Compared with the previous notice, coded as Hui Fa  No. 75, which governs special purpose vehicles (SPVs), Hui Fa  Notice No. 37 (Notice of the State Administration of Foreign Exchange on Issues Regarding Foreign Exchange Control on Offshore Investment and Financing as well as Round-trip Investment by Domestic Residents Through Special Purpose Vehicles) is significantly different in the way that it clearly supports the “go global” strategy, streamlines and facilitates forex registration, and improves convertibility between cross-border capital and financial transactions.
Notice No. 75 placed its main emphasis on helping companies carry out overseas equity financing. The promulgation of Notice No. 37 indicates the accelerating liberalisation of capital accounts and the gradual relaxation of forex control.
Forex registration of equity incentives of unlisted SPVs. Under the framework of Notice No. 75 and Hui Fa  Notice No. 7, forex registration of the shares of a non-listed company acquired pursuant to an employee stock ownership plan (ESOP), whether by means of the exercise of an option or the realisation of restricted stocks/units (RSs or RSUs), is not governed. Notice No. 75 applies only to so-called replacement of overseas shares with domestic equity by founding shareholders, while Notice No. 7 applies only to the ESOP of a listed company.
Notice No. 37 clearly specifies for the first time that forex registration and registration procedures can be carried out for the equity incentive plans implemented by non-listed SPVs for the directors, supervisors, senior management members and employees of their domestic companies. This means the same set of operating guidelines and application forms are shared in the registration of round-trip investment by founding shareholders and registration of offshore investment by individuals.
Previously, the employees of entrepreneurial companies using “red-chip architecture” were subject to the above-mentioned forex registration restrictions because they could not become the direct shareholders of the companies prior to the listing of the companies, so that most employees remained uncertain about the ESOPs implemented by the companies. After Notice No. 37 enters into force, these companies may establish offshore SPVs and launch equity incentive plans by directly using offshore private equity funds.
However, considering the complexity of ESOPs and the flexibility in their implementation, Notice No. 37 requires that the acquisition of, and change in, an option prior to a listing should be registered in the name of the actual acquirer.
Regarding details about the design of an incentive method, the increase in the number of founders and the ESOP model commonly used for entrepreneurial companies may be affected because a company needs to consider the right time to help employees apply for registration, and the ways to deal with the stocks exercised if an employee has left the company.
Based on the literal meaning of Notice No. 37, domestic residents participating in ESOPs are not required to carry out forex registration. Instead they can apply to carry it out. Other clauses of Notice No. 37 related to forex registration are described as “they shall apply for handling it”. If these clauses are interpreted in strict compliance with the literal meaning, non-listed SPVs need not necessarily handle forex registration during the exercise of an equity incentive plan.
Companies and employees are advised to consider carefully whether these clauses apply or not. However, the State Administration of Foreign Exchange (SAFE) may need to further clarify this.
Streamline registration items and specify re-registration. Under the framework of Notice No. 75 and subject to the stringent requirements of Guo Shui Han  Notice No. 698 for the indirect transfer of the shares of Chinese companies, SAFE usually asks founding shareholders to provide tax payment documentation when they make changes in registration on the sale of shares overseas, which will oblige founding shareholders to bear a greater tax risk associated with the sale of these shares.
Notice No. 37 contains two specific clauses that limit the authority for the registration of round-trip investment: (1) registration shall only be made for SPVs with a single-layered structure directly established or controlled by individual domestic residents; and (2) changes in registration shall only be made to “general information such as domestic resident individual shareholders, name and term of operation of a registered SPV, or to major matters such as capital increase, capital reduction, equity transfer or exchange, as well as merger or division by domestic resident individuals”.
If a domestic resident sets up a multi-layered SPV, they can simply evade the registration obligation, and if the shares are transferred by using an indirectly controlled SPV, it is not required to be registered. However, since it is difficult to ascertain the scale of operation during implementation process, we need to keep an eye on the comments of the regulatory authorities.
Notice No. 37 also covers the procedures for forex re-registration and the imposition of punishment followed by re-registration for alleged violations to allow SPVs, which have been established under Notice No. 75 but have not been re-registered for various reasons, to be legalised to correct the historical defects.
Outward remittance of funds
According to Notice No. 37, domestic legal and natural persons can make capital contributions to the offshore companies controlled by them with their domestic and foreign assets or equity. Notice No. 37 provides that domestic companies directly or indirectly controlled by domestic residents may lend to their registered SPVs based on real, legitimate needs according to existing regulations. They may purchase forex for remitting funds based on real, legitimate needs for the setup, share repurchases or delisting of SPVs.
This amendment is to improve the channel for remitting funds out of China – prior to this, only overseas financing was allowed and no funds were allowed to be remitted out of China – conducive to the movement and transfer of cross-border funds of conglomerates. However, the actual implementation will depend on the co-operation of various departments.
The supersedence of Notice No. 75 by Notice No. 37 is no doubt favourable to overseas investment and financing by domestic companies because it further relaxes the regulatory requirements and raises more expectations of the market for a change in the overall regulatory direction.
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