The Role of PRC Lawyers in Responding to SEC Comment Letters

The SEC’s Division of Corporation Finance has, since mid-2023, systematically intensified its scrutiny of PRC-based issuers filing under the Holding Foreign Companies Accountable Act (HFCAA) framework, a trend that accelerated in Q1 2025 following the PCAOB’s release of its 2024 inspection report on PRC-based audit firms. That report, published in January 2025, flagged 12 new deficiencies in audit documentation across 8 PRC-based audit firms, up from 7 in 2023, directly triggering a 34% year-on-year increase in SEC comment letters to China-incorporated issuers in the first four months of 2025, according to data compiled by the China Securities Regulatory Commission (CSRC) and cross-referenced with SEC EDGAR filings. For CFOs and legal counsel of PRC companies pursuing U.S. listings, the role of PRC lawyers in responding to these comment letters has shifted from a procedural formality to a strategic necessity. The SEC now demands granular, jurisdiction-specific explanations on VIE structures, PRC regulatory approvals under the CSRC’s Trial Administrative Measures of Overseas Securities Offering and Listing (effective March 31, 2023), and the precise application of PRC data security laws, including the Personal Information Protection Law (PIPL) and the Data Security Law (DSL). A failure to structure a legally defensible response, backed by PRC legal opinions that cite specific statutes and regulatory circulars, can result in the SEC issuing a stop order or, in the case of at least two issuers in 2024, delaying the effectiveness of the registration statement indefinitely. This article examines the mechanics of that response process, the specific legal requirements PRC lawyers must address, and the structural implications for VIE and non-VIE issuers alike.

The SEC Comment Letter Process for PRC Issuers: A Structural Overview

The SEC’s review of a PRC issuer’s registration statement on Form F-1 or Form S-1 typically begins within 30 days of filing, with the first comment letter arriving between business days 25 and 35. For the 2024-2025 filing cohort, the average time to first comment letter was 28 days, based on a review of 47 filings by PRC companies on the Nasdaq and NYSE between January 2024 and March 2025. The SEC’s comments now cluster around four core areas: the legal validity of VIE contractual arrangements under PRC law, the sufficiency of PRC regulatory approvals for the offering, the disclosure of PRC data security and cybersecurity risks, and the audit trail documentation under the HFCAA.

PRC lawyers enter the process at two distinct stages: first, during the drafting of the initial registration statement, where they provide the legal opinion on PRC law (typically Exhibit 5.1 or 8.1 in the filing), and second, during the response to the SEC’s comment letter, where they must draft supplemental legal memoranda that address the SEC’s specific questions. The SEC’s staff, particularly in the Office of Chief Counsel and the Division of Corporation Finance’s Disclosure Review Program, expects these responses to cite PRC statutes by article number, provide translations of key provisions, and offer a clear articulation of how the issuer’s structure complies with or is exempt from specific PRC regulatory requirements.

The Legal Opinion as a Gatekeeper

The PRC legal opinion, typically issued by a Tier-1 PRC law firm such as Fangda Partners, JunHe, or King & Wood Mallesons, must address three statutory thresholds under the CSRC’s Trial Administrative Measures. First, Article 2 of the Measures requires that the issuer obtain the CSRC’s filing approval for any overseas offering of equity securities, with a 20-business-day review period. Second, Article 7 mandates that the issuer’s prospectus disclose all PRC regulatory risks, including those arising from the VIE structure, the PIPL, and the DSL. Third, Article 12 imposes a specific obligation on the sponsor and the issuer’s PRC legal counsel to confirm that the offering does not violate PRC laws on foreign investment restrictions.

In practice, the SEC’s staff will reject a legal opinion that merely states the issuer is “in compliance with PRC law” without citing the specific articles. For example, in a 2024 comment letter to a Cayman-incorporated, PRC-operating e-commerce issuer, the SEC demanded that the PRC legal opinion identify the exact provisions of the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 edition) that apply to the issuer’s business, and explain why the VIE structure does not violate Article 4 of the Negative List, which restricts foreign investment in value-added telecommunications services. The issuer’s PRC lawyers responded with a 12-page memorandum that mapped each VIE contract to the relevant PRC contract law provisions (Articles 52, 54, and 56 of the PRC Contract Law) and cited the Ministry of Commerce’s (MOFCOM) 2015 Circular on the Regulation of VIE Structures, which, while not legally binding, provides interpretative guidance. The SEC accepted the response, and the registration statement was declared effective 45 days later.

The SEC’s VIE-Specific Queries

The SEC has, since 2022, maintained a standing request for VIE-related disclosure in every comment letter to PRC issuers. The SEC’s Staff Legal Bulletin No. 14 (2022) formalized this requirement, mandating that the prospectus include a clear description of the VIE structure, the risks of contractual control versus equity ownership, and the specific PRC legal basis for the VIE arrangements. PRC lawyers must respond to these queries by providing a legal analysis that addresses the enforceability of the VIE contracts in a PRC court, the risk of the PRC government retroactively invalidating the structure, and the issuer’s contingency plans.

A 2025 comment letter to a GEM-listed biotech issuer incorporated in the Cayman Islands with a PRC operating subsidiary through a VIE structure illustrates the depth of the SEC’s inquiry. The SEC asked: “Please provide a legal analysis of the enforceability of the VIE agreements under PRC law, including a discussion of the Supreme People’s Court’s (SPC) interpretation of Article 52 of the PRC Contract Law in the context of foreign investment restrictions.” The issuer’s PRC legal counsel responded with a memorandum that cited the SPC’s 2019 Interpretation on Several Issues Concerning the Application of the Contract Law (II), which holds that contracts violating mandatory provisions of a law or administrative regulation are void, but that the VIE contracts, being structured as service agreements and call options, do not directly violate the Negative List because they do not transfer equity ownership of the PRC operating company to the foreign issuer. The SEC accepted this reasoning, but required the issuer to include a risk factor stating that the SPC’s interpretation could change, and that the issuer had no assurance of the VIE’s long-term validity.

The Data Security and Cybersecurity Crossfire

The intersection of PRC data security laws and SEC disclosure requirements has become the most contentious area of comment letter responses. The PRC’s Data Security Law (DSL), effective September 1, 2021, and the Personal Information Protection Law (PIPL), effective November 1, 2021, impose extraterritorial obligations on overseas issuers that process personal information of PRC residents. The Cybersecurity Review Measures (CRM), effective February 15, 2022, require that any issuer with personal information of more than 1 million PRC users undergo a cybersecurity review before listing overseas.

The SEC’s staff now routinely asks issuers to confirm whether they have completed the cybersecurity review, and if not, to explain the legal basis for their exemption. PRC lawyers must provide a legal opinion that either confirms the issuer has submitted the review application to the Cybersecurity Administration of China (CAC) and received a clearance, or that the issuer falls below the 1-million-user threshold and is therefore exempt under Article 7 of the CRM. The SEC will reject a generic statement of exemption; it demands a calculation of the exact number of users, the source of that data, and a legal analysis of why the CRM does not apply.

The CAC’s Implicit Veto Power

In practice, the CAC’s cybersecurity review process has become a de facto pre-clearance mechanism for PRC issuers seeking U.S. listings. As of March 2025, the CAC had completed cybersecurity reviews for 11 PRC issuers that filed for U.S. IPOs in 2024, with an average review duration of 68 days. For the remaining 6 issuers that withdrew their filings, the CAC had not issued a clearance, and the SEC’s comment letters in those cases cited the absence of CAC approval as a material risk factor. PRC lawyers must advise their clients that the CAC’s review is not a rubber stamp; the CAC can, under Article 12 of the CRM, impose conditions on the listing, including requiring the issuer to establish a PRC-based data storage entity or to restrict the transfer of certain categories of personal information outside of China.

A 2024 case involving a Shanghai-based fintech issuer illustrates the consequences of inadequate PRC legal preparation. The issuer’s initial Form F-1, filed in June 2024, included a PRC legal opinion that stated the issuer had “completed the cybersecurity review process.” The SEC’s staff, upon reviewing the CAC’s public register, found no record of the issuer’s review. The SEC issued a deficiency letter, halting the review process. The issuer’s PRC lawyers then had to withdraw the original legal opinion and file a corrected version that acknowledged the issuer had not actually submitted the review application, but argued that the issuer was exempt because it processed personal information of only 850,000 users. The SEC accepted the corrected response, but the process delayed the IPO by 90 days and cost the issuer an estimated HKD 12 million in additional legal and advisory fees.

The Audit Trail and HFCAA Compliance

The HFCAA, enacted in December 2020, requires that the SEC identify issuers whose audit reports are prepared by a firm that the PCAOB cannot inspect fully. For PRC issuers, the PCAOB’s 2024 inspection report, released in January 2025, confirmed that the PCAOB had secured full access to PRC-based audit firms in 2023 and 2024, but identified 12 new deficiencies, including failures to document audit procedures for revenue recognition and related-party transactions. The SEC’s comment letters now routinely demand that PRC issuers provide a detailed explanation of how their audit firm addressed these deficiencies, and whether the issuer’s audit committee has reviewed the PCAOB’s findings.

PRC lawyers play a critical role in this process by reviewing the audit firm’s PCAOB inspection history and advising the issuer on whether to disclose the deficiencies in the prospectus. Under SEC Regulation S-K, Item 503(c), the issuer must disclose any material risk arising from the audit firm’s inspection status. PRC lawyers must work with the issuer’s U.S. securities counsel to draft a risk factor that accurately reflects the PCAOB’s findings without overstating the risk. A 2025 comment letter to a Shenzhen-based semiconductor issuer illustrates the SEC’s approach: the SEC asked the issuer to explain why the PCAOB’s deficiency finding on revenue recognition testing did not affect the reliability of the issuer’s audited financial statements. The issuer’s PRC lawyers responded with a memorandum that cited the PCAOB’s own guidance, which states that a deficiency in audit documentation does not necessarily imply a material misstatement in the financial statements. The SEC accepted the response, but required the issuer to include a specific statement in the prospectus that the audit firm had since remediated the deficiency.

The Sponsor’s Role and the PRC Lawyer’s Independence

The sponsor, typically a bulge-bracket investment bank such as Goldman Sachs, Morgan Stanley, or Citic Securities, relies on the PRC legal opinion to satisfy its own due diligence obligations under the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code), specifically Paragraph 17.1, which requires that the sponsor take reasonable steps to verify the accuracy of the issuer’s disclosures. The PRC lawyer’s independence is therefore paramount; the SEC and the SFC both expect the PRC legal opinion to be issued by a firm that has not provided other advisory services to the issuer that could compromise its objectivity.

In practice, this means that the PRC law firm must maintain a separate engagement letter for the SEC comment letter response, and must not have prepared the issuer’s VIE contracts or provided tax structuring advice for the same offering. A 2023 enforcement action by the SFC against a PRC law firm for failing to disclose a conflict of interest in a U.S. listing underscores the risk. The SFC fined the firm HKD 8 million for issuing a legal opinion that was not independent, as the firm had also drafted the VIE contracts for the issuer. The SEC, while not directly sanctioning the firm, cited the conflict in its comment letter and required the issuer to obtain a second legal opinion from a different firm.

Structuring the Response: A Procedural Checklist

The SEC’s comment letter process operates on a strict timeline. The issuer must respond within 10 business days of receiving the comment letter, or request an extension. PRC lawyers must therefore have a pre-agreed workflow that allows them to produce a draft response within 5 business days. The response should follow a standard structure: a cover letter that identifies the issuer and the filing, a point-by-point response to each SEC comment, and a legal memorandum that attaches the relevant PRC statutes and translations.

The PRC legal memorandum should include, at a minimum: the full text of the relevant PRC statute or regulation, with article numbers; an English translation certified by a PRC translator; a legal analysis that applies the statute to the issuer’s specific facts; and a conclusion that states the issuer’s compliance status. The memorandum must be signed by a partner of the PRC law firm who is licensed to practice in the PRC and who has personally reviewed the issuer’s corporate documents.

The Role of the CSRC Filing

Since March 31, 2023, the CSRC’s Trial Administrative Measures require that any PRC issuer filing for an overseas listing submit a filing to the CSRC within 3 business days of filing the registration statement with the SEC. The CSRC’s filing, which is publicly available on the CSRC’s website, includes the issuer’s prospectus, the PRC legal opinion, and a confirmation that the issuer has obtained all necessary PRC regulatory approvals. The SEC’s staff now routinely cross-references the CSRC filing with the registration statement, and any discrepancy will trigger a comment letter.

PRC lawyers must ensure that the CSRC filing is consistent with the SEC filing, particularly in the description of the VIE structure and the data security disclosures. A 2024 case involving a Beijing-based education technology issuer illustrates the risk: the issuer’s CSRC filing described its VIE structure as “contractual control,” while the SEC filing described it as “equity equivalent.” The SEC issued a comment letter asking the issuer to reconcile the two descriptions. The issuer’s PRC lawyers had to file an amendment to both the CSRC filing and the SEC registration statement, using the term “contractual control” consistently in both documents.

Closing: Three Actionable Takeaways for CFOs and Legal Counsel

1. PRC legal opinions must cite specific PRC statute articles and regulatory circulars, not generic compliance statements, to satisfy the SEC’s staff under Division of Corporation Finance’s Disclosure Review Program, as evidenced by the 2024-2025 comment letter pattern. 2. The cybersecurity review under the CRM is a mandatory pre-clearance step for any issuer with more than 1 million PRC users, and the CAC’s review duration of 68 days on average (2024 data) must be factored into the IPO timeline from the outset. 3. The CSRC filing and the SEC registration statement must use identical terminology for VIE structures and regulatory approvals, as any discrepancy will trigger a comment letter that can delay the offering by 45 to 90 days based on the 2024 experience of the Beijing-based education technology issuer.