The Securities Law of the People’s Republic of China (the “PRC Securities Law”) was amended on March 1, 2020. In paragraph 4, Article 2, an extraterritorial jurisdiction clause was added (the “Long-arm jurisdiction Clause”), which stipulates: “any security offering or trading activities outside of the territory of the People’s Republic of China that disturbs the domestic market order of the People’s Republic of China, damages the legitimate rights and interests of domestic investors, shall be dealt with and subject to legal liabilities in accordance with the applicable provisions of this Law1. Notwithstanding the aforesaid stipulation, we take the view that this does not mean that the CSRC will start to proactively initiate investigations or directly impose sanctions against fraudulent conduct relating to the issuance or listing of China-based stocks in overseas markets.
There are two preconditions regarding CSRC’s application of the Long-arm-jurisdiction Clause: “disturbing the domestic market order, damaging the rights and interests of domestic investors.” Regarding the aforesaid preconditions, neither the PRC legislature nor the CSRC has clarified whether these conditions have to be met simultaneously or only alternatively in order to trigger the application of the Long-arm jurisdiction Clause. As for conduct “disturbing the market order”, based on previous administrative sanction decisions made by the CSRC, for the most part it refers to conduct relating to the fabrication of rumors by the concerned parties, which, objectively speaking, disrupts the security market.
After the promulgation of the newly amended PRC Securities Law, it is widely believed by the securities industry that the Long-arm jurisdiction Clause in the PRC Securities Law mainly targets conduct by overseas institutions which involves the malicious manipulation/shorting of the PRC domestic market, or the disruption of the PRC market order. It is generally understood that misrepresentation by a China-based stock company in an overseas market is not sufficient to trigger fluctuations in the PRC domestic market or disrupt the PRC market order. A possible exception might be that, as the SSE STAR Market (China’s sci-tech innovation board) allows overseas companies to issue stocks or depository receipts in China, for companies that are both listed overseas and issue stocks or depository receipts in China, it is possible that the CSRC will, by applying the Long-arm jurisdiction Clause, impose sanctions on them in the event that their conduct overseas puts the PRC domestic market into a volatile status, to the extent of disrupting the PRC domestic market order.
There are no specific stipulations on how to investigate, collect evidence and/or impose sanctions on overseas companies and institutions provided for in the internal norms of the CSRC, such as the Basic Rules of the China Securities Regulatory Commission on Investigating and Dealing with Securities/Futures Cases of Illegality and Incompliance2 and the Working Rules of the Administrative Sanction Committee of the China Securities Regulatory Commission3. Therefore, it is widely believed by the securities industry that in the short term the Long-arm jurisdiction Clause is unlikely to be implemented, considering that currently the Long-arm jurisdiction Clause is a standalone clause without any supporting rules. Moreover, considering that the constitutive elements for related crimes under PRC criminal law, such as “the crime of fraudulent issuance of stocks and bonds”, “the crime of illegal disclosure/non-disclosure of important information” and “the crime of providing false supporting documents”, are more stringent, we take the view that any relevant responsible persons of a China-based stock company is unlikely to assume criminal liabilities in China as a result of the application of the Long-arm jurisdiction Clause.
The Chinese government has long been opposed to the reckless exercise of long-arm jurisdiction by other countries and attaches great importance to the principle of comity and bilateral cooperation. It explicitly provides for this in the PRC Securities Law whereby “no foreign securities regulatory authorities are allowed to conduct investigation and evidence collection directly in China”. In our opinion, this will lead to the CSRC’s prudent attitude towards imposing sanctions on possible fraudulent activity of China-based stock companies in overseas markets.
On April 3, 2020, the CSRC announced that it had paid great attention to Luckin Coffee’s financial fraud. According to the relevant arrangements regarding international cooperation on security regulations, it announced that it would investigate the alleged fraud according to the law, and resolutely crack down on any securities fraud, effectively protecting the rights and interests of investors. When the CSRC spokesperson in charge of the Luckin Coffee investigation answered a journalist’s question on April 27, 2020, they did not mention the Long-arm jurisdiction Clause in the PRC Securities Law but greatly emphasized the importance of cross-border regulatory cooperation. According to the CSRC, after Luckin Coffee’s financial fraud was exposed, the CSRC has since communicated with the SEC regarding cross-border regulatory cooperation, to which the SEC made a positive response. The CSRC further reiterated that it supports foreign securities regulatory authorities’ investigations of financial fraud of listed companies within their own jurisdictions, and will carry out cross-border regulatory cooperation, inter alia, by providing auditory work papers of overseas listed companies to foreign regulatory authorities.
In conclusion, in general we are of the view that the newly-added Long-arm jurisdiction Clause in the PRC Securities Law will not lead to the imposition of direct sanctions by the CSRC on overseas fraudulent activity of China-based stock companies.
2. “《中国证券监督管理委员会调查处理证券期货违法违规案件基本准则》”in Chinese.
3. “《中国证券监督管理委员会行政处罚委员会工作规则》” in Chinese.