Chinese Investment in Your Company
As lawyers, we spend a lot of time fielding good, bad, weird, interesting, deep, superficial, and all types of other questions from people. We're generally expected to be oracle-level wizards, a lot like people are treating AI now. In this series, we'll share some of these questions that people ask us, along with our answers.
What is the right way for a private company to raise capital from a Chinese investor?
Question. I have a longtime business contact in China who has expressed interest in investing in my company. What are some of the things I should know about how to do this right?
Short Answer. Raising capital from Chinese investors for a U.S. entity involves navigating a complex regulatory landscape that involves various state and federal agencies, but it can be accomplished. The U.S. has specific regulations and agencies involved to ensure compliance and mitigate potential risks. Regulation S, the Committee on Foreign Investment in the United States (CFIUS), and the dollar amount limitations for Chinese citizens investing abroad are all important to understand.
1. The Role of Regulation S
Regulation S is a key provision under the U.S. Securities Act of 1933 that governs the offering and sale of securities to foreign investors, including Chinese investors. It allows U.S. companies to raise capital from foreign investors without the securities or offering being registered with the Securities and Exchange Commission (SEC). However, the securities must be offered and sold outside the United States, meaning the offering must occur in an "offshore transaction."
For U.S. entities seeking Chinese investment, Regulation S provides a pathway to raise funds without the burden of SEC registration, which can be time-consuming and costly. However, companies must adhere strictly to the conditions set forth in Regulation S, such as ensuring that no directed selling efforts are made in the U.S. and verifying that the buyers are indeed foreign nationals or entities.
Failure to comply with Regulation S can result in significant penalties. Many companies will rely on Regulation S in conjunction with Regulation D, which is an often-utilized exemption for raising capital in the U.S.
2. The Role of CFIUS
The Committee on Foreign Investment in the United States (CFIUS) is a U.S. government body that reviews foreign investments in U.S. companies for national security implications. CFIUS has the authority to block or impose conditions on transactions involving foreign investors if they are deemed a threat to national security.
For U.S. entities raising capital from Chinese investors, both the executive and legal teams should assess whether the investment might trigger a CFIUS review. Factors that could prompt a review include the sector in which the U.S. company operates (e.g., critical technology, infrastructure, and data) and the level of control or influence the foreign investor might gain.
If CFIUS determines that an investment poses a national security risk, it can recommend that the executive branch block the transaction or require the parties to take certain actions to mitigate the risk. Given the heightened scrutiny on Chinese investments in recent years, particularly in sensitive industries, companies should prepare for the possibility of a CFIUS review and to structure the investment accordingly. For investments that impact critical sectors, we often suggest a preemptive application to CFIUS to receive the equivalent of a comfort letter for the investment.
3. Dollar Amount Limitations for Chinese Investors
Chinese citizens face certain restrictions on the amount of capital they can legally invest abroad each year. According to Chinese foreign exchange regulations, individuals are generally limited to converting up to $50,000 worth of Chinese Yuan (RMB) into foreign currency annually. This limit applies not only to investments but also to other foreign exchange transactions, such as purchasing foreign goods or services.
For U.S. entities seeking significant capital from Chinese investors, this limitation means that individual investments might be capped unless the investor is able to obtain special permissions or structures the investment through a business entity rather than investing as an individual.
As with any regulation, there are often exceptions for well-connected and creative individuals. High-net-worth individuals and entities may have more flexibility in moving larger sums abroad, often through sophisticated financial instruments, other sophisticated financial structures, or overseas entities. It's essential for U.S. companies raising capital to be aware of these restrictions and to consider them when structuring deals with Chinese investors to ensure compliance with both U.S. and Chinese laws.
Conclusion
Raising capital from Chinese investors requires careful navigation of various legal requirements. Regulation S provides a framework for offering securities to foreign investors, while CFIUS plays a critical role in reviewing and potentially blocking foreign investments that could impact U.S. national security. Also, understanding the dollar amount limitations on Chinese citizens' overseas investments is crucial for structuring compliant and successful capital raises. We recommend engaging with legal and financial experts who specialize in cross-border investments to ensure that all aspects of the transaction are properly managed.
To view the full article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.