China Tightens Scrutiny on Offshore IPOs for Tech, Biotech Companies
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Chinese regulators are adopting a stricter approach to companies seeking listings via offshore incorporated vehicles, impacting tech and biotech initial public offering (IPO) candidates and USD-denominated funds. This move by the China Securities Regulatory Commission (CSRC) aims to discourage the establishment of "red-chip-structured" companies in sensitive industries.
The CSRC is pushing private companies, whose main businesses and assets are in China, to restructure as mainland-incorporated entities and list via H shares. This discourages the use of offshore holding vehicles in jurisdictions such as the Cayman Islands for Hong Kong listings.
Industry sources indicate this stricter oversight ensures that any sale of assets does not escape regulatory scrutiny. Approved offshore structures require listing applicants to provide detailed explanations of foreign exchange arrangements and overseas investment procedures.
Vice-chair of investment banking for the Asia-Pacific region at JPMorgan Chase, David Lau, stated that many biotech and tech specialist funds are offshore USD funds. He added that adopting a red-chip structure makes it easier for Chinese companies to attract global investors.
Lau also explained that these structures offer greater flexibility for partnerships, acquisitions, and business development with overseas entities. They additionally help incentivise overseas employees, particularly for companies with extensive offshore operations.
The move will likely slow Hong Kong’s IPO pipeline, as the CSRC will take longer to grant listing approvals, Lau commented. Corporate partner at international law firm Cooley, Michael Yu, noted that offshore structures typically attract USD-denominated funds for listing or financing.
Yu added that some of these funds may face additional regulatory procedures when investing directly into People’s Republic of China-incorporated companies compared to Cayman entities. More than 20 companies, mostly tech and biotech firms, registered their pre-IPO tutoring on the CSRC website last month.
This registration is a mandatory step before companies can raise funds in Hong Kong. Last month, the CSRC issued supplemental filing requirements to at least three companies with offshore holding structures seeking to list in Hong Kong.
The regulator demanded detailed explanations of how these offshore vehicles were set up and whether proper foreign exchange and overseas investment procedures had been followed. Artificial-intelligence-driven drug discovery company Exegenesis Bio, which filed for a listing on the Hong Kong stock exchange in January, was asked to clarify compliance with China’s genetic resource management rules regarding its human genetic resources work.
Exegenesis Bio, founded in 2019, develops gene therapies and oligonucleotide drugs. Pharmeyes Cayman, a data-driven healthcare solutions provider that filed in February, was asked whether any assets had been shifted offshore at below-market prices.
Fresh-food retail chain Qdama International, which filed in January, was told to investigate offshore private funds, including Generation Alpha Investment and related vehicles, to identify their ultimate investors. A market source indicated that regulators are concerned offshore structures could weaken their oversight and control of sensitive industries.
The CSRC’s regulations might affect foreign investors’ willingness to invest in Chinese companies, as they could increase financing costs. After dismantling a red-chip structure, investors would need to reinvest in a domestic Chinese entity, incurring foreign exchange risks.
Those who have already invested in red-chip structures would need to consider their exit strategies. The specifics of the curbs, including which types of companies would be covered, have not yet been set out, according to a market source. Clearer rules are expected, as hundreds of companies await such clarity.
Chinese regulators are increasing scrutiny on tech and biotech companies seeking IPOs via offshore vehicles.
The CSRC is discouraging "red-chip-structured" companies and pushing for mainland incorporation.
This stricter approach could slow Hong Kong's IPO pipeline and create hurdles for USD-denominated funds.
Source: SCMP