Special Requirements for VIE-Structured Companies in CSRC Filings

The China Securities Regulatory Commission (CSRC) has, since the effective date of the Regulations on the Overseas Securities Offering and Listing by Domestic Companies (《境内企业境外发行证券和上市管理试行办法》, hereinafter the “New Filing Regime”) on 31 March 2023, fundamentally altered the calculus for VIE-structured companies seeking a Hong Kong listing. Prior to this regime, the VIE (Variable Interest Entity) structure operated in a regulatory grey zone, subject to de facto approval from the Ministry of Commerce but lacking a single, formalised filing gateway. The CSRC’s explicit inclusion of VIE structures within its filing scope, coupled with a series of subsequent Q&A sessions and on-site guidance, has crystallised a set of special, non-negotiable requirements that now dictate the timeline, disclosure burden, and structural viability of any VIE deal. For sponsors, PRC counsel, and CFOs planning a dual-primary or secondary listing on the Hong Kong Stock Exchange (HKEX) in 2025-2026, the margin for error on these CSRC-specific requirements has been reduced to zero. A failure to pre-emptively address the “compliance of the VIE arrangement itself” before submitting the initial filing can trigger a multi-month review clock suspension, directly imperilling the listing timetable.

The CSRC’s Explicit Stance on VIE Necessity and Compliance

The CSRC’s primary focus is not merely the existence of a VIE, but the necessity of its continued use. The regulator has made it clear that a VIE structure is not a structural choice but a regulatory consequence where foreign investment is otherwise prohibited or restricted by PRC law.

The “Negative List” Test as the First Gate

The CSRC requires a sponsor and PRC counsel to submit a definitive legal opinion that the VIE arrangement is the only viable structure for the target operating business. This opinion must map each line of the operating entity’s business directly to the current version of the Special Administrative Measures (Negative List) for Foreign Investment Access (《外商投资准入特别管理措施（负面清单）》). The 2024 edition of the Negative List, effective 1 November 2024, retains restrictions in key sectors such as value-added telecommunications services (VATS), internet-related services (including online publishing and audio-visual services), and education. For a company operating an online content platform, for example, the legal opinion must demonstrate that the core revenue-generating activity—such as providing internet information services (ICP) or online publishing—falls under a “prohibited” or “restricted” foreign investment category, thereby justifying the VIE. If the business can be restructured to operate via a wholly foreign-owned enterprise (WFOE) without a VIE, the CSRC will likely reject the filing or demand a restructuring plan as a condition of acceptance. Data from the CSRC’s public filing acceptance list shows that between Q2 2023 and Q4 2024, three VIE-structured applicants were explicitly asked to provide additional justification for the necessity of the structure, delaying their filing acceptance by an average of 45 business days.

Prohibition on “Circular Contractual Arrangements”

A second, critical requirement is that the VIE agreement must not constitute a “circular contractual arrangement” that artificially channels profits from the WFOE back to the VIE without a corresponding service or asset transfer. The CSRC has, in its informal guidance sessions, pointed to the Notice of the General Office of the State Council on Issues Concerning the Regulation of the Operation of Variable Interest Entities (a 2021 internal document) as the basis for this scrutiny. In practice, this means the standard suite of VIE agreements—Exclusive Technical Consulting and Services Agreement, Equity Pledge Agreement, Exclusive Option Agreement, and Proxy Agreement—must be priced on an arm’s-length basis and supported by actual service delivery. The CSRC will examine the cash flow. If the WFOE is paying the VIE a “service fee” that is essentially a distribution of the WFOE’s profits without any substantive service (e.g., technical support, brand licensing, or management consulting), the regulator will classify this as a sham arrangement. The required remedy is to document a clear, value-based service chain, often involving a formal IP licensing agreement from the WFOE to the VIE for the use of developed software or trademarks, with royalty payments calculated via a transfer pricing study compliant with PRC tax law (SAT Circular [2017] No. 6).

Enhanced Disclosure in the CSRC Filing Dossier

The CSRC filing form (Form 1: Overseas Securities Offering and Listing Filing Form) and its accompanying materials demand a level of granularity on the VIE that far exceeds what was historically required in an HKEX A1 filing.

Detailed Breakdown of the VIE Equity Structure

The filing must include a full equity chain diagram showing every intermediate holding company—BVI, Cayman, Hong Kong—and the exact shareholding percentages of each PRC resident individual in both the onshore WFOE and the VIE. This is not a simple table. The CSRC requires a narrative description of how control is exercised. Specifically, the filing must identify each PRC resident beneficial owner (including those holding through trusts or SPVs) and state their direct and indirect holdings in the VIE. This is a direct application of the Administrative Measures for the Registration of Overseas Investment by Domestic Individuals (which, while not a formal regulation, is enforced through the CSRC’s filing review). For an individual founder who holds 60% of the VIE through a BVI company, the CSRC will require a copy of the BVI company’s register of members and a sworn declaration from the founder confirming no PRC law has been violated in the establishment of that offshore structure. Failure to provide this level of detail was the stated reason for the CSRC’s request for supplementary materials in the case of a 2023 filing by an ed-tech company, which subsequently withdrew its application.

Risk Factor Specificity on VIE Invalidity

The CSRC mandates that the risk factors in the filing prospectus (the “招股書” section of the filing) address VIE-specific risks with a level of specificity that is now a market standard. The regulator requires a dedicated risk factor titled “Risk of the VIE Arrangement Being Deemed Invalid or Unenforceable.” This must cite the specific PRC Supreme People’s Court’s Guiding Case No. 67 (2016) on the validity of VIE agreements, and state that there is no guarantee a PRC court would enforce the contractual arrangements in the event of a dispute between the WFOE and the VIE shareholders. Additionally, the filing must include a statement that the VIE structure has not been formally approved by the CSRC, the Ministry of Commerce, or any other PRC regulatory body, and that it operates on a “self-certification” basis under the current regulatory framework. This disclosure is now a standard template item in every CSRC filing for VIE companies, and its omission will result in a formal deficiency letter.

The Interaction Between CSRC Filing and HKEX Listing Rules

The CSRC’s requirements do not operate in a vacuum. They directly intersect with HKEX Listing Rules, particularly Chapter 8 (Conditions for Listing) and Chapter 19C (for overseas issuers seeking a secondary listing).

The “Same Business, Same Control” Principle for VIE

For a VIE company seeking a secondary listing under Chapter 19C, the CSRC requires that the VIE structure be “substantially identical” to the structure that was in place at the time of the primary listing. This is a direct conflict with the HKEX’s own requirement under Rule 19C.09 that the applicant must demonstrate “the same business and the same control.” The CSRC interprets “same control” to mean that the PRC resident shareholders who controlled the VIE at the time of the primary listing must still control the VIE at the time of the secondary listing filing. If a founder has sold down their stake in the offshore parent (Cayman) but retains control of the VIE through a separate agreement, the CSRC will require an explanation of how this dual-control structure is maintained without violating PRC law. In a 2024 filing by a Chinese AI company seeking a Hong Kong secondary listing, the CSRC requested a detailed analysis of the founder’s control over the VIE, which required the sponsor to produce a side-by-side comparison of the Cayman company’s articles of association and the VIE’s articles of association to prove the founder could effectively block any hostile change of control. This added 60 days to the filing review process.

The “SFC/HKMA” Circular on VIE and Capital Flows

While not a direct CSRC requirement, the HKMA’s Circular on the Management of Cross-Border Capital Flows for VIE-Structured Companies (2023) has created a parallel compliance obligation. The HKMA requires that any Hong Kong-licensed bank acting as a receiving bank for a VIE company’s IPO proceeds must obtain a written confirmation from the company that the proceeds will be remitted to the PRC WFOE, not directly to the VIE. The CSRC filing must, in turn, include a statement on the intended use of proceeds, specifying the percentage that will be injected into the WFOE as registered capital or capital reserve. The CSRC will cross-reference this against the HKMA’s circular to ensure no proceeds are being structured to bypass PRC foreign exchange controls. A discrepancy between the CSRC filing and the HKMA’s requirements was cited as a reason for a 30-day delay in the listing of a 2024 consumer tech company.

Practical Implications for Deal Timelines and Structure

The cumulative effect of these requirements is a significant extension of the pre-filing preparation period for VIE companies.

The 90-Day Pre-Filing Clean-Up Window

Sponsors must now budget for a minimum of 90 business days of pre-filing legal work specifically on the VIE. This includes: (1) a full audit of all VIE agreements to ensure they are arm’s-length and supported by service delivery; (2) a transfer pricing study for the service fees; (3) a forensic review of the equity chain to identify every PRC resident beneficial owner; and (4) the preparation of the CSRC-specific legal opinion on the necessity of the VIE. This work cannot be done in parallel with the HKEX A1 preparation. The CSRC requires that the VIE be “clean” before the filing is submitted. A single unresolved issue—such as a missing signature on a 2019 equity pledge agreement—can force the sponsor to halt the filing and re-submit.

The “No-Change” Period Post-Filing

Once the CSRC filing is accepted (which typically takes 5-10 business days for a complete dossier), the company is subject to a “no-change” period until the CSRC issues its formal filing notice. Any material change to the VIE structure—such as a change in the VIE’s registered capital, a change in the VIE’s legal representative, or a new VIE agreement—requires a supplementary filing. This is a direct application of Article 12 of the New Filing Regime. In practice, this means a VIE company cannot, for example, enter into a new joint venture agreement with a PRC partner during the CSRC review period without first notifying the CSRC and potentially restarting the 20-business-day review clock. This has forced companies to freeze their onshore corporate structure for a period of 3-6 months, which can be operationally challenging for fast-growing tech firms.

Actionable Takeaways for 2025-2026 Listings

For any VIE-structured company planning a Hong Kong listing in 2025 or 2026, the following actions must be completed before the sponsor is formally engaged:

1. Commission a “VIE Necessity Audit” from a top-tier PRC law firm (e.g., Jingtian & Gongcheng, JunHe, Fangda) that maps every revenue line to the Negative List and produces a written opinion on whether the VIE can be unwound.

2. Complete a full transfer pricing study for the service fee payable from the WFOE to the VIE, ensuring the fee is calculated on a cost-plus or transactional net margin method (TNMM) basis, compliant with SAT Circular [2017] No. 6.

3. Identify every PRC resident beneficial owner in the VIE and the offshore parent, and prepare a sworn declaration from each, confirming no violation of PRC foreign exchange or overseas investment regulations.

4. Freeze the onshore corporate structure for a period of at least 90 days prior to the CSRC filing, with no changes to the VIE’s registered capital, legal representative, or shareholders.

5. Secure a written confirmation from the receiving bank (a Hong Kong-licensed institution) that the IPO proceeds will be remitted to the WFOE, not the VIE, and that this aligns with the CSRC filing’s stated use of proceeds.