China IPO Watch

中概股 · 2025-12-16

How to Divide Work Scope Between Onshore and Offshore Counsel on an IPO

The division of labour between onshore and offshore legal counsel in a Chinese company’s overseas IPO has become a source of increasing tension and cost overrun, driven by the PRC’s July 2023 implementation of the Measures for the Administration of Overseas Securities Offerings and Listings by Domestic Companies (《境内企业境外发行证券和上市管理试行办法》, the “Overseas Listing Rules”) by the China Securities Regulatory Commission (CSRC). Prior to this regime, the work split was largely a matter of convention and commercial negotiation, with offshore counsel (typically in Hong Kong or New York) handling listing rules compliance and onshore counsel (PRC) managing domestic corporate restructuring. Since 2023, however, the CSRC’s mandatory filing requirement has created a new layer of dual-review that blurs these boundaries. A 2024 survey by the Beijing-based law firm Zhong Lun found that 68% of completed filings involved at least one round of supplemental questions from the CSRC that required coordinated responses from both PRC and offshore counsel, up from an estimated 30% under the pre-filing regime. For issuers targeting a dual-primary listing on the Hong Kong Stock Exchange (HKEX) and a Nasdaq or NYSE listing, the cost of legal fees has risen by an average of 18-25% year-on-year since 2022, according to data from Dealogic and internal estimates from five Hong Kong-based sponsors interviewed for this article. This article provides a framework for allocating work scope between onshore and offshore counsel, referencing specific HKEX Listing Rules, the SFC Code of Conduct, and the CSRC’s filing guidelines.

The Core Workstreams: A Functional Split

The fundamental principle for dividing work remains jurisdictional competence: each counsel handles the legal system in which it is qualified to practice. However, the practical execution of this principle has become more layered due to cross-border regulatory overlap.

PRC Corporate Restructuring and the VIE Architecture

Onshore counsel is exclusively responsible for the domestic restructuring that prepares the PRC operating entities for an offshore listing. This includes the establishment or conversion of the onshore Wholly Foreign-Owned Enterprise (WFOE), the drafting and registration of the Variable Interest Entity (VIE) agreements, and the 37号文 (Circular 37) and 7号文 (Circular 7) filings with the State Administration of Foreign Exchange (SAFE). The typical VIE structure—where a Cayman Islands holding company, through a Hong Kong intermediate subsidiary, owns a WFOE in the PRC, which then controls the operating company via contractual arrangements—requires onshore counsel to ensure the VIE agreements are enforceable under PRC law. This is not a theoretical exercise. In the 2022 HKEX listing of JD Logistics, the prospectus explicitly disclosed that the VIE agreements were governed by PRC law and that any dispute would be submitted to PRC arbitration, a point that onshore counsel had to certify in the legal opinion.

Offshore counsel’s role in this workstream is limited to reviewing the structural diagram for consistency with the offshore listing vehicle’s constitutional documents and ensuring the flow of funds (from the IPO proceeds to the onshore operations) complies with the BVI or Cayman Islands’ corporate legislation. The offshore counsel does not draft the VIE agreements; it only confirms that the structure, as described in the prospectus, does not violate the HKEX Listing Rules, specifically Rule 8.04 (the issuer must be a going concern) and Rule 19A.04 (the issuer must demonstrate that its structure is not prohibited by the laws of its place of incorporation or the PRC). Any legal opinion on the enforceability of the VIE structure must be issued by PRC-qualified lawyers, a requirement reinforced by the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “SFC Code”), paragraph 17.6, which mandates that sponsors must obtain legal opinions from lawyers qualified in the relevant jurisdiction for all material legal matters.

CSRC Filing and Regulatory Coordination

The CSRC filing process is the single largest source of new work that blurs the traditional boundary. The filing requires a “comprehensive legal opinion” from a PRC law firm, which must cover the issuer’s domestic shareholding structure, the legality of its overseas listing, and compliance with PRC data security laws (the Data Security Law and the Personal Information Protection Law, effective 2021). This opinion is filed directly with the CSRC and is not a standard due diligence product for offshore counsel.

However, the CSRC’s supplementary questions often demand information that only offshore counsel possesses. For example, the CSRC may ask about the issuer’s compliance with US SEC disclosure requirements or the terms of its Hong Kong placing agreements. In such cases, onshore counsel must coordinate with offshore counsel to provide a joint response. The Overseas Listing Rules (Article 12) explicitly require that the filing materials be “true, accurate, and complete,” and that any material change during the review process be reported. This creates a shared liability: if the CSRC finds a material omission in the filing, both the PRC law firm and the offshore sponsor can face regulatory action. A practical example occurred in the 2023 filing of QuantumPharm, where the CSRC requested additional details on the company’s PRC data processing activities, requiring both onshore counsel (for the data compliance analysis) and offshore counsel (for the US SEC disclosure) to produce a consolidated appendix within 15 business days.

Due Diligence and Verification: Parallel but Distinct

Due diligence (DD) is the workstream where overlap is most common and where cost overruns typically occur. The key is to establish a single source of truth for the data room while maintaining separate work product for each jurisdiction.

Onshore counsel conducts the PRC legal due diligence, covering the operating company’s incorporation, licenses, material contracts, intellectual property, employment, tax compliance, and litigation history. This is governed by the PRC Securities Law (2019 revision) and the Provisions on the Administration of the Issuance of Securities by Companies Listed Overseas (2023). The onshore DD report is a foundational document that the offshore counsel will rely upon, but the offshore counsel does not re-perform this work. Instead, the offshore counsel reviews the onshore DD report for red flags and ensures that the disclosure in the prospectus is consistent with the findings.

A critical point of interaction is the verification of the PRC business license and the ICP License (Internet Content Provider license) for technology companies. The HKEX Listing Rules (Chapter 9, Rule 9.11(23a)) require that the sponsor confirm the issuer has all material licenses. The sponsor’s offshore counsel will typically ask onshore counsel to provide a certified copy of each license and a legal opinion on its validity. In the 2024 IPO of Kuaishou Technology, the prospectus disclosed that the company held 15 separate ICP licenses, each verified by PRC counsel and cross-referenced by the Hong Kong sponsor’s legal team.

Offshore DD: HKEX and SEC Listing Requirements

Offshore counsel is responsible for the due diligence related to the listing venue. For a Hong Kong IPO, this includes reviewing the issuer’s constitutional documents for compliance with the HKEX Listing Rules (specifically Rules 2.03 and 2.04 on general principles), verifying the directors’ and substantial shareholders’ backgrounds, and confirming the issuer’s eligibility for listing under Chapter 8 (Main Board) or Chapter 23 (GEM). Offshore counsel also drafts the sponsor’s due diligence plan, which must be submitted to the SFC under paragraph 17 of the SFC Code.

The offshore counsel’s DD work product is the Listing Document Verification Notes (VNs), a detailed document that cross-references every statement in the prospectus to a source document in the data room. This is a Hong Kong-specific requirement. The VNs are not shared with onshore counsel in their entirety, but the portions relating to PRC law statements (e.g., “the company holds all material PRC licenses”) are extracted and sent to onshore counsel for confirmation. The HKEX Listing Decision HKEX-LD43-3 (2019) makes clear that the sponsor must retain all VNs and that the exchange may request them during the listing review. This creates a clear boundary: onshore counsel provides the underlying facts; offshore counsel constructs the verification framework.

The prospectus is a joint product, but the drafting responsibility is sharply divided by section.

The Prospectus: Sectional Responsibility

Onshore counsel typically drafts the sections on PRC regulation (e.g., “Regulation – PRC”), the risk factors related to PRC law (e.g., VIE structure enforceability, data privacy risks), and the description of the PRC business operations. Offshore counsel drafts the sections on the offering structure, the terms of the placing and underwriting agreement, the directors’ and shareholders’ rights, and the HKEX or SEC disclosure requirements. The Business section is usually a joint effort, with onshore counsel providing the factual narrative and offshore counsel ensuring it meets the Listing Rules disclosure standards (Rule 11.07 for Main Board).

A common point of friction is the Use of Proceeds section. The HKEX Listing Rules (Rule 11.13) require a detailed breakdown of how the IPO proceeds will be used. If a portion is to be deployed in the PRC, onshore counsel must confirm that the proposed use does not violate PRC foreign exchange controls (SAFE rules) or the Catalogue of Industries for Guiding Foreign Investment (the negative list). Offshore counsel then formats this into the prospectus table and ensures it is consistent with the underwriting agreement’s conditions precedent.

Each counsel issues its own legal opinion. The onshore law firm issues a PRC Legal Opinion covering the validity of the issuer’s PRC operations, the enforceability of the VIE agreements, and compliance with PRC securities laws. This opinion is addressed to the issuer and the sponsor and is typically included as an exhibit to the sponsor’s due diligence report. The offshore counsel issues a Listing Legal Opinion on the issuer’s valid incorporation under Cayman Islands or BVI law, the due authorization of the share issuance, and the compliance of the offering documents with the HKEX Listing Rules and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) for Hong Kong incorporations.

The two opinions are independent. The offshore counsel’s opinion will usually contain an explicit reliance carve-out for matters of PRC law, stating that it has relied on the PRC legal opinion for all PRC law matters. Conversely, the PRC legal opinion will state that it does not opine on the laws of the Cayman Islands or Hong Kong. This separation is critical for liability management. In the event of a dispute, each counsel’s liability is confined to its own opinion. The SFC’s Enforcement Bulletin (Issue 7, 2022) noted that in a case involving a PRC issuer, the sponsor was fined for failing to identify a material PRC licensing issue that was disclosed in the onshore counsel’s opinion, underscoring that the sponsor (and its offshore counsel) cannot simply delegate responsibility to onshore counsel.

Post-Listing Compliance and Ongoing Obligations

The work split does not end at listing. Post-IPO, the issuer must maintain compliance with both PRC and listing venue rules.

PRC Annual Reporting and Filing

Under the Overseas Listing Rules, a PRC company listed overseas must file an annual report with the CSRC within four months of the end of its financial year. This filing must include a legal opinion from PRC counsel confirming that the company’s operations remain in compliance with PRC law. The onshore counsel also handles any changes to the VIE structure, such as the addition or removal of a variable interest entity, which triggers a new filing under Article 15 of the Overseas Listing Rules.

HKEX Continuing Obligations

Offshore counsel handles the HKEX continuing obligations, including the preparation of annual and interim reports (Rule 13.46), notifiable transactions (Chapter 14), and connected transactions (Chapter 14A). The onshore counsel’s role here is to provide the underlying PRC law analysis for any transaction that involves a PRC subsidiary—for example, confirming that a connected transaction (e.g., a loan from the listed issuer to a PRC subsidiary) does not violate PRC foreign exchange rules. The HKEX Guidance Letter GL89-16 (updated 2024) on connected transactions explicitly requires that the independent financial adviser obtain a legal opinion from PRC counsel on the legality of any such transaction under PRC law.

Actionable Takeaways

  1. Define the work product boundary in the engagement letter: The engagement letter for both onshore and offshore counsel should explicitly list which sections of the prospectus and which legal opinions each firm is responsible for, with a clear reliance clause on the other’s work product to avoid duplicative effort and overlapping liability.

  2. Establish a single data room with tiered access: The data room should be structured with a core folder (for onshore and offshore counsel to share) and restricted folders (for each counsel’s own work product). This prevents the offshore counsel from inadvertently relying on unverified onshore documents and vice versa.

  3. Mandate a joint CSRC filing coordination call at the start of the filing process: The issuer should schedule a meeting within the first week of the CSRC filing process that includes both onshore and offshore counsel, the sponsor, and the issuer’s CFO, to agree on a single point of contact for CSRC supplementary questions and a response timeline of no more than 10 business days.

  4. Allocate the VIE enforceability opinion exclusively to onshore counsel: The offshore counsel should not draft or opine on the enforceability of the VIE agreements. This is a matter of PRC law, and the offshore counsel’s role is limited to confirming the structural consistency with the HKEX Listing Rules.

  5. Budget for a 20% cost contingency for cross-border DD verification: Based on the 2023-2024 filing data, issuers should expect that at least 15-20% of the total legal fee budget will be consumed by the back-and-forth verification between onshore and offshore counsel on CSRC-related and data privacy issues. This contingency should be explicitly included in the sponsor’s fee estimate.