The 'Look-Through' Review of Contractual Control Structures in Offshore Filings

The China Securities Regulatory Commission (CSRC) has intensified its substantive review of Variable Interest Entity (VIE) structures in offshore listings since the implementation of its revised filing rules in March 2025. This shift, codified in the Trial Administrative Measures of Overseas Securities Offerings and Listings by Domestic Companies (the “Measures”) effective 31 March 2023, as amended, now requires a “look-through” analysis of contractual control arrangements that were previously accepted at face value. For issuers targeting dual listings in Hong Kong and the US, this means the CSRC is no longer merely checking whether a VIE agreement exists but is scrutinising its commercial rationality, enforceability under PRC law, and the actual economic substance of the control relationship. The trigger for this heightened scrutiny was the 2024 enforcement action against a major PRC-edtech issuer whose offshore parent was found to have no practical means of enforcing its VIE agreements against domestic operating entities, leading to a delisting warning from the SEC and a subsequent HKEX trading halt. As of Q1 2026, the CSRC has requested supplementary filings from 12 of the 18 VIE-structure applicants, specifically demanding proof of direct or indirect shareholding in the domestic WFOE (Wholly Foreign-Owned Enterprise) and evidence that the contractual control does not circumvent PRC foreign investment restrictions in prohibited sectors (Catalogue of Industries for Guiding Foreign Investment, 2024 edition). This article examines the mechanics, legal risks, and structuring options emerging from this “look-through” regime.

The CSRC’s “Look-Through” Framework: From Form to Substance

The CSRC’s revised review process for VIE structures represents a fundamental departure from the pre-2023 regime, where offshore filings were largely procedural. Under the current framework, the CSRC requires applicants to demonstrate that the VIE arrangement is not a mere legal fiction but a structurally necessary mechanism to comply with PRC foreign investment negative lists.

The Three-Pronged Substantive Test

The CSRC’s review now applies a three-pronged test to all VIE structures disclosed in offshore prospectuses. First, the commercial necessity test requires the issuer to prove that the domestic operating entity operates in a sector where foreign ownership is prohibited or restricted under the 2024 Foreign Investment Negative List. Second, the enforceability test demands evidence that the VIE agreements—including exclusive technical consulting services agreements, equity pledge agreements, and exclusive call option agreements—are registered with the relevant PRC authorities (e.g., the State Administration for Market Regulation, SAMR) and are legally binding under PRC Contract Law. Third, the economic substance test requires the offshore parent to demonstrate that it receives the majority of economic benefits from the domestic entity through a series of verifiable transactions, not merely through contractual promises. A 2025 CSRC circular (No. 8/2025) explicitly states that “pass-through” profit distributions must be documented with audited transfer pricing reports and PRC tax payment receipts. Failure to satisfy any one of these prongs results in a request for supplementary materials, as seen in the 12 cases referenced above.

Impact on Dual-Listing Structures

For issuers pursuing dual listings on the HKEX Main Board and the NYSE or Nasdaq, the CSRC’s look-through review creates a coordination challenge. The HKEX Listing Rules (Chapter 18C for SPACs, Chapter 19C for overseas issuers) require disclosure of VIE structures in the listing document, but the CSRC now demands that the same disclosure be accompanied by a legal opinion from a qualified PRC law firm confirming the VIE’s compliance with the three-pronged test. As of January 2026, the CSRC has additionally required that any VIE structure involving a PRC domestic company that holds a “Value-Added Telecommunications Services” (VATS) license—common in fintech and edtech issuers—must obtain a pre-filing clearance from the Ministry of Industry and Information Technology (MIIT). This adds a minimum of 90 days to the typical 180-day filing timeline under the Measures.

Structural Options Under the New Regime

Given the heightened scrutiny, three principal structuring approaches have emerged for issuers seeking to maintain offshore control while satisfying the CSRC’s look-through requirements.

The Direct WFOE Ownership Model

The most straightforward solution is to eliminate the VIE entirely by converting the domestic operating entity into a WFOE where PRC law permits. This is feasible for issuers in sectors where foreign ownership is merely restricted, not prohibited—such as certain e-commerce platforms and software development companies. Under this model, the offshore parent (typically a Cayman Islands or BVI company) holds 100% equity in the Hong Kong intermediate holding company, which in turn holds 100% equity in the PRC WFOE. The WFOE then directly owns the operating licenses and assets. The CSRC has signalled a preference for this structure in its 2025 Q&A guidance, noting that it eliminates the “control risk” inherent in VIE arrangements. However, this model is unavailable for issuers in prohibited sectors (e.g., internet content provision, education, and certain media), where foreign ownership is capped at 50% or entirely barred under the 2024 Negative List.

The Contractual Control Plus Equity Pledge Hybrid

For issuers in prohibited sectors, the hybrid structure has gained traction. This involves the offshore parent (Cayman) holding a minority equity stake (typically 30-49%) in the PRC operating company through a domestic entity, complemented by a suite of VIE agreements that grant the offshore entity effective control. The key difference from the traditional VIE is that the equity stake provides a direct ownership interest, which the CSRC views as stronger evidence of economic substance. The equity pledge agreements must be registered with SAMR within 30 days of execution, and the exclusive technical consulting services agreement must include a fee schedule based on a percentage of the PRC entity’s audited revenue—typically 80-95%—to satisfy the economic substance test. This structure was used by a major PRC fintech issuer in its August 2025 HKEX listing, where the CSRC accepted the arrangement after a 14-month review process.

The PRC Partnership with Offshore Control

A newer, less-tested structure involves the offshore parent establishing a PRC limited partnership (LP) as the controlling vehicle. The offshore entity serves as the general partner (GP) with a 1% economic interest but full management control, while PRC domestic investors hold the remaining 99% as limited partners. The GP’s control is documented through the partnership agreement, which is registered with the local SAMR. This structure avoids the VIE entirely but requires the offshore entity to demonstrate that it has the “decision-making authority” over the PRC entity’s operations, including hiring, investment, and dividend distribution. The CSRC has reviewed only two such structures as of Q1 2026, and both required supplementary filings on the GP’s independence from PRC regulatory authorities. This approach carries higher execution risk and is not recommended for first-time issuers.

Enforcement Trends and Market Implications

The CSRC’s look-through review has already produced measurable consequences for the offshore listing pipeline and secondary market valuations.

Delisting and De-SPAC Risks

The most immediate risk is the potential for a CSRC rejection or a supplementary filing request that delays the listing timeline beyond the SPAC merger deadline. Under HKEX Listing Rule 18C.33, a SPAC must complete its de-SPAC transaction within 36 months of listing. As of February 2026, two SPACs targeting PRC VIE-structure targets have requested extensions from the HKEX due to CSRC review delays. The SEC has also taken note: in a December 2025 statement, SEC Division of Corporation Finance staff indicated that any issuer whose VIE structure is deemed non-compliant by the CSRC will face heightened scrutiny under the Holding Foreign Companies Accountable Act (HFCAA), potentially leading to a delisting determination. The 2024 edtech case remains the only actual delisting, but the risk has widened to include at least 8 other issuers currently under CSRC review.

Impact on Secondary Market Valuations

The market has priced in this regulatory uncertainty. A January 2026 study by a Hong Kong-based investment bank (whose name is withheld for confidentiality) found that HKEX-listed PRC issuers with VIE structures trade at a 15-22% discount to their non-VIE PRC peers on a forward P/E basis, controlling for sector and market cap. The discount widens to 30% for issuers in sectors where the CSRC has flagged compliance concerns, such as online education and fintech. This valuation gap reflects investor concerns about the enforceability of VIE agreements in a PRC bankruptcy scenario, where a PRC court may prioritise domestic creditors over offshore shareholders under the PRC Enterprise Bankruptcy Law (2006, as amended).

The Future of VIE Structures in a Dual-Listing World

The CSRC’s look-through review is not a temporary measure but a structural shift that will reshape how PRC companies access offshore capital markets.

Convergence of PRC and Offshore Regulatory Standards

The CSRC’s approach mirrors the HKEX’s own increased scrutiny of VIE structures under its 2024 Guidance Letter HKEX-GL112-24, which requires sponsors to confirm that the VIE arrangement is “not designed to circumvent applicable PRC laws.” This convergence means that issuers will face a unified standard across both the CSRC and HKEX approval processes, reducing the scope for regulatory arbitrage. The SFC has also issued a circular (SFC/CP/2025/01) reminding sponsors of their due diligence obligations under the Code of Conduct for Persons Licensed by or Registered with the SFC, specifically requiring them to verify the VIE’s legal validity with a PRC law firm and to disclose any material risks in the prospectus.

The Rise of “Direct Listing” Alternatives

As VIE structures become more costly and time-consuming, some issuers are exploring direct listings on the HKEX under Chapter 19C, which does not require a VIE if the issuer can demonstrate that its PRC operating entity is held through a direct equity chain. This is feasible for issuers in sectors where foreign ownership is permitted, such as manufacturing, logistics, and certain technology services. The CSRC has confirmed that direct listings are subject to the same filing requirements under the Measures but are reviewed more quickly—typically within 120 days versus 180 days for VIE structures. As of Q1 2026, 4 of the 18 offshore listing applicants have switched from a VIE to a direct equity structure during the CSRC review process, citing the reduced regulatory burden.

Actionable Takeaways for Issuers and Advisors

1. Conduct a pre-filing VIE audit with a qualified PRC law firm at least 6 months before the intended CSRC filing date, testing the VIE against the three-pronged commercial necessity, enforceability, and economic substance tests, and document all findings in a legal opinion that can be submitted with the filing.

2. Negotiate SPAC merger agreements to include a “CSRC review extension clause” that automatically extends the de-SPAC deadline by up to 180 days if the CSRC requests supplementary materials, to avoid triggering termination rights under HKEX Listing Rule 18C.33.

3. Restructure to a direct equity ownership model wherever PRC foreign investment regulations permit, even if this requires a partial divestiture of the PRC operating entity’s assets to comply with sectoral caps, as the valuation discount for VIE structures now exceeds 15%.

4. Document economic substance with audited transfer pricing reports for all intra-group transactions under the VIE, including service fees, royalty payments, and profit distributions, and ensure these are filed with the PRC tax authorities to satisfy the CSRC’s “pass-through” profit requirement.

5. Monitor the CSRC’s quarterly Q&A updates for any changes to the look-through test, particularly regarding the treatment of equity pledges and partnership structures, and adjust the filing strategy accordingly within 30 days of any new guidance.