美股招股观察

Building a Legal Team for a US IPO: Division of Labour Between Onshore and Offshore Counsel

The number of Chinese companies filing confidential draft registration statements with the US Securities and Exchange Commission (SEC) under the Holding Foreign Companies Accountable Act (HFCAA) inspection regime has rebounded to pre-2021 levels, with 27 PRC-based issuers submitting F-1 or S-1 filings in the first quarter of 2025 alone, according to data compiled by the China Securities Regulatory Commission (CSRC). This resurgence, driven by a combination of Beijing’s tacit approval of offshore listings via the revised 2023 Filing Rules and a narrowing valuation gap between US and Hong Kong markets, has exposed a critical bottleneck: the assembly of a legal team that can bridge the gap between PRC onshore regulatory requirements and US federal securities law. A poorly structured division of labour between PRC counsel (often referred to as “onshore” or “PRC counsel”) and Hong Kong or US-based “offshore” counsel can add 4-8 weeks to a typical 6-9 month IPO timeline and inflate legal fees by 15-25% (Sidley Austin, 2024 IPO Cost Survey). The core challenge is not the volume of work but the jurisdictional fault lines: PRC counsel must navigate the 2023 CSRC Filing Rules, the Cybersecurity Review Measures (effective February 2022), and the revised Data Security Law (effective September 2021), while offshore counsel must satisfy SEC disclosure requirements under Regulation S-K and the Sarbanes-Oxley Act of 2002. This article dissects the optimal allocation of responsibilities across four critical workstreams: regulatory clearance, due diligence, prospectus drafting, and post-listing compliance.

The PRC Counsel Mandate: Navigating the CSRC Filing Regime and Data Sovereignty

The single most consequential change for any PRC-incorporated or PRC-operating company seeking a US listing is the CSRC’s 2023 Filing Rules (《境内企业境外发行证券和上市管理试行办法》), which came into effect on 31 March 2023. Under these rules, any issuer with a “principal place of business” in the PRC—defined broadly as where the board of directors, management, or core operations are based—must file a confidential submission with the CSRC within three working days of its SEC confidential draft submission. PRC counsel bears the primary responsibility for this filing, which requires a detailed legal opinion on the issuer’s compliance with PRC corporate, foreign investment, and data security laws. As of Q1 2025, the CSRC has processed 142 such filings, with an average review period of 45 calendar days (CSRC public filing database). The key division of labour here is that PRC counsel must also coordinate with the issuer’s PRC external auditor (typically a PRC-based PCAOB-registered firm) to confirm that the audit work papers comply with the PRC State Secrets Law and the revised Data Security Law. Offshore counsel, by contrast, has no standing to make representations to the CSRC and must rely entirely on the PRC counsel’s opinion for the SEC’s review of the issuer’s compliance with the HFCAA.

The Cybersecurity Review and the “Critical Information Infrastructure” Threshold

A second, increasingly contentious area is the Cybersecurity Review Measures (《网络安全审查办法》), which require any issuer that holds data on more than 1 million users of a “critical information infrastructure” (CII) operator to submit to a mandatory cybersecurity review by the Cyberspace Administration of China (CAC). PRC counsel must determine whether the issuer falls within the CII definition, which the CAC has interpreted expansively since 2022 to include any entity in the “internet platform” sector with a user base exceeding 100 million. As of March 2025, the CAC has conducted 14 reviews of US-listing candidates, with an average duration of 12 weeks (CAC annual report, 2024). Offshore counsel’s role here is limited to ensuring that the SEC’s disclosure requirements under Item 105 of Regulation S-K (risk factors) adequately describe the potential material impact of a CAC review on the issuer’s operations, including the risk of a forced delisting if the review is not completed within the SEC’s 12-month review window.

Offshore Counsel’s Core Domain: SEC Registration, Underwriting, and Exchange Listing

While PRC counsel handles the onshore regulatory maze, offshore counsel—typically a Hong Kong-based or US-based law firm with a dedicated US capital markets practice—owns the SEC registration process. This includes drafting the Form F-1 (for foreign private issuers) or S-1 (for domestic US issuers), coordinating with the underwriters’ counsel, and managing the SEC’s review process. The division of labour here is stark: offshore counsel drafts the “business” and “risk factors” sections of the prospectus, while PRC counsel provides the factual foundation through legal due diligence reports. Offshore counsel also manages the listing application to the chosen exchange—NYSE or Nasdaq—including compliance with the exchange’s initial listing standards. For a Nasdaq Global Select Market listing, for example, the issuer must meet at least one of four financial standards (e.g., income standard: USD 11 million aggregate pre-tax earnings in the last three fiscal years) and a minimum bid price of USD 4.00. Offshore counsel verifies these criteria and drafts the listing application.

The Underwriting Agreement and the “Due Diligence Defence”

One of the most legally sensitive areas is the underwriting agreement, which is exclusively the domain of offshore counsel. Under Section 11 of the Securities Act of 1933, underwriters face strict liability for material misstatements in the registration statement unless they can establish a “due diligence defence”—meaning they conducted a reasonable investigation of the issuer’s business and financials. Offshore counsel, working with the underwriters’ counsel, designs the due diligence protocol, which typically includes a review of the issuer’s material contracts, board minutes, and financial statements. PRC counsel’s contribution here is to provide a “10b-5” legal opinion (under Rule 10b-5 of the Securities Exchange Act of 1934) on the issuer’s compliance with PRC law, which the underwriters rely on to satisfy their due diligence obligations. A 2024 survey by the International Bar Association found that 68% of US IPO underwriters now require a standalone PRC law opinion from a recognised PRC law firm, up from 42% in 2020, reflecting increased regulatory complexity.

The Hong Kong “Bridge” Role: Listing Counsel and the Cross-Border Structuring

For issuers that are incorporated in the Cayman Islands or Bermuda—the standard offshore holding company structure for PRC companies—Hong Kong-based counsel often serves as the “listing counsel” or “Hong Kong counsel,” bridging the PRC onshore and US offshore workstreams. This role is not mandated by any US or PRC regulation, but it has become standard practice since 2018, when the Hong Kong Stock Exchange (HKEX) revised its Listing Rules to require all PRC-incorporated issuers to maintain a Hong Kong-based compliance officer. The Hong Kong counsel’s primary function is to structure the offshore holding company’s corporate governance to satisfy both PRC foreign investment restrictions (e.g., the 2020 Foreign Investment Law’s negative list) and US exchange governance requirements (e.g., Nasdaq’s requirement for a majority of independent directors). A typical structure involves a Cayman Islands holding company that owns a Hong Kong subsidiary, which in turn owns a PRC wholly foreign-owned enterprise (WFOE). Hong Kong counsel drafts the constitutional documents for the Cayman vehicle and the Hong Kong subsidiary, ensuring compliance with the Hong Kong Companies Ordinance (Cap. 622) and the Cayman Islands Companies Act.

The VIE Structure and the “Variable Interest Entity” Risk Disclosure

A significant subset of PRC issuers—particularly those in the education, internet, and media sectors—use a Variable Interest Entity (VIE) structure to bypass PRC foreign ownership restrictions. Hong Kong counsel typically takes the lead on drafting the VIE agreements, including the exclusive call option agreement and the power of attorney, which must be governed by PRC law. PRC counsel then opines on the enforceability of these agreements under PRC law, while offshore counsel ensures that the SEC’s disclosure requirements under Item 4.B of Form F-1 (description of the VIE structure) are met. As of March 2025, the SEC has increased its scrutiny of VIE structures, requiring all VIE-related disclosures to include a specific risk factor stating that the PRC government “could disallow this structure at any time.” Hong Kong counsel must coordinate between the two sides to ensure that the disclosure is consistent and that the VIE agreements are filed as exhibits to the registration statement.

Post-Listing Compliance: The Ongoing Division of Labour

The division of labour does not end at the listing date. Under the Sarbanes-Oxley Act of 2002, Section 404 requires the issuer’s management and external auditor to assess the effectiveness of internal controls over financial reporting (ICFR). PRC counsel plays a critical role in ensuring that the issuer’s PRC subsidiaries maintain proper books and records in compliance with the PRC Accounting Law (《中华人民共和国会计法》) and the revised PRC Securities Law (effective March 2020). Offshore counsel, meanwhile, manages the issuer’s ongoing SEC reporting obligations—annual reports on Form 20-F, current reports on Form 6-K, and proxy statements—and coordinates with the issuer’s US-based transfer agent and exchange-listing compliance team. A common point of failure is the timing of the annual report filing: the SEC requires Form 20-F to be filed within four months of the issuer’s fiscal year-end (for foreign private issuers), while the CSRC requires the annual filing under the 2023 Filing Rules to be submitted within three months. PRC counsel must ensure the CSRC filing is completed before the SEC filing, as the CSRC has the authority to block the SEC filing if its review is not complete.

The PCAOB Inspection and the “HFCAA” Sunset

The HFCAA, enacted in December 2020, requires that the issuer’s auditor be subject to inspection by the US Public Company Accounting Oversight Board (PCAOB). As of December 2022, the PCAOB secured full access to inspect PRC-based audit firms, including the “Big Four” PRC affiliates and the top-tier local firms. However, the current agreement expires in 2025, and the renewal terms are under negotiation. PRC counsel must monitor the status of the PCAOB’s access and advise the issuer on contingency planning, including the potential need to appoint a Hong Kong or Singapore-based auditor if the PCAOB’s access is revoked. Offshore counsel, in turn, must update the issuer’s risk factors to reflect this geopolitical uncertainty. A 2024 report by the US-China Economic and Security Review Commission noted that 23 PRC issuers have already moved their auditor to Hong Kong as a precautionary measure.

Actionable Takeaways

  1. Engage PRC counsel at least 12 weeks before the confidential SEC submission to allow sufficient time for the CSRC filing, which has a 45-day average review period, and for any potential CAC cybersecurity review, which can take 12 weeks.
  2. Allocate the VIE structuring work to a Hong Kong-based counsel with specific experience in drafting PRC-law-governed VIE agreements, as this is a distinct skill set from US securities law.
  3. Ensure the underwriting agreement includes a standalone PRC law opinion from a recognised PRC law firm, as 68% of US IPO underwriters now require this for due diligence defence purposes.
  4. Build a 4-6 week buffer into the IPO timeline specifically for the coordination between PRC counsel’s CSRC filing and offshore counsel’s SEC review, as the two processes operate on different calendars and cannot be run in parallel.
  5. Monitor the PCAOB access renewal negotiations closely; if the agreement is not renewed by Q4 2025, issuers should prepare to appoint a Hong Kong-based PCAOB-registered auditor as a backup.