FinVolution(FINV)2022-04-29 10:35Foreign Exchange and Regulatory Risks - Limited hedging options in China may expose the company to foreign currency exchange risk, with no hedging transactions entered in 2021 [247]. - The PRC government controls the convertibility of RMB into foreign currencies, affecting the company's ability to utilize net revenues effectively [248]. - The PRC government has imposed more restrictive foreign exchange policies since 2016, which may hinder the company's ability to pay dividends in foreign currencies [249]. - PRC regulations on offshore investment activities may limit the company's ability to increase registered capital or distribute profits [253]. - Non-compliance with SAFE Circular 37 could restrict the company's ability to distribute profits and expose it to legal liabilities [254]. - Approval from the CSRC may be required for offshore offerings, with uncertainties regarding the timeline and conditions for obtaining such approvals [269]. - The Draft Provisions and Draft Administration Measures propose a new filing-based regime for overseas offerings, with potential fines ranging from RMB 1 million to RMB 10 million for non-compliance [272]. Taxation and Compliance Issues - The classification as a PRC resident enterprise could subject the company to a 25% enterprise income tax on global income, impacting net income [260]. - Uncertainties regarding tax residency rules may lead to unfavorable tax consequences for the company and its non-PRC shareholders [262]. - The company may not be able to obtain benefits under relevant tax treaties on dividends paid by its PRC subsidiaries [263]. - The company faces uncertainties regarding indirect transfers of equity interests in PRC resident enterprises, which may require reporting to PRC tax authorities [265]. - The SAT Public Notice 7 introduces a new tax regime for indirect transfers, potentially subjecting gains to PRC enterprise income tax at a rate of 10% [267]. - The company may incur additional compliance costs related to SAT Circular 698 and SAT Public Notice 7 for past and future transactions involving PRC taxable assets [268]. Corporate Governance and Shareholder Rights - The company is incorporated under the laws of the Cayman Islands, which may limit shareholders' ability to enforce judgments obtained in U.S. courts [294]. - As of March 31, 2022, holders of Class B ordinary shares own 93.2% of the aggregate voting power, significantly limiting the influence of Class A shareholders [301]. - Holders of ADSs may have limited rights to participate in future rights offerings, which could lead to dilution of their holdings [290]. - The depositary may determine it is unlawful or impractical to distribute dividends or other distributions to ADS holders, potentially causing a decline in the value of the ADSs [292]. - The depositary may close its transfer books at any time, which could limit the transferability of ADSs [293]. Financial Performance and Market Risks - The company relies on dividends and distributions from its PRC subsidiaries to meet liquidity requirements, with a current withholding tax rate of 10% on dividends paid to foreign investors, potentially reduced to 5% under certain conditions [264]. - The market price of the company's ADSs may be volatile due to factors beyond its control, including the performance of other Chinese companies listed in the U.S. [280]. - The trading volume and price of the company's ADSs may be affected by announcements related to product quality, changes in market valuations, and fluctuations in quarterly results [281]. - The company may face significant price declines in its ADSs due to substantial future sales or perceived potential sales in the public market [283]. Legal and Compliance Challenges - The PCAOB is currently unable to inspect the company's auditor in China, which may affect investor confidence in the quality of financial statements [275]. - The company expects to be identified as a "Commission Identified Issuer" shortly after the filing of its annual report on Form 20-F due to PCAOB's inability to inspect its auditor [276]. - If the PCAOB cannot conduct inspections before the issuance of the financial statements for the year ending December 31, 2023, trading of the company's shares and ADSs in the U.S. may be prohibited, significantly impairing capital raising efforts [277]. - A bill passed by the U.S. Senate could reduce the number of consecutive non-inspection years required for trading prohibitions under the HFCA Act from three years to two, potentially leading to trading prohibitions in 2023 [279]. - Being a public company has resulted in increased legal, accounting, and compliance costs, particularly after ceasing to qualify as an "emerging growth company" [313]. - The company faces potential securities class action suits that could divert management's attention and resources, negatively impacting operations [315]. - Significant expenses may be incurred to defend against any class action suits, regardless of their outcome [315]. - A successful claim against the company could result in substantial damages, adversely affecting financial condition and operational results [315]. Employee Compensation and Stock Options - The company has not made adequate contributions to employee benefit plans, which may result in penalties and affect financial condition [250]. - The company has granted options to purchase 127,415,885 Class A ordinary shares under the 2013 Plan, with a maximum of 221,917,800 shares authorized [304]. - Under the 2017 Plan, options to purchase 6,885,045 Class A ordinary shares were granted, with a maximum of 1,000,000,000 shares authorized [305]. - Share-based compensation expenses incurred in 2021 amounted to RMB95.2 million (US$14.9 million) related to options granted under both the 2013 and 2017 Plans [306]. - The company is likely classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the taxable year ended December 31, 2021 [312].