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When listing overseas, the founder had to know two documents.

Editor’s note: This article is from WeChat public account “Futu-Ease” (ID: futu-ie) , author: Li Yifei Frank Li.

Sixteen years ago in the spring, Silicon Valley Bank brought 25 well-known American venture capital teams including Sequoia Capital, Carlyle Fund, Red Dot Ventures, and Jingwei Ventures to China for a quiet inspection. The prelude to the Chinese venture capital industry has begun. The following year, 2005, a number of venture capital institutions landed in China, officially starting the venture of Chinese foreign venture capital institutions in China.

With the pace of catching unicorns by overseas investment institutions in China, more and more start-ups have established overseas structures-this is a necessary step for Chinese companies to obtain investment from overseas institutions or overseas IPOs.

Under the overseas structure, the legendary “Document No. 37” and “Document No. 7” have become two mysterious documents that the founders often hear. In this issue of “Futura Comfort Expert Sharing”, we will interpret these two “mysterious documents” for you.

Sharing guests:

Li Yifei, ICS Investment Consulting Partner

Key points to share in this issue:

-The three functions of registration of “Document 37”

-“Document 7” registration requirements and 4 issues facing enterprises

Document No. 37

Let us first understand what is “Document 37”.

The full name of Circular 37 is: “Notice of the State Administration of Foreign Exchange on Relevant Issues concerning the Foreign Exchange Management of Domestic Residents’ Overseas Investment and Financing through Special Purpose Companies and Return Investment” (Huifa [2014] No. 37). Circular No. 37 registration refers to the foreign exchange registration of overseas investments by domestic residents.

Handling Circular 37 has three functions:

1. Resolving the compliance of domestic residents holding overseas shares

2. Resolving compliance with overseas financing and return investments

3. Open channels for domestic residents’ overseas investment funds repatriation

▎Solve the issue of compliance of domestic residents’ overseas holdings

Chinese people have many restrictions on overseas investment or shareholdings. For example, foreign exchange management regulations do not allow Chinese natural persons to invest abroad in principle. Under the existing foreign exchange management system, No. 37Wen is the only way for Chinese natural persons to legally and legally hold shares of overseas companies.

▎Solve compliance issues with overseas financing and return investments

In return, the return investment is generally referred to as an individual or enterprise of Chinese nationality investing abroad and returning to China to invest in a foreign-invested enterprise. Under the regulations of the State Administration of Foreign Exchange, this foreign-invested enterprise will be recognized as a foreign-invested enterprise of a special nature, that is, a “return investment enterprise”.

In this process, foreign-invested enterprises must declare that they are returning investment enterprises when they handle domestic foreign exchange registration and bank accounts, otherwise they will face the risk of punishment due to false declarations.

For the situation where there is a Chinese natural person in this overseas structure, the Chinese natural person needs to complete the corresponding overseas investment compliance procedures, namely Document 37 registration, in order to successfully complete the “return investment enterprise” in the foreign exchange registration of foreign-invested enterprises Logo.

Open channels for domestic residents’ overseas investment funds to be transferred back

If the investment made by Chinese domestic residents abroad generates capital gains, whether it is dividends or transaction realization, if the funds are to be returned to the territory when the funds are repatriated in the future, the foreign exchange declaration also needs to provide the completed Document 37 Registration documents.

So, in short, in the overseas financing and listing structure, all Chinese natural persons who hold shares in the overseas structure need to go through Document 37 registration to ensure foreign exchange compliance, which mainly includes the following three types of people: p>

1. Founder of Chinese Enterprise

2. Other Chinese natural person shareholders of Chinese companies

3. ESOP before listing of Chinese companies to encourage employees who exercise rights

Documents 2 and 7

The full name of “Document No. 7” refers to the “Notice of the State Administration of Foreign Exchange on Relevant Issues Concerning Foreign Exchange Management of Domestic Individuals’ Participation in Equity Incentive Plans for Overseas Listed Companies” (Huifa [2012] No. 7).

Registration of Document No. 7 is aimed at overseas listed companies.Equity incentive plan to obtain compliance registration for overseas income. That is to say, for companies listed in overseas companies that have an employee incentive plan, the company needs to register Document 7 for the incentive plan within 3 months of listing or new plan release.

From the time of declaration, the overseas structured enterprises need to report to the foreign exchange administration within 3 months when they are listed or planned to be released. Principle:

1. Must have direct or indirect equity relationship with listed companies;

2. In practice, this agency is generally required to have employees in this incentive program.

As far as the place of declaration is concerned, the agency needs to make a declaration to the SAFE office where it is located.

Since the listing of a large number of Chinese stocks in 2018 and the appearance of a large number of employee options for overseas listed companies, the SAFE’s review of the registration of Document No. 7 has become increasingly strict and standardized.

In March 2019, a news report pointed out that Ali requires employees to complete the fund repatriation within 6 months of exercise of options. Although this is only an internal notice, it also reflects the SAFE’s options for registering and listing options for overseas listed companies. Increasingly standardized implementation requirements.

Under such circumstances, the main problems faced by China Stock Exchange in the registration of Document 7 include:

▎The start time of the equity incentive plan is earlier than the listing time

Circular 7 is aimed at the company’s equity incentive plan after listing. At present, most of the emerging Chinese stock companies that have come through the startup period already have equity incentive plans before listing. The applicability of this part of the incentive plan in Circular 7 is more controversial. From our current practice, we see that more than 90% of customers have such problems.

The author believes that this problem is partly due to the rapid development of entrepreneurial enterprises and related capital markets in recent years. Circular 7 issued in 2012 has a certain solution to the convergence of equity incentive plans generated by overseas listings of such companies. Blank, the revision of regulations is also lagging.

Long-term holding of stock after exercise

According to the current requirements of foreign exchange management, in principle, overseas listed employees are not allowed to hold shares of listed companies for a long time after exercising, but due to the cumbersome overseas stock transactions and banking procedures, there is no clear time on the document, as above The Ali example mentioned is regulated in this regard.

▎RSU issues

Restricted stocks generally have the process of allowing employees to obtain long-term stocks after exercise. This is similar to the second point above, so the mention of RSU in the application process is also controversial.

▎VIE company

VIE companies are quite special. From the perspective of equity structure, foreign companies and VIE companies do not have a clear equity relationship, but control the company through an agreement-controlled relationship. Regarding the determination of affiliation with listed companies, the supervisory level may find it more difficult. There are some disputes about whether the employees of VIE belong to the group of listed companies.

Three, summary

As far as the equity incentive plan is concerned, if a Chinese company wants to realize the employee’s overseas equity incentive plan before listing, its jurisdiction falls under Circular 37. For some core employees of the enterprise, they can apply for 37 before the listing. The registration method of the document is to hold overseas shares in compliance.

For post-listing companies, the foreign exchange management of their options belongs to Circular 7. For some common problems of current supervision, companies should make corresponding adjustments during the listing process to achieve the smooth implementation of post-listing incentive plans.

Column introduction

“Futura Comfort” is a corporate service brand of Futu, providing Hong Kong stocks, US stocks IPO distribution and employee stock ownership plan (ESOP) solutions. The “Futu Anyi Expert Sharing” column will provide you with internal reference of the original dry goods.

Author introduction

Li Yifei Frank Li, graduated from Beijing Jiaotong University, one of the founding partners of ICS Investment Consulting. Since 2011, he has been engaged in consulting services for the construction of overseas investment and financing structures. Provide services for equity restructuring, offshore financing and listing restructuring. In particular, he has extensive experience in VIE, red-chip structure reorganization-related processes, and compliance procedures, as well as related policies and practices involving personal foreign investment registration and corporate overseas investment.

Introduction of the organization

ICS Investment Consulting, established in 2011, is an enterprise service agency specializing in domestic and overseas investment and financing, overseas listed project framework construction and restructuring services, especially in the field of VIE, red chip architecture, and overseas equity financing. Experience. The main service matters include the registration of domestic and overseas companies and funds, the establishment of offshore trusts, the SAIC Circular No. 37 / No. 7 registration, the establishment of foreign-invested enterprises, and the registration of outbound investments.