In the last several years, the Division of Corporation Finance has been issuing guidance regarding the disclosure obligations of companies based in or with a majority of their operations in the People’s Republic of China (China-based Companies[2]).[3]  The guidance addresses an array of disclosure issues, including those related to the variable interest entity structure, the reliability of financial reporting, the regulatory environment in China, and corporate governance matters.  Recently, the Division noted, in the context of the Commission’s rules under the Holding Foreign Companies Accountable Act (HFCAA),[4] that it is monitoring disclosures by certain China-based Companies and may provide additional guidance.[5]  As part of its filing review process, the Division also issues comments to China-based Companies to enhance their compliance with disclosure obligations under the federal securities laws.  The Division continues to believe that companies should provide more prominent, specific, and tailored disclosures about China-specific matters so that investors have the material information they need to make informed investment and voting decisions. 

In this regard, the Division is focused on three areas of disclosure related to China-specific matters.

First, we remind companies of their disclosure obligations under the HFCAA.  More particularly, public companies identified as Commission-Identified Issuers (CIIs) under the HFCAA must comply with the submission and disclosure requirements under the HFCAA and Commission rules for each year in which they are identified.[6]  CIIs are listed on the SEC website at www.sec.gov/HFCAA.  For CIIs that are foreign issuers, the required disclosures include, among other matters, the percentage of shares owned by foreign government entities, whether government entities in the foreign jurisdiction have a controlling financial interest with respect to the issuer, identification of all Chinese Communist Party (CCP) officials who are on the board of the issuer or the operating entity for the issuer, and whether the issuer’s articles of incorporation (or any equivalent organizing document) contain any “charter” of the CCP.  The Division will review the relevant filings for compliance with these submission and disclosure requirements.

Second, the Division continues to issue comments seeking more specific and prominent disclosure about material risks related to the role of the government of the People’s Republic of China (the PRC) in the operations of China-based Companies.[7]  In particular, the Division is seeking disclosures about any material impacts that intervention or control by the PRC in the operations of these companies has or may have on their business or the value of their securities.  We remind companies that there are other ways in which a government or any person can exercise control over a company beyond appointing members to the board or having formal powers under the company’s organizational documents.  The federal securities laws and regulations generally define the term “control” (including the terms “controlling,” “controlled by,” and “under common control with”) more broadly.  For purposes of the Commission’s rules under the Securities Act of 1933 and the Securities Exchange Act of 1934, control “means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”[8] 

Third, we note that companies may need to make disclosures related to material impacts of certain statutes.  On December 23, 2021, the Uyghur Forced Labor Prevention Act (UFLPA) became law in the United States.[9]  The UFLPA, among other matters, prohibits the import of goods from the Xinjiang Uyghur Autonomous Region of the PRC.  In light of the UFLPA, companies should evaluate their disclosures with a view towards providing investors with tailored disclosure about the material impacts of the provisions of this statute on their business.  These impacts may include material compliance risks or material supply chain disruptions that companies may face if conducting operations in, or relying on counterparties conducting operations in, the Xinjiang Uyghur Autonomous Region. 

The following illustrative letter contains sample comments that, depending on the particular facts and circumstances, the Division may issue to companies.  These sample comments do not constitute an exhaustive list of the issues that companies should consider.  The Division urges companies to consider these sample comments and additional developments in this area as they prepare their disclosure documents.  Companies should contact the industry office responsible for review of the company’s filings with any questions regarding the company’s proposed disclosure.