China Legal Update - SAFE Circulars

The offshore holding company structure widely used by Chinese entrepreneurs to obtain overseas venture capital and private equity investment, engage in cross-border trade sales, and undertake overseas initial public offerings has been significantly impacted by two new circulars from the State Administration of Foreign Exchange (SAFE).

Many if not all venture capital and private equity investments into China rely upon a structure that consists of an offshore holding company incorporated in either the Cayman Islands or the British Virgin Islands by founders/owners of a business being operated in the PRC. The offshore company then establishes or acquires a wholly foreign-owned enterprise (WFOE), which in turn operates the business or acquires the assets needed to operate the business. For some