CHINA UPDATE: Circular 78 to be Replaced - Simplified SAFE Filings Expected

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As you are likely aware, employee equity offers in China are subject to strict foreign exchange processes under Circular 78 issued in 2007 by the State Administration of Foreign Exchange (the "SAFE"). Under Circular 78, public companies wishing to grant stock options or restricted stock units to employees in China or offer them the opportunity to participate in an employee stock purchase program must first complete a somewhat arduous registration with the SAFE. Although the specific requirements differ by province, companies must also track and report all equity transactions to the SAFE on a quarterly basis, and an annual renewal filing is also generally required.
 
However, based upon recent discussions with the Beijing SAFE, it is anticipated that the SAFE will soon issue a new circular to replace Circular 78. The exact date is not clear yet, but the new circular will likely provide simplified procedures for the SAFE filings, as well as additional guidance regarding companies' internal administrative processes in relation to employee equity. Furthermore, the Beijing SAFE has informally advised that current applications for SAFE approval should be held until the new circular is published, although for now the Shanghai SAFE is still accepting submissions. Companies should consult with counsel regarding any pending or upcoming SAFE filings, and we will of course continue to monitor the developing law and keep you updated.

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