms, including the amount of commissions we receive, which could result in a reduction in revenue from that contract.

 

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If our largest insurance company partners terminate or change the material terms of their contracts with us, it would be difficult for us to replace the lost commissions, which could adversely affect our business and operating results.

 

For the year ended December 31, 2020, our top five insurance company partners, after aggregating the business conducted between their local branches and our branch offices, accounted for 70.61% of our total revenue. In particular, Ping An Insurance accounted for 30.07% of our total revenue during the fiscal year of 2020. For the year ended December 31, 2019, our top five insurance company partners, after similar aggregation, accounted for 66.88% of our total revenue. During this period, Ping An Insurance accounted for 23.37% of our total revenue. The termination or any changes in the material terms of those contracts with our top insurance company partners could adversely affect our business and operating results.

 

For the six months ended June 30, 2021, our top five insurance company partners, after aggregating the business conducted between their local branches and our branch offices, accounted for 61.38% of our total revenue. In particular, Ping An Insurance accounted for 13.78% of our total revenue during the six months ended June 2021. For the six months ended June 30, 2020, our top five insurance company partners, after similar aggregation, accounted for 67.44% of our total revenue. During this period, Ping An Insurance accounted for 33.99% of our total revenue. The termination or any changes in the material terms of those contracts with our top insurance company partners could adversely affect our business and operating results.

 

Our business and prospects could be materially and adversely affected if we are not able to manage our growth successfully.

 

As of the date of this prospectus, our distribution network has expanded from our Sichuan Province headquarter to having 48 branches, and we plan to open more branches and further expand our mix of products and service offering. We anticipate significant growth in the future. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. To manage and support our continued growth, we must continue to improve our operational, administrative, financial and technological systems, procedures and controls, and expand, train and manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships with insurance companies, regulators and other third parties. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities, which in turn could have a material adverse effect on our results of operations.

 

We may not be successful in implementing important new strategic initiatives and technologies, which may have an adverse impact on our business and financial results.

 

There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations, which may result in an adverse impact on our business and financial results. Our online insurance sales platform “Heng Kuai Bao,” which became operational in 2019, is designed to enhance our insurance service efficiency, improve users’ experiences, improve our results of operations and drive long-term shareholder value. However, Heng Kuai Bao is currently available to our sales agents and management only while our technology development team and outside IT service provider are still developing Heng Kuai Bao’s functions for insurance purchasers. We obtained the Internet Insurance Agency Filing in June 2020 to conduct online insurance business through our website and the applications of Heng Kuai Bao and You Hui Bao, which is not being used. Our management team has limited experience with this online business strategy and cannot assure you that this online insurance business will bring sustainable growth and economic benefits to the Company and our shareholders.

 

Additionally, we have dipped our toes into life insurance business since 2018. We have been training our sales agents to be well versed in property and life insurance products since early 2020 and as of December 2020, we proudly announced that we had about 190 versatile agents with knowledge in both property and life insurance. However, we believe that it will take us substantial amount of time and capital to transform most of our property insurance agents into property and life insurance agents. As such, we may not be able to expand our life insurance agent business and realize the high profit margin associated therewith as we expected, and our business and financial results may be adversely impacted due to the expenses incurred by training of our salespersons.

 

If our investments in our online platforms are not successful, our business and results of operations may be materially and adversely affected.

 

We have devoted significant resources to developing our insurance website and applications Heng Kuai Bao and You Hui Bao, which allow our salespersons and management to streamline the insurance purchase process and are being developed to serve insurance purchasers in the future. In the next several years, we intend to continue to devote resources to maintaining and developing the technology and content of our website and applications. However, our efforts to develop our online platforms may not be successful or yield the benefits that we anticipate. In addition, our online expansion may depend on a number of factors, many of which are beyond our control, including but not limited to:

 

  the effectiveness of our marketing campaigns to build brand recognition among consumers and our ability to attract and retain customers to our brick mortar branches and online shopping site;
     
  the acceptance of third-party regarding e-commerce platforms as an effective channel to distribute insurance products;

 

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  public concerns over security of e-commerce transactions and confidentiality of information;
     
  increased competition from insurance companies and banks, which directly sell insurance products through their own websites, call centers, portal websites which provide insurance product information and links to insurance companies’ websites, and other professional insurance intermediary companies which may launch independent websites;
     
  further improvement in our information technology system; and
     
  further development and changes in applicable rules and regulations which may increase our operating costs and expenses, impede the execution of our business plan or change the competitive landscape.

 

On July 22, 2015, the China Insurance Regulatory Commission, or CIRC, promulgated the Interim Measures for the Supervision of Internet Insurance Business, or Interim Measures, which became effective on October 1, 2015, and set forth the qualifications and procedures for insurance intermediaries to operate internet insurance businesses in China. On December 7, 2020, the CBIRC issued the Decree of the China Banking and Insurance Regulatory Commission (No. 13, 2020) promulgating the Measures for The Supervision of Internet Insurance Business, which were implemented on February 1, 2021 and as a result superseded the Interim Measures for the Supervision of Internet Insurance Business. The Measures for The Supervision of Internet Insurance Business provide that the specialized insurance intermediaries shall comply with the relevant provisions of the CBIRC on the classification and supervision thereof. As advised by our PRC counsel, we have obtained the necessary approvals and licenses for our online and offline insurance operations. Because online insurance emerged recently in China and is evolving rapidly, the CBIRC may promulgate and implement new rules and regulations to govern this sector from time to time. It can be costly to adjust our operations to comply with the constant changes and further development of regulations, to which our insurance business is subject. Any failure to obtain new permits or make required adjustments in response to future regulatory changes may have a material adverse impact on our growth, business prospects and results of operations.

 

Any significant failure in our information technology systems could have a material adverse effect on our business and profitability.

 

Our financial control, accounting, customer database, business website, proprietary insurance applications, customer services and other data processing systems, together with the communication systems of our local branches and our main offices in the City of Chengdu, function and operate based on our information technology network, which is critical to our insurance business. Cyber-attacks, software malfunction, computer virus attacks or unintended computer or internet errors may cause substantial delays or disruption to our daily operations and therefore may negatively affect our customer experiences, business reputation, and even long-term business relationships and business prospects if not resolved properly in a timely manner.

 

Our future success depends on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their services.

 

Our future success depends heavily upon the continuing services of the members of our senior management team and other key personnel, in particular Jiulin Zhang the CEO, the founding member and executive director of the Company and Heng Guang Insurance. In addition, our dedicated and skilled professionals, such as sales, branding and technology development, play key roles in our operations. If one or more of our senior executives or other key personnel, including key training personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them with suitable candidates or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and key personnel is intense, the pool of qualified candidates is very small, and we may not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. We do not have insurance coverage for the loss of our senior management team or other key personnel’s services.

 

In addition, if any of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive trade information and key professionals and staff members. As of the date of this prospectus, we did not have any confidentiality or non-competition agreement or arrangement with any of our executive officers and key employees. See “Executive Compensation—Agreements with Named Executive Officers” for more information. If any of our executive officers or key employees joins a competitor of ours, we will face the risks of expending time and resources to find a suitable replacement and losing clients that may be taken away by the departing officer or key employee.

 

We do not currently have business insurance to cover our main assets and business. Any uninsured occurrence of business disruption, litigation or natural disaster could expose us to significant costs, which could have an adverse effect on our results of operations.

 

The insurance industry in China is still at the development stage, and insurance companies in China currently offer limited business-related insurance products. As such, we may not be able to insure against certain risks related to our assets or business operations despite of our intention to do so. The costs of insuring such risks and the difficulties associated with acquiring such insurance on commercially reasonable terms may make it impractical for us to have such insurance for our assets and operations. As of the date of this prospectus, we did not have any business liability or disruption insurance to cover our operations. As a result, any business disruption, litigation, natural disaster, or significant damages to our facilities could disrupt our business operations, and require us to incur substantial costs and divert significant resources to repair such uninsured damages. The uninsured damages could have an adverse effect on our results of operations and financial condition.

 

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Because our industry is heavily regulated, any material changes in the regulatory environment could change the competitive landscape of our industry or require us to change the way we do business. The administration, interpretation and enforcement of the laws and regulations currently applicable to us could change rapidly. If we fail to comply with applicable laws and regulations, we may be subject to civil and criminal penalties or lose our privilege to conduct insurance business, which could materially and adversely affect our business and results of operations.

 

We operate in a highly regulated industry. The laws and regulations applicable to us are constantly evolving and may change rapidly in the future. We could be required to spend significant time and resources on complying with material regulatory changes, which could disrupt the competitive landscape of our industry and cost us some or all of our competitive advantages or market shares. The attention of our management team could be diverted to these efforts to comply with an evolving regulatory or competitive environment. For example, the PRC Insurance Law and related regulations were materially amended in the following years: 2002, 2009, 2014 and 2015. The 2015 amendments involved a number of significant changes to the regulatory regime, including elimination of the requirement for any insurance agent, broker or claims adjusting practitioners to obtain a qualification certificate issued by the CIRC. The elimination of the certificate requirement may result in an unbridled increase in competition for our business and in misconduct by sales or service persons, including sales misrepresentation. In addition, the general increase in misconduct in the insurance agent industry could potentially harm the reputation of the industry and have an adverse impact on our business.

 

On March 13, 2018, CIRC and CBRC were combined to form the Chinese Banking and Insurance Regulatory Committee, or CBIRC. This new organization stepped into the shoes of both CIRC and CBRC as the regulator of both Chinese insurance industry and banking industry. There is uncertainty as to how the new authority, CBIRC will guide the insurance business in China. If we fail to adapt to any new rules and regulations promulgated by the CBIRC in the future, such failure could substantially and adversely affect our business and results of operations.

 

Additionally, errors created by our products or services may be determined or alleged to be in violation of the applicable laws and regulations. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability, adversely affect demand for our services, invalidate all or portions of some of our customer contracts; require us to change or terminate some portions of our business; tarnish our reputation; and therefore impose material and adverse effects on our business.

 

Although we have not had any material violations to date, we cannot assure you that our operations will always comply with the interpretation and enforcement of the laws and regulations implemented by the CBIRC. Any determination by a provincial or national government agency that our activities or those of our vendors or customers have violated any of these laws could subject us to substantial civil or criminal penalties, require us to change or terminate certain aspects of our operations or business, or disqualify us from providing services to insurance companies or other customers; and, thus could have an adverse effect on our business.

 

Sales agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.

 

Agent or employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:

 

  engaging in misrepresentation or fraudulent activities when marketing or selling insurance products to customers;
     
  hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses; or
     
  otherwise not complying with laws and regulations or our control policies or procedures.

 

For instance, in October 2015, one of our branch office managers in Sichuan was found guilty and civilly liable for raising funds with the forged corporate seal of Heng Guang Insurance without any knowledge or involvement of the Company. After this incident, our management adopted remediating procedures to supervise and monitor our employees and agents in the local branches. However, we cannot always deter agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We cannot assure you, therefore, that agent or employee misconduct will not lead to a material adverse effect on our business, reputation, results of operations or financial condition.

 

Risks Related to Our Corporate Structure

 

Because we conduct our agent business through Heng Guang Insurance, a VIE entity, if we fail to comply with applicable law, we could be subject to severe penalties and our business could be materially and adversely affected.

 

We operate our insurance agent business through Heng Guang Insurance, a VIE entity, pursuant to a series of contractual arrangements between WFOE and Heng Guang Insurance, as a result of which, under United States generally accepted accounting principles, the assets and liabilities of Heng Guang Insurance are treated as our assets and liabilities and the results of operations of Heng Guang Insurance are treated in all aspects as if they were the results of our operations. There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between WFOE and Heng Guang Insurance.

 

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If Heng Guang and WFOE or their ownership structure or the contractual arrangements are determined to be in violation of any existing or future PRC laws, rules or regulations, or Heng Guang Insurance fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

  revoking or suspending the business and operating licenses of Heng Guang Insurance;
     
  discontinuing or restricting the operations of Heng Guang Insurance;
     
  imposing conditions or requirements with which we or Heng Guang Insurance may not be able to comply;
     
  requiring us, our WFOE, or Heng Guang Insurance to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our Ordinary Shares;
     
  restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and
     
  imposing fines to WFOE or Heng Guang Insurance.

 

We cannot assure you that the PRC courts or regulatory authorities may not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable, and Heng Guang Insurance will not be treated as a VIE entity and we will not be entitled to treat Heng Guang Insurance’s assets, liabilities and results of operations as our assets, liabilities and results of operations, which could effectively eliminate the assets, liabilities, revenue and net income of Heng Guang Insurance from our balance sheet and statement of income. This would most likely require us to cease conducting our business and would result in the delisting of our Ordinary Shares from the stock market where the Ordinary Shares will be traded and a significant impairment in the market value of our Ordinary Shares.

 

We rely on contractual arrangements with Heng Guang Insurance, a VIE entity, and its shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.

 

We have relied and expect to continue to rely on contractual arrangements with Heng Guang Insurance and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Business—Corporate History and Structure.These contractual arrangements may not be as effective in providing us with control over Heng Guang Insurance and its subsidiaries as direct ownership. We have no direct or indirect equity interests in Heng Guang Insurance or any of its branches.

 

If we had direct ownership of Heng Guang Insurance, we could effect changes, subject to any applicable fiduciary obligations, at the management level. But under the current contractual arrangements, as a legal matter, if Heng Guang Insurance and its officers fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such VIE arrangements and rely on legal remedies under the PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if Heng Guang Insurance refused to transfer its net profits to our WFOE, a wholly-owned subsidiary of the Company pursuant to the VIE agreements, or if Heng Guang Insurance were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to fulfill their contractual obligations.

 

Investors in this offering are not buying shares of Heng Guang Insurance, our operating company, but instead are buying class A ordinary shares of Heng Guang Cayman, a shell company that maintains VIE Agreements with Heng Guang Insurance.

 

Investors in this offering are not buying shares of Heng Guang Insurance, our operating company, but instead are buying class A ordinary shares of Heng Guang Cayman, a shell company that maintains a series of service and management agreements, or VIE Agreements, with the associated operating company, Heng Guang Insurance. Should any or part of the VIE agreements become invalid, illegal or unenforceable under the laws, regulations or policies of PRC, the market price of our class A ordinary shares shall be likely to be adversely affected and the value of such shall decline greatly or even become completely worthless. As a result, you may lose part or all of your investment in our class A ordinary shares.

 

If any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

 

We currently conduct our operations in China through our VIE contractual arrangements. As part of these arrangements, substantially all of our assets that are significant to the operation of our business are held by Heng Guang Insurance. If Heng Guang Insurance becomes bankrupt and all or part of its assets become subject to the rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owners or third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business operations, financial performance and the market prices of our ordinary shares.

 

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Our Shareholders are subject to greater uncertainties because we operate through a VIE structure due to restrictions on the direct ownership of our Chinese operating entities imposed by the CIRC even though the insurance agency industry falls within the permitted category in accordance with the Catalogue and the Negative List.

 

Investment in the PRC by foreign investors and foreign-invested enterprises must comply with the Catalogue for the Guidance of Foreign Investment Industries (the “Catalogue”) (2019 Revision), which was last amended and issued by MOFCOM and NDRC on June 30, 2019 and became effective since July 30, 2019, and the Special Management Measures for Foreign Investment Access (2020 version), or the Negative List, which came into effect on July 23, 2020. The Catalogue and the Negative List contain specific provisions guiding market access for foreign capital and stipulate in detail the industry sectors grouped under the categories of encouraged, restricted and prohibited industries. The VIE structure has been adopted by many PRC-based companies, to conduct business in the industries that are currently subject to foreign investment restrictions in China, or are on the Negative List, due to the applicable PRC laws under which direct foreign ownership of these companies are prohibited. Any industry not listed in the Negative List is a permitted industry unless otherwise prohibited or restricted by other PRC laws or regulations. Currently, the insurance agent industry falls within the permitted category in accordance with the Catalogue and the Negative List.

 

Due to the stringent and harsh approval conditions of China Securities Regulatory Commission, if a Chinese operating entity wants to list its securities directly on a capital market overseas, many Chinese companies use the VIE structure to avoid the constraints of the China Securities Regulatory Commission. Even though the insurance agency industry falls within the permitted category in accordance with the Catalogue and the Negative List, we have opted for a VIE structure instead of direct ownership. As a result, our corporate structure and contractual arrangements may be subject to greater scrutiny by various PRC government authorities, and therefore the PRC government scrutiny may subject our shareholders to greater uncertainty with regard to their control over Heng Guang Insurance.

 

We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our WFOE, our VIE and its shareholders, is valid, binding and enforceable in accordance with its terms under the Chinese laws and regulations. However, as there are substantial uncertainty regarding the interpretation and application of PRC laws and regulations, there can be no assurance that the PRC government authorities, such as the Ministry of Commerce, or the MOFCOM, or other authorities would agree that our corporate structure or any of the above contractual arrangements comply with PRC regulatory requirements, existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

 

Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years from the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements were not entered into at arm’s length in such as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and transfer pricing adjustments of the income of our subsidiaries and affiliates. A transfer pricing adjustment could, among other things, result in a decrease of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our subsidiary’s tax expenses. In addition, PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIE’s tax liabilities increase or if Heng Guang Insurance is required to pay late payment fees and other penalties.

 

Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

We, through our WFOE in the PRC, have entered into a series of contractual arrangements with our consolidated VIE and its shareholders. For a description of these contractual arrangements, see “Business—Corporate History and Structure.” If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance, injunctive relief, and damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of our consolidated VIE refused to transfer its equity interests in the consolidated VIE to us or our designee when we exercised the purchase option pursuant to these contractual arrangements, then we might have had to take legal actions to compel the VIE and its Shareholders to perform their contractual obligations.

 

All our VIE contractual arrangements are governed by PRC laws and provide for the resolution of disputes through litigation in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and formal guidelines as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such litigation should legal action be taken. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated VIE and relevant permits and licenses held by it which we require to operate our business in the PRC, and our ability to conduct our business may be negatively affected. See “Risk FactorsRisks Related to Doing Business in China – Uncertainties with respect to the PRC legal system could adversely affect us.”

 

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The shareholders of our VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The shareholders of our VIE may have actual or potential conflicts of interest with us. The shareholders of the VIE may refuse to sign or breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with the VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from it. For example, the shareholders may cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that if and when conflicts of interest arise any or all of these shareholders of the VIE will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between the shareholders of the VIE and our company. If we cannot resolve any conflict of interest or dispute between us and the shareholders of the VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of the disputes.

 

PRC regulations of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary and VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Any funds we transfer to WFOE or the VIE, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, the combined amount of offshore capital contributions and loans cannot exceed the FIE’s approved total investment amount. Any capital contributions to our PRC subsidiary must be filed with MOFCOM or its local counterparts, and registered with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (a) any loan provided by us to WFOE, which is a FIE, cannot exceed the difference between its total investment amount and registered capital, and must be registered with SAFE or its local counterparts, and (b) any loan provided by us to our VIE, over a certain threshold, must be approved by the relevant government authorities and must be registered with SAFE or its local counterparts. Given that the registered capital and total investment amount of WFOE are currently the same, if we seek to make a capital contribution to WFOE we must first apply to increase both its registered capital and total investment amount, while if we seek to provide a loan to WFOE, we must first increase its total investment amount. Although we currently do not have any immediate plans to utilize the proceeds from this offering to make capital contribution to WFOE or provide any loan to WFOE or to our VIE, if we seek to do so in the future, we may not be able to obtain the required government approvals or complete the required registrations on a timely basis, if at all. If we fail to receive such approvals or complete such registrations, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allowed FIEs to settle their foreign exchange capital at their discretion, but continued to prohibit FIEs from using funds denominated in RMB converted from any foreign currency for expenditures beyond their business scopes, providing entrusted loans or repaying loans between non-financial enterprises. Violations of SAFE Circular 19 could result in serious monetary or other penalties. SAFE Circular 19 and relevant foreign exchange regulatory rules may significantly limit our ability to use RMB denominated funds converted from the net proceeds of this offering to fund Heng Guang Insurance’s operations in China, to invest in or acquire any other PRC companies through our PRC subsidiaries or affiliates or to establish new affiliates in the PRC, which may adversely affect our business, financial condition and results of operations.

 

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As a “controlled company” under the rules of the NASDAQ Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.

 

Our directors and officers beneficially own a majority of the voting power of our outstanding Ordinary Shares. Under the NASDAQ Listing Rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the NASDAQ Listing Rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company” exemption under the NASDAQ Listing Rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Capital Market corporate governance requirements. Our status as a controlled company could afford less protection to our public shareholders than a non-controlled company due to the possibility of us opting for the “controlled company” exemption.

 

We have identified several significant deficiencies in our internal control over financial reporting. If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

 

We will be subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. These requirements will first apply to our annual report on Form 20-F for the fiscal year ending on December 31, [*]. In addition, an independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting when the Company no longer qualifies as an emerging company. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

Prior to this offering, we have been a private company with limited accounting personnel with U.S. GAAP experience and other resources with which to adequately address our internal control over our financial closing and reporting process and other procedures. During the course of preparing our consolidated financial statements as of and for the years ended December 31, 2020 and 2019 and six months ended June 30, 2021 and 2020 in connection with this offering, we identified a number of control deficiencies, which included significant deficiencies, in our internal control over financial reporting. Many of the deficiencies noted below were communicated to us from our independent registered public accounting firm as observations which stemmed from their audit. However, as noted in their report, their audit included consideration of internal control over financial reporting as a basis for designing the audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of our internal control over financial reporting. The significant deficiencies identified include: (1) a lack of formal internal controls over financial closing and reporting processes; (2) a lack of a formal risk assessment process; (3) a lack of accounting personnel with knowledge of U.S. GAAP and SEC financial reporting requirements; and (4) a lack of regular preparation of U.S. GAAP consolidated management accounts. It is important to note that we did not undertake a comprehensive assessment of our internal controls for purposes of identifying and reporting control deficiencies as we will be required to do so after we are a public company. Had we undertaken such an assessment, additional significant deficiencies and/or material weaknesses may have been identified.

 

We plan to take a number of measures to remediate the control deficiencies identified, including: (1) preparing a comprehensive accounting policies and procedures manual that covers U.S. GAAP and ensuring that accounting personnel are familiar with and follow the manual; (2) establishing a risk assessment process that complies with the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission, a private sector organization dedicated to improving the quality of financial reporting; (3) hiring additional accounting personnel with external reporting experience, including knowledge of the SEC reporting requirements and U.S. GAAP, and investor relations personnel; and developing formal procedures to prepare U.S. GAAP consolidated financial information on a monthly basis.

 

We plan to remediate these significant deficiencies in time to meet the deadline for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If, however, we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our Ordinary Shares. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

 

Risks Related to Doing Business in China

 

Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations.

 

Substantially all of our assets and operations are currently located in China. Accordingly, our business, financial condition, results of operations, and prospects may be influenced, to a significant degree, by political, economic, and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, including the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industries by imposing regulatory guidance or policies. The Chinese government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policies, and providing preferential treatment to particular industries or companies.

 

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While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government, or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, reduce demand for our services, and weaken our competitive position. The Chinese government has implemented various measures to encourage economic growth and guided the allocation of various types of resources. Some of these measures may benefit the overall Chinese economy, but others may have a negative effect on our operations. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In the past, the Chinese government has implemented certain measures to control the pace of economic growth, such as interest rate adjustments. These measures may decrease the auto-mobile based transportation activities in China, which may adversely affect the overall auto insurance demands and our business.

 

Furthermore, Heng Guang Cayman and our China based operating entities, as well as our investors, face uncertainty about future actions by the Chinese government that could significantly affect our financial performance and operations in China, including the enforceability of our VIE contractual arrangements. If future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing VIE contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. If the PRC government determines that any part of our VIE structure and VIE Agreements do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, our ordinary shares may decline in value or become worthless if we are unable to assert our contractual control rights over the assets of Heng Guang Insurance that conducts all or substantially all of our operations.

 

As of the date of this prospectus, there is no laws, regulations or other rules require our China based operating entities to obtain permission or approvals from Chinese authorities to list its affiliate’s securities on U.S. exchanges, and neither we nor our China based operating entities have received or were denied such permission. However, there is no guarantee that we or Heng Guang Insurance will receive or not be denied permission from Chinese authorities to list on U.S. exchanges in the future.

 

We face risks related to epidemics, such as the COVID-19 outbreak originated in Wuhan, China at the end of 2019, and other outbreaks, which have disrupted and could in the future disrupt our operations and adversely affect our business, financial condition and results of operations.

 

Our business had been materially and adversely affected by the COVID-19 outbreak originated in Wuhan, China at the end of 2019. In 2020, the PRC and local governments implemented a series of temporary restrictions during the outbreak of COVID-19, including temporary travel bans among cities, towns and even local municipalities. Such travel restrictions substantially and directly hindered our in-person sales activities and limited our daily internal operations. Because our life insurance sales heavily relied on in-person services by our agents, COVID-19 affected our income generated by the life insurance sector the most. In addition, the negative psychological impacts of COVID-19 brought hesitation and concerns of new and existing customers about going to our branch offices to explore our insurance products and services. Furthermore, we believed that the job losses or decline of job security due to COVID-19 may discourage certain people from purchasing automobiles, which partially contributed to our decline in sales of auto insurance. As a result, our net income for the year ended December 31, 2020 amounted to $45,718, reflecting a decrease of $2,767,012, or 98.4%, compared with the net income of $2,812,730 for the year ended December 31, 2019. As a result, our net loss for the six month ended June 30, 2021 amounted to $493,918, reflecting a decrease of $823,218, compared with the net income of $329,300 for the six month ended June 30, 2020.

 

If COVID-19’s new variants, such as SARS-CoV2, become a larger threat to people in the PRC or other outbreaks affect the PRC, our business operations may be severely disrupted. In response to the COVID-19 outbreak, we have established and been operating through Heng Kuai Bao, the online platform, where customers and insurance agents can interact remotely and we communicate internally on a regular basis. Furthermore, we have developed a few new ancillary services catering corporate clients, including without limitation the trucking services, commercial passenger services, and online taxi booking. However, in general, our business operations depend on China’s overall economy and demand for insurance products, including auto insurance products, which could be negatively affected by reduced transportation during the era of an epidemic. A prolonged epidemic of COVID-19 and its variants would likely have a material adverse effect on our business operations and financial performance despite of counter-COVID actions and efforts.

 

As of the date of this prospectus, we think the COVID-19 outbreak is generally considered under control in China and we have been able to resume our ordinary level of business activities since May 2020. In light of the current circumstances and based on information currently available, we believe that the negative impacts of COVID-19 on our business temporary and mainly contained in the fiscal year of 2020. However, it is almost impossible to predict whether and when we will experience another epidemic or the damages and impacts caused thereby. Should we encounter another epidemic in the PRC, such outbreak may severely disrupt or completely shut down our business operations and therefore our share may worth less or become utterly worthless.

 

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

 

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which became effective on January 1, 2020. The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves space for interpretation, future laws, administrative regulations or provisions of the State Council to include contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our VIE through contractual arrangements will not be deemed as a foreign investment under the Foreign Investment Law inEdgar the future.

 

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment on a “negative list”. The Special Administrative Measures for Access to Foreign Investment (Negative List) (2020 Edition) (Order No. 32 of the National Development and Reform Commission and the Ministry of Commerce), came into effect on July 23, 2020, further shortened the “negative list” compared to the 2019 edition, increasing foreign investment openness to the services, manufacturing and agriculture industries.

 

The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over Heng Guang Insurance through contractual arrangements is deemed as foreign investment in the future, and any business of Heng Guang Insurance is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements may be deemed invalid and illegal, and we may be required to unwind such contractual arrangements and restructure our business operations, any of which may have material adverse effects on our business operations.

 

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with existing VIE contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

 

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Changes in the policies of the PRC government could have a significant impact upon our ability to operate profitably in the PRC.

 

Currently, we conduct all of our operations and all of our revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. Policies of the PRC government can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation.

 

Because our business is dependent upon government policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair our ability to operate profitably, if at all.

 

Although the PRC government has been pursuing and implementing a number of economic reforms for more than two decades, the PRC government continues to exercise significant control over economic growth in the PRC. Because we are a group of private companies, we rely upon the governmental policies that encourage private ownership of businesses. Restrictions on private ownership of businesses would affect the stability of our business operations in general. We cannot assure you that the PRC government will continue the policies in favor of a market-oriented economy or that existing policies favorable to us will not be significantly altered, especially in the event of a change of administration, social or political disruption.

 

PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably. Changes and uncertainty in PRC laws and interpretation may materially and adversely affect our business performance and impede our operations in China.

 

There are substantial uncertainties regarding the interpretation and enforcement of PRC laws and regulations including, but not limited to, the laws and regulations governing our insurance agent business. The laws and regulations over Chinese insurance intermediaries are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations and amendments to existing laws and regulations, may adversely affect our business operations. New laws and regulations may also have retroactive effects on our operations in certain circumstances. We cannot predict what effect the new PRC laws and regulations and new interpretation of existing PRC laws or regulations may have on our business. 

 

On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Since this announcement is relatively new, uncertainties still exist in relation to how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on companies like us. 

 

Because our business is conducted in Chinese dollars or RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect the amount of proceeds we will receive after the currency exchange from U.S. dollars to RMB.

 

Our business is conducted in the PRC, our internal books and records are recorded in renminbi or “RMB”, which is the legal currency of the PRC, and the audited consolidated financial statements that we file with the SEC and provide to our shareholders are presented in United States dollars. Changes in the exchange rate between the RMB and U.S. dollars would affect the value of our assets and the results of our operations denominated in United States dollars. The value of the RMB against the United States dollars and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy of the PRC and the United States. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition presented in U.S. dollars. Further, we will need to convert the net proceeds denominated in U.S. dollars we receive in this offering into RMB in order to use the funds for our business in the PRC. Any decrease in the conversion rate from the United States dollars to the RMB would reduce the amount of net proceeds in RMB we would receive after the currency conversion and therefore adversely affect our ability to implement our plan to use such proceeds from the offering.

 

If we become subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve such matters, which could harm our business operations, stock price and reputation.

 

U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and U.S. regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities, lack of effective internal controls over financial accounting, inadequate corporate governance policies and, in many cases, allegations of fraudulent activities. As a result of the scrutiny, criticism and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have experienced and may experience in the future high volatility in trading prices and market value and, in some cases, may be subject to the delisting procedures from the national stock exchanges. Some of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our business and stock prices when listed on a national stock exchange. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or false, we will have to expend significant capital and time to investigate such allegations and defend our company. If such allegations are proven to have merits, we and our business operations could be severely affected and you could sustain a significant loss in your investment in our ordinary shares.

 

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The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

 

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Securities Exchange Act. Our SEC reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our SEC reports, filings or any of our other public pronouncements.

 

The newly enacted “Holding Foreign Companies Accountable Act” and proposed “Accelerating Holding Foreign Companies Accountable Act” both call for additional and more stringent criteria to be applied to restrictive market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering and if our auditors fail to permit the Public Company Accounting Oversight Board (“PCAOB”) to inspect the auditing firm, our class A ordinary shares may be subject to delisting.

 

On April 21, 2020, the SEC and the PCAOB released a joint statement highlighting the risks associated with investing in companies based in or having substantial operations in certain “restrictive markets,” including China. The joint statement emphasized the risks associated with lack of access from the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in the markets where the PCAOB has limited access to the local auditing firms and their work.

 

On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a restrictive market, (ii) adopt a new requirement relating to the qualification of management or the board of directors of companies in the restrictive markets, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.

 

On December 18, 2020, the “Holding Foreign Companies Accountable Act” was signed by President Donald Trump and became law. This legislation requires certain issuers to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting firm that is not subject to inspection by the PCAOB. Furthermore, if the PCAOB is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trading on a national stock exchange.

 

On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which became law in December 2020. In June 2021, the Senate passed the AHFCAA, which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years.

 

The limited PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors in China. As a result, investors may be deprived of the benefits of such PCAOB inspections and supervision. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these public accounting firms’ audit procedures or quality control procedures, which could cause existing investors and potential investors in our Ordinary Shares to lose confidence in our audit procedures and audited financial statements.

 

Our auditor, KCCW Accountancy Corp., is an independent registered public accounting firm with the PCAOB and is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis. However, the above recent developments may have added uncertainties to our proposed offering, to which Nasdaq may apply additional and more stringent criteria with respect to our auditor’s audit and quality control procedures, adequacy of personnel and training, sufficiency of resources, geographic reach, and experience as related to their audits. If independent registered public accounting firm fails to permit PCAOB to inspect its firm, our class A ordinary shares may be subject to delisting by the stock exchange where such ordinary shares will be listed.

 

We must remit the offering proceeds to China before they may be used to benefit our business in China, and we cannot assure that we can finish all necessary governmental registration processes in a timely manner.

 

We plan to remit the proceeds of this offering back to China, and the process for sending funds of such scale to China may take several months after the closing of this offering. The Company may make advances or additional capital contributions to Heng Guang Insurance while the remittance of the offering proceeds is in process. For example, loans by us or additional capital contribution to our subsidiaries in China, cannot exceed the PRC statutory limits, while the shareholder loan must be also registered with the SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by MOFCOM or its local counterpart and the amount of registered capital of such foreign-invested company. The PRC regulatory clearance on the transfer of the offering proceeds to the PRC may delay our deployment of such capital and therefore may negatively affect our business growth strategy as planned.

 

Increases in labor costs in the PRC may adversely affect our business and our profitability.

 

China’s economy has experienced increases in labor costs in recent years, which is expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits and additional personal protective equipment during COVID-19, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our services or insurance products, our profitability and results of operations may be materially and adversely affected.

 

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In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefits of our employees. Pursuant to the PRC Labor Contract Law that became effective in January 2008 and its rules and amendments promulgated thereunder, employers are subject to stricter requirements in terms of labor contracts, minimum wages, payments of remuneration, terms of probation and unilateral termination of labor contracts. In the event that we decide to terminate some of our employees or otherwise alter our employment or labor practices, the PRC Labor Contract Law and regulations may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.

 

As the interpretation and implementation of the PRC Labor Contract Laws and regulations continue evolving, we cannot assure you that our employment practice does not and will not violate such rules and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

 

Failure to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.

 

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare payment obligations, and contribute to the plans in such amounts in relation to their employees’ salaries, as specified by the local government where the business operations are. Such requirement to contribute to employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. If we fail to make contributions to certain employee benefit plans or fail to comply with applicable PRC labor laws or regulations in the future, we may be subject to penalties and fines and/or catch-up contributions to certain employee benefit plans. A large lump sum payment obligation due to certain labor law violations will likely negatively affect our financial condition and results of operations.

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company (the “Stock Option Rules”), replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We have not adopted any stock incentive plan as of the date of this prospectus. However, if we adopt an employee stock incentive plan in the future, we and our executive officers and other employees who are PRC citizens or reside in the PRC for a continuous period of not less than one year will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and additional restrictions on such shareholders’ ability to exercise their stock options or remit proceeds gained from the sale of their securities into the PRC. We also face regulatory uncertainties that could restrict our ability to adopt incentive plans for our directors, executive officers and employees under PRC law.

 

Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website.

 

The PRC government has adopted regulations governing internet access and the distribution of news and information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If our website is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our online insurance operations or reputation could be adversely affected.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and subject to frequent changes, and their interpretation and enforcement involve significant uncertainties. As a result, under certain circumstances, it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable internet laws and regulations.

 

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We only have contractual control over our website, http://qy.hgbaoxian.com. We do not directly own the websites, including internet information provision services. This may disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.

 

The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, the MITT, and the MPS). The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our online insurance business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our online insurance business and results of operations.

 

Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law, or the “EIT Law,” that became effective in January 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances, and properties of an enterprise. In addition, a circular, known as SAT Circular 82, issued in April 2009 by the State Administration of Taxation, or the “SAT,” specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Further to SAT Circular 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident enterprises.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups, or by PRC or foreign individuals.

 

If the PRC tax authorities determine that the actual management organ of Heng Guang Insurance is within the territory of China, Heng Guang Insurance may be deemed to be a PRC resident enterprise for PRC enterprise income tax purposes and a number of unfavorable PRC tax consequences could follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Finally, dividends payable by us to our investors and gains on the sale of our shares may become subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether any of our non-PRC shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our shares. Although up to the date of this prospectus, Heng Guang Insurance has not been notified or informed by the PRC tax authorities that it has been deemed to be a resident enterprise for the purpose of the EIT Law, we cannot assure you that it will not be deemed to be a resident enterprise in the future.

 

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The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from any Chinese authority to list our ordinary shares on Nasdaq. However, if we were required to obtain any type of securities listing approval from the PRC government in the future and were denied such permission, we would not be able to continue listing on Nasdaq or offering securities to investors, and therefore our share price would significantly depreciate.

 

The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulations and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, insurance commissions, property and other matters. The central or local governments of these jurisdictions may impose new and restrictive regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China, and result in a material change in our operations and/or the value of our ordinary shares.

 

For example, the Chinese cybersecurity regulator announced on July 2, 2021, that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that Didi Global Inc.’s application be removed from all the smartphone application stores in China.

 

Given the example of Didi Global Inc. and recent statements of by the Chinese government indicating an intent to exert more oversight and control overseas offerings and foreign investments in Chinese companies, our insurance agency business may be subject to various government and regulatory interference once our ordinary shares are listed on Nasdaq and such regulatory actions could significantly limit or completely hinder our ability to offer or continue to offer securities to non-Chinese investors and directly cause the value and trading prices of our ordinary shares to significantly decline or become worthless.

 

Although we are currently not required to obtain any permission from any PRC government to list our ordinary shares on Nasdaq, it will remain uncertain when and whether we will be required to obtain any permission from the PRC government to list our shares on Nasdaq in the future, and even when we obtain such permission in accordance with the new rules and regulations, it will be unclear whether such permission will be rescinded or revoked at some point in time.

 

In light of recent events indicating greater oversight by the CAC over data security, we may be subject to a variety of PRC laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material adverse effect on our business, our listing on the Nasdaq Capital Market, financial condition, results of operations, and the offering.

 

The regulatory requirements with respect to cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, and significant changes, resulting in uncertainties about the scope of our responsibilities in that regard. Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us to government enforcement actions and investigations, fines, penalties, suspension or disruption of our operations, among other things. The Cybersecurity Law, which was adopted by the National People’s Congress on November 7, 2016 and came into force on June 1, 2017, and the Cybersecurity Review Measures, or the “Review Measures,” which were promulgated on April 13, 2020, provide that personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affect or may affect national security, it should be subject to cybersecurity review by the CAC. In addition, a cybersecurity review is required where critical information infrastructure operators, or the “CIIOs,” purchase network-related products and services, which products and services affect or may affect national security. Due to the lack of further interpretations, the exact scope of what constitute a “CIIO” remains unclear. Further, the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws.

 

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On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law requires that data shall not be collected by theft or other illegal means, and also provides for a data classification and hierarchical protection system. The data classification and hierarchical protection system puts data into different groups according to its importance in economic and social development, and the damages it may cause to national security, public interests, or the legitimate rights and interests of individuals and organizations in case the data is falsified, damaged, disclosed, illegally obtained or illegally used. In addition, the Office of the Central Cyberspace Affairs Commission and the Office of Cybersecurity Review under the CAC, published the Measures of Cybersecurity Review (Revised Draft for Comments) on July 10, 2021, which provides that, aside from CIIOs, data processing operators engaging in data processing activities that affect or may affect national security, must be subject to the cybersecurity review by the Cybersecurity Review Office. On December 28, 2021, a total of thirteen governmental departments of the PRC, including the PRC State Internet Information Office, issued the Measures of Cybersecurity Review, which will become effective on February 15, 2022. According to the Measures of Cybersecurity Review, a cybersecurity review is conducted by the CAC, to assess potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The Measures of Cybersecurity Review further, if effective, would require that critical information infrastructure operators and services and data processing operators that possess personal data of at least one (1) million users must apply for a review by the Cybersecurity Review Office of PRC, if they plan to conduct securities listings on foreign exchanges. In addition to the new Measures of Cybersecurity Review, it also remains uncertain whether any future regulatory changes would impose additional restrictions on companies like us.

 

We are subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private information. As of August 2021, Heng Guang Insurance’s online business platform collected, stored, used and processed all of the personal information and important data procured and collected from its operation in the PRC domestically, with zero cross-border data transfer. On January 21, 2021, Heng Guang Insurance received a level III data security certificate (the highest level in civilian system) from the Chinese Ministry of Public Security after completing the compliance test. As of the date of this prospectus, we have not received any notice from any authorities identifying us as a CIIO or requiring us to undertake a cybersecurity review by the CAC. Further, we have not been subject to any penalties, fines, suspensions, investigations from any competent authorities for violation of the regulations or policies that have been issued by the CAC to date. If the Review Measures Draft is enacted as proposed, we believe we may not be subject to the cybersecurity review by the CAC for this offering, given that: (i) we presently maintain and process all of our personal information data in the PRC; and (ii) data processed in our business is less likely to have a bearing on national security, thus it may not be classified as core or important data by the authorities. Therefore, we believe that we have complied with the regulations and policies issued by the CAC as of the date of this prospectus.

 

However, it remains uncertain as to how the Review Measures Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Review Measures Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we expect to take all reasonable measures and actions to comply therewith. However, we cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and we will not be subject to the cybersecurity review by the CAC or designated as a CIIO. We may experience disruptions to our operations should we be required to have a cybersecurity review by the CAC. Any cybersecurity review could also result in uncertainty to our Nasdaq listing, negative impacts on our share trading prices and diversion of our managerial and financial resources.

 

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Risks Relating to This Offering And The Trading Market

 

There has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you have paid, or at all.

 

Prior to this offering, there has not been a public market for our Ordinary Shares. We plan to apply for the listing of our Class A Ordinary Shares on the Nasdaq Capital Market. However, an active public market for our Class A Ordinary Shares may not develop or be sustained after the offering, in which case the market price and liquidity of our Class A Ordinary Shares will be materially and adversely affected.

 

The initial public offering price for our Class A Ordinary Shares may not be indicative of prices that will prevail in the trading market and such market prices may be volatile.

 

The initial public offering price for our Class A Ordinary Shares will be determined by negotiations between us and the underwriter, and does not bear any relationship to our earnings, book value or any other indicia of value. We cannot assure you that the market price of our Class A Ordinary Shares will not decline significantly below the initial public offering price. The financial markets in the United States and other countries have experienced significant price and volume fluctuations in the last few years. Volatility in the price of our Class A Ordinary Shares may be caused by factors outside of our control and may be unrelated or disproportionate to changes in our results of operations.

 

You will experience immediate and substantial dilution in the net tangible book value of Class A Ordinary Shares purchased.

 

The initial public offering price of our Class A Ordinary Shares is substantially higher than the net tangible book value per Class A Ordinary Share. Consequently, when you purchase our Class A Ordinary Shares in the offering and upon completion of the offering, you will incur immediate dilution. See “Dilution” on page 44. In addition, you may experience further dilution to the extent that additional Ordinary Shares are issued upon exercise of outstanding warrants or options we may grant from time to time.

 

Substantial future sales of our Class A Ordinary Shares or the anticipation of future sales of our Class A Ordinary Shares in the public market could cause the price of our Class A Ordinary Shares to decline.

 

Sales of substantial amounts of our Class A Ordinary Shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our Class A Ordinary Shares to decline. As of the date of this prospectus, there are 6,500,000 Class A Ordinary Shares and 3,500,000 Class B Ordinary Shares issued and outstanding. [*] Class A Ordinary Shares are expected to be outstanding immediately after the consummation of this offering, assuming the underwriter does not exercise its over-allotment, and [*] Class A Ordinary Shares are expected to be outstanding immediately after the consummation of this offering, assuming the underwriter exercises its over-allotment option in full. Sales of these shares into the market could cause the market price of our Class A Ordinary Shares to decline.

 

We do not intend to pay dividends on our Class A Ordinary Shares in the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any cash dividends in the foreseeable future. As a result, you may only receive return on your investments in our Class A Ordinary Shares if the market price of our Class A Ordinary Shares exceeds the price you pay.

 

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If securities or industry analysts do not publish research or reports about our business, or if they publish negative reports regarding our Class A Ordinary Shares or business operations, the price and/or trading volume of our Class A Ordinary Shares could decline.

 

The trading market for our Class A Ordinary Shares may be affected in part by the research reports that industry or securities analysts publish about our stock or our business. We do not have any control over these analysts or their reports. If one or more of the analysts who cover us downgrade our Class A Ordinary Shares or share negative information about us, the price of our Class A Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on our Class A Ordinary Shares, our visibility in the financial markets may decline, which could lead to the decreases of the trading price and trading volume of our Ordinary Shares.

 

The market price of our Class A Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

The initial public offering price for our Class A Ordinary Shares will be determined through negotiations between the underwriter and us and may deviate substantially from the market price of our Ordinary Shares following our initial public offering. If you purchase our Class A Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Class A Ordinary Shares, or the market price following our initial public offering, will equal or exceed the prices in the private offering transactions of our Class A Ordinary Share prior to our initial public offering. The market price of our Class A Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
     
  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including wars, incidents of terrorism, epidemics, earthquakes or other Acts of God.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the financial performance of those companies. In the past, shareholders have filed securities class actions following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

Because we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and our Class A Ordinary Shares.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from disclosure and other requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important. See “Prospectus Summary -Implications of Our Being an Emerging Growth Company.”

 

Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our Class A Ordinary Shares.

 

We anticipate that we will use the net proceeds from this offering for working capital and other corporate purposes as set forth in the “Use of Proceeds” on page 42. Our management will have significant discretion as to the use of the net proceeds from this offering and could spend the proceeds in ways that may not improve our results of operations or enhance the market price of our Class A Ordinary Shares in the near future.

 

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We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

Upon consummation of this offering, we will incur significant legal, accounting, and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the applicable stock exchange, impose various requirements on the corporate governance practices of public companies.

 

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. We expect to incur additional costs in obtaining director and officer liability insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers.

 

We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior March 31, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we will be required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.

 

We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Securities Exchange Act applicable to U.S. domestic issuers, and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer.

 

We expect to qualify as a foreign private issuer upon the completion of this offering. As a foreign private issuer, we will be exempt from the rules under the Securities Exchange Act prescribing the proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions under Section 16 of the Securities Exchange Act. In addition, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as United States domestic issuers, and we will not be required to disclose in our periodic reports all of the information that United States domestic issuers are required to disclose. While we currently expect to qualify as a foreign private issuer immediately following the completion of this offering, we may cease to qualify as a foreign private issuer in the future due to changes to our operations and other factors. Should we cease being a foreign private issuer, we will incur additional significant legal, accounting and related expenses, which may adversely affect our results of operations in the future.

 

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, which may limit the information publicly available to our investors and afford them less protection than if we were an U.S issuer.

 

Nasdaq listing rules require listed companies to have, among other things, a majority of its board members independent. As a foreign private issuer, however, we are permitted to, and we may follow home country practice in lieu of the above requirements, or we may choose to comply with the above requirement within one year of listing on the Nasdaq. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests of the Company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to those requirements although we intend to comply with the requirements on the three committees upon listing of our Class A Ordinary Shares. Nasdaq listing rules may require shareholder approval for certain corporate matters, such as approval on the equity incentive plans, material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq listing rules in determining whether shareholder approval is required. We may, however, consider following home country practice in the future in lieu of the requirements under Nasdaq listing rules with respect to certain corporate governance standards which may afford less protection to investors.

 

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As a foreign private issuer we are not required to comply with all of the periodic disclosure and current reporting requirements of the Securities Exchange Act and therefore there may be less publicly available information about us available to the public shareholders than if we were a U.S. domestic issuer. We are exempt from:

 

the rules requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
   
the sections of the Securities Exchange Act regulating the solicitation of proxies in respect of a security registered under the Securities Exchange Act;
   
the sections of the Securities Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
   
the selective disclosure rules by issuers of material non-public information under Regulation FD.

 

We are required to file an annual report on Form 20-F within four months from the end of each fiscal year. However, the information we are required to file with the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same level of protections or information that would be made available to you if we were a U.S. domestic issuer.

 

If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences.

 

A non-U.S. corporation, such as us, will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either

 

  At least 75% of our gross income for the year is passive income; or
     
  The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or are held for the production of passive income is at least 50%.

 

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Class A Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2021 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income. We will make this determination following the end of any particular tax year. Although the laws in this regard are unclear, because we control Heng Guang Insurance’s management decisions, and also because we are entitled to the economic benefits associated with Heng Guang Insurance, we are treating Heng Guang Insurance as our wholly-owned subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis, in general, according to Internal Revenue Code Section 1297(c), a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the stock by value. Although we do not technically own any stock in Heng Guang Insurance, the control of Heng Guang Insurance’s management decisions, the entitlement to economic benefits associated with Heng Guang Insurance, and the inclusion of Heng Guang Insurance as part of the consolidated group (in accordance with Accounting Standards Codification (ASC) Topic 810, “Consolidation,”) is akin to holding a stock interest in Heng Guang Insurance, and therefore we consider our interest in Heng Guang Insurance as a deemed stock interest. As a result, the income and assets of Heng Guang Insurance should be included in the determination of whether or not we are a PFIC in any taxable year. Should the IRS challenge our position and consider that we are as owning Heng Guang Insurance for United States federal income tax purposes, we would likely be treated as a PFIC.

 

For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”

 

The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.

 

We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our memorandum and articles of association, by the Companies Act (2021 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Caym