Yesterday, November 23, 2020, the Staff of the Securities and Exchange Commission Division of Corporation Finance issued CF Disclosure Guidance Topic No. 10. The guidance addresses disclosure considerations for companies that are based in or that have a majority of their operations in China. This guidance follows various public statements from SEC officials, as well as a roundtable on the risks associated with investments in emerging markets, an executive order, and the recommendations of the President's Working Group on Financial Markets.
The statement emphasizes the importance of high quality, reliable disclosure, including financial statement disclosure, while noting the limitations of promoting and enforcing high quality disclosure standards for PRC-based issuers. The guidance identifies various risks that should be considered and disclosed, including, but not limited to the following:
- Risks related to U.S. regulators' access to information and limited ability for regulatory oversight;
- Risks related to the company's organizational structure, through the use of variable interest entities (VIEs) and other contractual arrangements that are intended to mimic the benefits of direct ownership;
- Risks related to the regulatory environment in China;
- Differences in shareholder rights and recourse, governance, and reporting associated with China-based issuers;
- Limitations on shareholder rights and recourse;
- Differences in corporate law and corporate governance; and
- Reporting differences for China-based issuers that qualify as foreign private issuers.
The Staff Guidance notes that China-based issuers consider disclosing these and other material risks, and poses a number of questions that registrants should consider in preparing and reviewing the sufficiency of their disclosures. See the full CF Disclosure Guidance Topic here.
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