Stricter Chinese scrutiny of offshore vehicles a blow for tech and biotech IPO candidates

Many Chinese biotech and tech firms favour red-chip structures.

Photo: Shutterstock US dollar-denominated funds could face more hurdles when investing in Chinese tech and biotech companies as Beijing adopts a stricter approach to companies seeking listings via offshore incorporated vehicles.

Indicative of Chinese regulators’ caution in overseeing sensitive industries, industry sources say the move ensures that any sale of assets does not escape regulatory scrutiny.

And for any offshore incorporated structures that are approved, the stock regulator requires listing applicants to provide detailed explanations of foreign exchange arrangements and overseas investment procedures.

The shift comes as the China Securities Regulatory Commission (CSRC) moves to discourage private companies from setting up “red-chip-structured” companies – whose main businesses and assets are in China but which control those operations through offshore holding vehicles in jurisdictions such as the Cayman Islands – with a view to listing in Hong Kong, and instead pushes them to restructure as mainland-incorporated entities and list via H shares. “Many biotech and tech specialist funds are offshore US dollar funds … adopting [red-chip] structure makes it easier [for these Chinese companies] to attract global investors,” said David Lau, vice-chair of investment banking for the Asia-Pacific region at JPMorgan Chase.

Many Chinese biotech and tech firms also favoured red-chip structures, which gave them “greater flexibility for partnerships, acquisitions, and business development with overseas entities”, he said. “This structure also helps them incentivise overseas employees, since many of these companies have extensive offshore operations.” The move was likely to slow Hong Kong’s IPO pipeline, as it would take the CSRC – mainland China’s stock market watchdog – longer to grant listing approvals, Lau added.

Michael Yu, corporate partner at international law firm Cooley, said: “The offshore structures, which are typically used as the listing or financing vehicle, have attracted US dollar-denominated funds.

But some of those funds may face additional regulatory procedures when investing directly into the People’s Republic of China-incorporated companies compared to Cayman entities.” More than 20 companies, most of them tech and biotech firms, registered their pre-IPO tutoring on the CSRC website last month, a mandatory step before they can raise funds in Hong Kong, which has seen an i

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