China wants internet giants to get approval for investments and fundraising – sources

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HONG KONG/BEIJING — China’s cyberspace regulator has drafted new guidelines that will require the country’s major internet companies to seek its approval before undertaking any investment or fundraising, sources familiar with the matter said on Wednesday.

The requirements proposed by the Cyberspace Administration of China (CAC) will apply to any platform company with more than 100 million users, or with more than 10 billion yuan ($1.58 billion) in income, they said.

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Any internet companies involved in sectors on the negative list released by China’s National Development and Reform Commission (NDRC) last year will also need to seek approval, the sources said.

Some internet companies have already been notified, they added, and the draft rules are still subject to change.

The sources declined to be identified as the information was not yet public. The CAC did not immediately respond to a request for comment from Reuters.

The proposed rules would step up scrutiny from China’s increasingly assertive regulators, who have over the past year held back once-freewheeling internet giants in areas ranging from trading to their handling of user data.

It was not immediately clear what types of investments or fundraising might be impacted. A senior tech industry executive said he fears it will be applied to private market investments, such as pre-IPO private funding rounds.

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China has regularly updated a negative list prohibiting foreign investment in sectors such as compulsory education institutions, media outlets and rare earth minerals. Late last year, the NDRC required companies in these sectors to obtain clearance from regulators before they could list their shares outside the mainland.

Chen Weiheng, partner and head of the China practice at US law firm Wilson Sonsini, said the CAC’s “internal practice guidance”, if confirmed, could have a significant impact on the investment landscape on Internet and “even ending the era of large Internet platform operators to build”. an ecosystem through investments.

“The development appears to be driven by regulatory considerations of lingering antitrust concerns in the internet space and the need to oversee the investment activities of major publicly traded internet companies…this would be a move logically consistent with past antitrust and regulatory actions related to LIFE. .”

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Chinese tech giants such as Alibaba Group, Tencent Holdings, Meituan and ByteDance have created great empires over the years by acquiring or investing in smaller players, practices that Chinese regulators now criticize as monopolistic and unfair to their users.

Over the past year, they’ve been subjected to a slew of penalties, including fines for failing to report past transactions and for monopolistic behavior. From Feb. 15, China will also require companies with data on more than one million users to undergo a security review before listing their stocks overseas.

A private equity investor who declined to be identified said the draft rules could prompt big internet companies to slow down their investments, leaving more room for smaller, independent start-ups to survive and thrive.

It could also impact valuations, as these corporate giants were less sensitive to valuation but more to gaining a strategic advantage over competitors, he said.

“With the gradual exit of these strategic corporate investors, there will be less competition in the industry.”

($1 = 6.3483 Chinese yuan) (Reporting by Xie Yu, Kane Wu and Selena Li in Hong Kong; Yingzhi Yang and Zhang Yan in Beijing, Writing by Brenda Goh; Editing by Jacqueline Wong, Rashmi Aich and Kim Coghill)

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