New official opinion from the government of mainland China on the off-campus tutoring education sector: implications for VIE structures in this space? | Akin Gump Strauss Hauer & Feld LLP

Last month, we alerted our clients to the expected impact of the implementing rules for the law for the promotion of private education (“education sector implementation rules”), which indicated that mainland Chinese authorities continued to focus on regulating and streamlining the supply of private services. sectoral education at the compulsory education stage and has also focused on the use of “variable interest entities” (VIE) structures (“VIE structures”) in this business context.

Although these rules relate to the preschool and compulsory aspects of the education sector, the latest official government notice issued on July 24, 2021 on the after-school tutoring sector in mainland China (the “Education Sector Notice tutoring education ‘) has cast serious doubt on the continued viability of these for-profit tutoring enterprises for compulsory education, whether owned by national shareholders of the People’s Republic of China (PRC) or operated as a foreign-invested enterprise through a VIE structure.

With these measures, the government of mainland China appears to be strengthening its political efforts to focus educational activity on its traditional public education system and reduce financial pressures and other burdens on parents that may be associated with the widespread use of ‘paying private educational companies. .

What is the Tutorial Education Sector Notice?

The official title of the Tutorial Education Sector Notice, which was issued on July 24, 2021 by the General Office of the Central Communist Party (CPC) and the General Office of the State Council is “The Notice on further reduction of the homework burden and off-campus tutoring burden for compulsory education students ”.

The opinion focuses on the regulation of out-of-school tutoring operations and, although the tutorial education sector’s opinion is not in itself an implementing measure, it was promulgated by the CPC General Office and the Board of state. This means that even though no specific measure or timetable for implementation was set out in the opinion – it simply provided that any non-compliance should be “rectified” – the prohibitions it contains are likely to be applied. . Further guidance is awaited from the competent authorities on what measures will be needed to “rectify” the non-compliance and within what timeframe.

Foreign extracurricular tutoring companies

It is important to note that the tutorial education sector opinion, as part of its focus on the not-for-profit model for the education sector, expressly prohibits out-of-school tutoring platforms from raising funds. equity through a public offering, and prohibits the control or holding of equity. in these platforms by foreign capital, whether through mergers and acquisitions, entrusted transactions, franchises or VIE Structures.

Foreign ownership of education companies on the mainland has been and remains – along with other sectors such as the internet, media and telecommunications – restricted under China’s foreign ownership and investment rules – the so called “negative list1”. Until recently, many foreign-invested education companies on the continent had raised capital overseas using VIE structures in light of foreign ownership rules. Now, the Education Sector Implementation Rules and the Tutorial Education Sector Notice specify that the prohibition of foreign investment in education includes the use of VIE structures. This appears to put an end to the viability of for-profit extracurricular tutoring businesses and confirms that foreign ownership of tutoring businesses, even through the use of VIE structures, has been banned.

What is the next step for VIE structures on the continent?

The tutorial education sector opinion only relates to out-of-school tutoring in the compulsory education sector, but some investors fear that the specific ban on the use of VIE structures with regard to companies of Extracurricular tutoring in compulsory education may signal a wider movement on the part of Mainland Chinese authorities must crack down on the use of VIE structures in other sectors of the economy where foreign ownership is limited or prohibited.

Although these education sector measures were likely part of policy efforts to focus educational activity on China’s traditional non-profit public education system and reduce financial pressures and other burdens on parents. associated with private tutoring companies, it appears that the use of VIE structures, which are to be ‘rectified’ under advice from the tutoring education sector, may need to be phased out in the compulsory education sector. in China. The government’s approach to this issue in the compulsory education sector may also inform how the Chinese government will treat VIE structures in other sectors in the future.

1 The various sectors and industries where foreign investment is prohibited or restricted (i.e. negative list) are defined in the special administrative measures (negative list 2020 edition) on access to foreign investment and special administrative measures of the free trade area (negative list edition 2020)) on access to foreign investments.

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