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The China Securities Regulatory Commission (CSRC) recently released the Regulatory Guidelines on the Overseas Issuance of Asset-backed Securities Tokens Based on Onshore Assets, together with Working Guide No.1 for the Overseas Issuance of Asset-backed Securities Tokens Based on Onshore Assets: Contents and Format of Filing Materials.

Under the guidelines, overseas issuance of asset-backed securities (ABS) tokens secured by onshore assets refers to an activity where repayment is supported by cash flows generated from onshore assets or related asset rights, and tokenised beneficial interest certificates are issued offshore using cryptographic, distributed ledger, or similar technologies. The guidelines also impose restrictive requirements on the underlying assets and onshore entity that actually controls those assets.

The business must not be conducted where, for example: laws or regulations prohibit fundraising through capital markets; national security may be compromised; the controlling shareholder or de facto controller has committed criminal offences such as corruption or bribery within the past three years; the onshore entity is under a docketed investigation for suspected criminal conduct or major violations; the underlying assets involve material ownership disputes or are non-transferable by law; or the assets fall within a negative list for securitised assets.

Filing report

Before conducting the business, the onshore entity that actually controls the underlying assets must file with the CSRC and submit the required materials, including a filing report and the full set of offshore issuance documents.

The filing should fully describe the onshore filing entity, the underlying assets and the token issuance plan.

The onshore filing entity, its controlling shareholders, de facto controller, directors, supervisors and senior management, as well as relevant intermediaries, must ensure that the filing materials they produce are true, accurate and complete, and contain no misrepresentation, misleading statements or material omissions.

Specifically, the issuance plan section of the filing report should include:

1. 1. Basic issuance information including the issuer, size, term, method and target investors;
   2. Background and purpose, including the basic profile of the onshore assets, the necessity and strategic significance of the issuance;
   3. A detailed token issuance plan including the token¡¯s definition and nature, size, issuance method, trading mechanism, and mapping between the token and the underlying assets;
   4. A transaction structure chart covering the onshore and offshore structure, participants, legal relationships and cash flow paths;
   5. The data chain structure and blockchain technical description including the technical architecture, data storage approach, and data security measures; and
   6. The trading venue, trading rules and liquidity arrangements for the token.

The onshore filing entity¡¯s basic information should include its name, registered capital, incorporation date, domicile, principal business and asset size. Its standardised operations should cover its corporate governance structure, compliance management and any major litigation or arbitration.

Basic information on project participants should include the names, addresses, contact details and affiliation of the onshore and offshore participants. Basic information on the underlying assets should cover their type and content, ownership status, appraised value, and cash flow profile, including historical cash flows, forecasts of future cash flows, and an analysis of cash flow stability.

The report should also explain the legality and compliance status of the underlying assets, as well as the internal approval and compliance aspects of the issuance decision-making process.

Onshore and offshore compliance should also be addressed in the report. Onshore, this includes whether approvals or filings have been obtained for foreign investment, outbound investment, foreign exchange management, cross-border renminbi management, cybersecurity, data security, state-owned assets management, any opinions from competent industry regulators, and whether a national security review is implicated.

It should also state whether the onshore filing entity completed the required approvals, filings or security review procedures before submitting the filing.

Offshore, it should cover whether the offshore issuance complies with local regulatory requirements, and whether any approvals from offshore regulators have been obtained. After the issuance is completed, and if any major risk or other material event occurs, the onshore filing entity should report the relevant circumstances to the CSRC.

Legal opinion

In addition to the filing report, the onshore filing entity must also submit a legal opinion and the full set of offshore issuance documents. The legal opinion should mainly address the following points.

Eligibility and compliance. (1) The onshore filing entity¡¯s eligibility; (2) its business operations; (3) its compliance and standardisation; (4) whether it is expressly prohibited by any law, administrative regulation or relevant state rules from raising funds through the capital markets; (5) whether the offshore issuance of ABS tokens has been deemed by competent authorities to potentially endanger national security; (6) whether the entity, its controlling shareholders or de facto controller has committed, in the past three years, criminal offences such as corruption, bribery, embezzlement, misappropriation, or offences disrupting the socialist market economic order; and (7) whether it is currently under a formal investigation for suspected criminal conduct or major violations, with no clear conclusion yet.

Underlying asset compliance. (1) The authenticity and legality of the underlying assets, title or entitlement, and any encumbrances; (2) the legality and effectiveness of the transfer; (3) whether there are any material title disputes or any restrictions or prohibitions on transfer; and (4) whether any circumstances fall within the negative list for asset securitisation business.

Onshore and offshore compliance. (1) Onshore compliance status and any security review status; and (2) whether approvals from offshore regulators have been obtained and whether the offshore issuance is compliant.

Finally, the legal opinion should provide an overall concluding opinion.

A firm hand

Under the Notice on Further Preventing and Handling Risks Related to Virtual Currency Trading and Speculation, carrying out real-world asset tokenisation activities onshore, as well as providing related intermediary or information technology services, is classified as illegal financial activity.

As for onshore entities conducting such business offshore, regulators apply a strict ¡°same business, same risk, same rules¡± principle. Without the consent of the relevant authorities and the required filings, no entity or individual may conduct such businesses.

Yang Lin is a partner at ETR Law Firm