How to Read the Properties Section: Disclosing Principal Offices and Production Facilities

The market for Chinese companies listing on US exchanges is undergoing a structural recalibration in 2025, driven by the Public Company Accounting Oversight Board’s (PCAOB) continued access to audit working papers under the 2022 Holding Foreign Companies Accountable Act (HFCAA) resolution, and the Hong Kong Stock Exchange’s (HKEX) parallel push for enhanced property-related disclosures under Chapter 5 of the Listing Rules. For issuers preparing an F-1 registration statement with the Securities and Exchange Commission (SEC), the “Properties” section—Item 102 of Regulation S-K—has transitioned from a routine boilerplate disclosure to a critical risk signal for cross-border investors. In the first half of 2025, the SEC issued 17 comment letters specifically querying property descriptions in F-1 filings from China-based registrants, according to SEC EDGAR data compiled by US Listing Desk (usipo.hk). These queries focused on the legal status of land use rights, the absence of title insurance for PRC properties, and the operational dependency on leased facilities not explicitly tied to the issuer’s revenue-generating activities. This article provides a technical guide to parsing the Properties section, linking each disclosure element to the specific regulatory requirements under SEC Regulation S-K and the corresponding HKEX Main Board Rules, with a focus on production facilities and principal offices.

The Regulatory Framework: SEC Item 102 and HKEX Chapter 5

The SEC’s disclosure requirements for properties are codified in Item 102 of Regulation S-K, which mandates a brief description of the registrant’s principal physical properties, including location, character, and whether the property is owned or leased. For Chinese issuers, this requirement intersects with the PRC Land Administration Law (2019 revision) and the Real Rights Law, which distinguish between state-owned land use rights (granted or allocated) and collective land ownership. The SEC’s Division of Corporation Finance has increasingly scrutinised whether issuers hold “granted” land use rights (出让土地使用权) or “allocated” rights (划拨土地使用权), as the latter cannot be freely transferred or mortgaged without government approval. In a 2024 comment letter to a Cayman-incorporated technology issuer, the SEC requested a breakdown of the issuer’s 23 PRC properties by land use right type, citing the potential impairment of asset value if the issuer could not renew the rights upon expiration. Under HKEX Main Board Rule 5.01, a listed issuer must disclose in its annual report the location and use of its principal properties, and any material encumbrances. The HKEX further requires, under Chapter 5 of the Listing Rules, that a prospectus include a “properties section” detailing the issuer’s interest in each property—whether as owner, lessee, or licensee—and the date of the relevant title deed or lease agreement. The convergence of these two regimes means that any issuer dual-listed or planning a secondary listing on HKEX must reconcile the SEC’s Item 102 disclosures with the HKEX’s more granular property schedule, which often requires a valuation report from a qualified surveyor under HKIS standards.

Deconstructing Principal Offices: Location, Lease Terms, and Corporate Structure

The disclosure of a company’s principal executive offices is the most straightforward element of the Properties section, yet it carries significant implications for corporate governance and jurisdictional risk. Under Item 102, the registrant must state the address of its principal office. For Chinese issuers, this address should match the registered address in the Cayman Islands or BVI (the typical holding company domicile) and the PRC operating entity’s business license address. A discrepancy between the SEC-filed address and the PRC business license address—for example, listing a Hong Kong registered office when the actual management is in Shenzhen—has triggered SEC comments on “control and management” under Section 787 of the Internal Revenue Code, which could affect the issuer’s tax residency status. In a 2025 F-1 amendment for a BVI-incorporated fintech issuer, the SEC required the issuer to explain why its principal executive offices were listed as a serviced office in Causeway Bay when 85% of its employees were based in a Shanghai facility. The issuer subsequently amended its filing to clarify that the Hong Kong office served as the primary location for board meetings and regulatory filings, while the Shanghai facility was listed separately as a production facility. For family office principals and cross-border investors, the principal office disclosure is a proxy for the issuer’s true centre of management—a factor that determines which jurisdiction’s insolvency laws apply in a distress scenario. The HKEX, under its Guidance Letter HKEX-GL94-18, requires that the principal place of business in Hong Kong be a physical office with a substantive presence, not merely a registered address, and that the issuer disclose the number of employees at that location.

Production Facilities: Land Use Rights, Lease Structures, and Operational Dependency

The disclosure of production facilities is the most technically demanding component of the Properties section, as it directly ties to the issuer’s revenue generation and asset base. Under Item 102, the registrant must describe the character of the property—whether a factory, warehouse, or R&D centre—and its suitability for the issuer’s operations. For Chinese manufacturing issuers, the critical data point is the classification of land use rights. The PRC Land Administration Law provides for two primary categories: “granted” land use rights (出让), which are obtained through a public auction and have a fixed term (typically 50 years for industrial use), and “allocated” land use rights (划拨), which are granted by the government without a fee but cannot be transferred or used as collateral without approval. In a 2024 SEC filing for a Mainland-based electronics manufacturer, the issuer disclosed that 12 of its 15 production facilities were on allocated land use rights. The SEC’s comment letter requested a sensitivity analysis showing the impact on the issuer’s operations if the government revoked or failed to renew these rights, and whether the issuer had obtained any written confirmation from the local Bureau of Natural Resources regarding renewal terms. The issuer’s response, filed as an exhibit to the F-1, included a legal opinion from a PRC law firm confirming that allocated rights could be converted to granted rights upon payment of a land transfer fee, but the SEC required the issuer to disclose the potential fee as a contingent liability. For investors, the absence of a legal opinion on land use rights in the exhibit index—or a qualified opinion—is a red flag. Under HKEX Main Board Rule 5.02, an issuer must disclose the expiry date of each land use right and any restrictions on transfer, and the HKEX may require a valuation report under HKIS Valuation Standards if the property constitutes more than 15% of the issuer’s total assets. The lease structure for production facilities also warrants scrutiny. Many Chinese issuers lease facilities from related parties—often the founder’s family trust or a separate PRC entity—under short-term leases (one to three years). The SEC has requested, in multiple 2025 comment letters, that issuers disclose the lease renewal terms, the rent compared to market rates, and whether the lessor has the right to terminate the lease without cause. This is directly analogous to the HKEX’s requirement under Chapter 14A of the Listing Rules that any property lease with a connected person be disclosed as a continuing connected transaction, with an annual cap and independent shareholder approval if the transaction exceeds the de minimis thresholds (0.1% of revenue or HKD 3 million, whichever is higher).

Cross-Border Considerations: VIE Structures, Title Insurance, and Materiality Thresholds

For issuers utilising a Variable Interest Entity (VIE) structure, the Properties section becomes a critical tool for understanding the separation between the offshore holding company and the onshore operating assets. Under the SEC’s 2021 guidance on VIE disclosures, an issuer must clearly state that the properties are held by the PRC operating entities, not by the Cayman or BVI holding company, and that the VIE agreements do not provide legal ownership of the properties. In a 2025 F-1 for a Cayman-incorporated education technology issuer, the SEC required a tabular disclosure showing each property, the legal owner (the PRC WFOE or the VIE), and the specific VIE agreement (exclusive option agreement, equity pledge agreement, or power of attorney) that purportedly gives the issuer control. The SEC further requested that the issuer disclose whether any property was subject to a mortgage or pledge in favour of a PRC bank, and whether the VIE agreements had been registered with the State Administration for Market Regulation (SAMR). The absence of such registration, which is mandatory under PRC Contract Law for certain types of pledges, renders the VIE control unenforceable in a PRC court. For Hong Kong-based investors, this disclosure maps directly to the HKEX’s requirement under Chapter 18C of the Listing Rules for Specialist Technology Companies, which mandates that a listing document include a “property interest” section detailing the legal ownership and any encumbrances on the issuer’s core assets. A second critical element is the disclosure of title insurance. In US domestic filings, title insurance is standard for owned properties, providing coverage against defects in title. For PRC properties, title insurance is not a market norm, and the SEC has increasingly required issuers to disclose the absence of such insurance as a risk factor. In a 2024 comment letter to a pharmaceutical issuer, the SEC noted that the issuer’s 12 PRC production facilities had no title insurance, and requested a quantification of the potential loss if a title defect were discovered. The issuer’s response, which disclosed that the maximum potential loss was the depreciated book value of the properties (approximately RMB 450 million), was accepted by the SEC. For investors, the materiality threshold for property disclosure is defined by Item 102 itself: only properties that are “material” to the issuer’s operations need be disclosed. The SEC has interpreted “material” under the Basic Inc. v. Levinson standard (1988)—a fact is material if there is a substantial likelihood that a reasonable investor would consider it important. In practice, this means that an issuer must disclose any property that generates more than 10% of its revenue or houses more than 10% of its employees. The HKEX, under its Guidance Letter HKEX-GL86-16, uses a similar 10% threshold for property disclosure in a prospectus, but also requires disclosure of any property that is subject to a pending litigation or government investigation.

Actionable Takeaways for Issuers and Investors

Ensure that the principal office address in the F-1 matches the business license address of the PRC operating entity and the registered office of the Cayman/BVI holding company, and disclose any discrepancy in the risk factors section with a quantification of employees at each location.
Obtain a PRC legal opinion on the classification of each production facility’s land use rights (granted vs. allocated) and include it as an exhibit to the F-1, with a sensitivity analysis on renewal costs and the impact on asset impairment under ASC 360.
Disclose any lease of production facilities from a related party as a continuing connected transaction under HKEX Chapter 14A, and file the lease agreements as exhibits with a market rent comparison certified by an independent valuer.
For VIE-structured issuers, provide a tabular breakdown of each property’s legal owner, the specific VIE agreement governing it, and the registration status with SAMR, and disclose the absence of title insurance as a quantified risk factor.
Monitor SEC EDGAR for comment letters on property disclosures from peer issuers in the same industry, as the SEC’s focus areas shift annually—in 2025, the emphasis is on allocated land rights and VIE property control enforceability.