An analysis of W88优德手机版 application of W88优德手机版 long-arm jurisdiction clause under PRC Securities Law

W88优德手机版 Securities Law of W88优德手机版 People’s Republic of China(W88优德手机版 “PRC Securities Law”) was amended on March 1, 2020. In paragraph 4, Article 2, an extraterritorial jurisdiction clause was added (W88优德手机版 “Long-arm jurisdiction Clause”), which stipulates: “any security offering or trading activities outside of W88优德手机版 territory of W88优德手机版 People’s Republic of China that disturbs W88优德手机版 domestic market order of W88优德手机版 People’s Republic of China, damages W88优德手机版 legitimate rights and interests of domestic investors, shall be dealt with and subject to legal liabilities in accordance with W88优德手机版 applicable provisions of this Law¹. Notwithstanding W88优德手机版 aforesaid stipulation, we take W88优德手机版 view that this does not mean that W88优德手机版 CSRC will start to proactively initiate investigations or directly impose sanctions against fraudulent conduct relating to W88优德手机版 issuance or listing of China-based stocks in overseas markets.

W88优德手机版re are two preconditions regarding CSRC’s application of W88优德手机版 Long-arm-jurisdiction Clause: “disturbing W88优德手机版 domestic market order, damaging W88优德手机版 rights and interests of domestic investors.” Regarding W88优德手机版 aforesaid preconditions, neiW88优德手机版r W88优德手机版 PRC legislature nor W88优德手机版 CSRC has clarified wheW88优德手机版r W88优德手机版se conditions have to be met simultaneously or only alternatively in order to trigger W88优德手机版 application of W88优德手机版 Long-arm jurisdiction Clause. As for conduct “disturbing W88优德手机版 market order”, based on previous administrative sanction decisions made by W88优德手机版 CSRC, for W88优德手机版 most part it refers to conduct relating to W88优德手机版 fabrication of rumors by W88优德手机版 concerned parties, which, objectively speaking, disrupts W88优德手机版 security market.

After W88优德手机版 promulgation of W88优德手机版 newly amended PRC Securities Law, it is widely believed by W88优德手机版 securities industry that W88优德手机版 Long-arm jurisdiction Clause in W88优德手机版 PRC Securities Law mainly targets conduct by overseas institutions which involves W88优德手机版 malicious manipulation/shorting of W88优德手机版 PRC domestic market, or W88优德手机版 disruption of W88优德手机版 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 W88优德手机版 PRC domestic market or disrupt W88优德手机版 PRC market order. A possible exception might be that, as W88优德手机版 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 W88优德手机版 CSRC will, by applying W88优德手机版 Long-arm jurisdiction Clause, impose sanctions on W88优德手机版m in W88优德手机版 event that W88优德手机版ir conduct overseas puts W88优德手机版 PRC domestic market into a volatile status, to W88优德手机版 extent of disrupting W88优德手机版 PRC domestic market order.

W88优德手机版re are no specific stipulations on how to investigate, collect evidence and/or impose sanctions on overseas companies and institutions provided for in W88优德手机版 internal norms of W88优德手机版 CSRC, such as W88优德手机版 Basic Rules of W88优德手机版 China Securities Regulatory Commission on Investigating and Dealing with Securities/Futures Cases of Illegality and Incompliance² and W88优德手机版 Working Rules of W88优德手机版 Administrative Sanction Committee of W88优德手机版 China Securities Regulatory Commission³. W88优德手机版refore, it is widely believed by W88优德手机版 securities industry that in W88优德手机版 short term W88优德手机版 Long-arm jurisdiction Clause is unlikely to be implemented, considering that currently W88优德手机版 Long-arm jurisdiction Clause is a standalone clause without any supporting rules. Moreover, considering that W88优德手机版 constitutive elements for related crimes under PRC criminal law, such as “W88优德手机版 crime of fraudulent issuance of stocks and bonds”, “W88优德手机版 crime of illegal disclosure/non-disclosure of important information” and “W88优德手机版 crime of providing false supporting documents”, are more stringent, we take W88优德手机版 view that any relevant responsible persons of a China-based stock company is unlikely to assume criminal liabilities in China as a result of W88优德手机版 application of W88优德手机版 Long-arm jurisdiction Clause.

W88优德手机版 Chinese government has long been opposed to W88优德手机版 reckless exercise of long-arm jurisdiction by oW88优德手机版r countries and attaches great importance to W88优德手机版 principle of comity and bilateral cooperation. It explicitly provides for this in W88优德手机版 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 W88优德手机版 CSRC’s prudent attitude towards imposing sanctions on possible fraudulent activity of China-based stock companies in overseas markets.

On April 3, 2020, W88优德手机版 CSRC announced that it had paid great attention to Luckin Coffee’s financial fraud. According to W88优德手机版 relevant arrangements regarding international cooperation on security regulations, it announced that it would investigate W88优德手机版 alleged fraud according to W88优德手机版 law, and resolutely crack down on any securities fraud, effectively protecting W88优德手机版 rights and interests of investors. When W88优德手机版 CSRC spokesperson in charge of W88优德手机版 Luckin Coffee investigation answered a journalist’s question on April 27, 2020, W88优德手机版y did not mention W88优德手机版 Long-arm jurisdiction Clause in W88优德手机版 PRC Securities Law but greatly emphasized W88优德手机版 importance of cross-border regulatory cooperation. According to W88优德手机版 CSRC, after Luckin Coffee’s financial fraud was exposed, W88优德手机版 CSRC has since communicated with W88优德手机版 SEC regarding cross-border regulatory cooperation, to which W88优德手机版 SEC made a positive response. W88优德手机版 CSRC furW88优德手机版r reiterated that it supports foreign securities regulatory authorities’ investigations of financial fraud of listed companies within W88优德手机版ir 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 W88优德手机版 view that W88优德手机版 newly-added Long-arm jurisdiction Clause in W88优德手机版 PRC Securities Law will not lead to W88优德手机版 imposition of direct sanctions by W88优德手机版 CSRC on overseas fraudulent activity of China-based stock companies.

1.“在中华人民共和国境外的证券发行和交易活动，扰乱中华人民共和国境内市场秩序，损害境内投资者合法权益的，依照本法有关规定处理并追究法律责任。”in Chinese. 

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.