Author: Jack
KOO, Partner of V&T Law Firm, Email: [email protected]

Dear reader,

Many people in practice are sort of confused about the definitions of ICP
and EDI, and have some un-answered queries about related issues. We hereby
submit this Memo regarding our detailed answers or analysis on the captioned
for your reference.

1.
Questions Raised
by PRCV set forth below (“Questions”):

As per our telephone discussion and exchange of e-mails before during the
middle of this April, it is understood that PRCV seeks to have us answer the
following questions and provide related advices from legal perspectives, where
applicable, which questions are set out as follows:

(1)
What is ICP/EDI? Who needs the relevant license?

(2)
What are the currently applicable laws and regulations
on ICP/EDI for foreign investors?

(3)
What procedure and how long does it take for a start-up
(already with related license to operate value-added telecommunication
businesses) to renew its license in the case of receiving foreign investment?

(4)
Are there any legal ways not to undergo the procedure
as stated in the Question (3)?

(5)
Is there anything else worthy of being considered
as to ICP/EDI?

2.
Analysis or
Answers on the aforementioned Questions:

(1)     As
regards Question (1): What is ICP/EDI? Who needs the relevant license?

ICP stands for
“Internet Content Provider”, and when it comes to the “ICP License” under the
PRC law and also within the Chinese business context (the “ICP License”) it
generally refers to a license granted by the relevant competent telecommunications
bureau of the province, autonomous region or centrally-administered
municipality (the “Telecommunications Bureau”) or the Ministry of Industry and
Information Technology (the “MIIT”) to engage in the business of provision
of internet-based information services for payment  (with “commercial nature”) within the scope
of a province, an autonomous region or a centrally-administered municipality or
on a “Cross-locality” basis (the “ICP Business”), and it shall be
borne in mind that such ICP business is merely a sub-category of the “Value-added
Telecommunications Business” (generally meaning making use of public network
infrastructure to provide telecommunications and information services, as
defined and categorized below in detail).

In practice, it is
not unusual for one to confuse ICP Business with EDI or even the broader
concept of Value-added Telecommunications Business, but the three definitions
(the “Three Definitions”) are different in terms of extent of
content, or in nature.

For your
information, as per Announcement of the
Ministry of Industry and Information Technology on Promulgating the
Classification Catalogue of Telecommunications Services (Version 2015)(promulgated
by MIIT and effective since March 1, 2016) (the “Catalogue”), Value-added
Telecommunications Business, a type “B” telecommunication business (as opposed
to the type A “Basic Telecommunication Business”) is the largest concept among
the Three Definitions and is categorized into the following categories: B11
Internet data center services, B12 Content delivery network services, B13
Domestic Internet protocol virtual private network services, B14 Internet
access services and B2 Category II Value-added Telecommunications Services
(with such B2 Category II being sub-categorized into B21 Online data
processing and transaction processing services, B22 Domestic multi-party
communication services, B23 Store-and-forward services, B24 Call center
services, B25 Information services and B26 Code and regulation
conversion services).

In summary, the ICP
Business is a sub-concept of the Value-added Telecommunications Business, and
it is basically defined by the Catalogue (as defined below) as the “B25
Information services” (referring to “the information services provided
for users through the public communication network or the Internet by relying
on the information collection, development, processing and information platform
construction”, as provided for in the Catalogue), which information services
mainly include “information release platform and transmission services,
information search and inquiry services, information community platform
services, instant information interaction services, information protection and
processing services, etc.”.

Pursuant to the currently
effective Telecommunications Regulations
of the People's Republic of China (2016 revision) (the “TR”)
and the Administrative Measures on
Telecommunications Business Licensing (promulgated by MIIT and becoming
effective as of September 1, 2017 ) (the “Licensing Measures”,
referred collectively with the TR as the “Telecommunications Business Permits
Regulations”), enterprises engaging in ICP Business or B25 Information
services shall obtain a licence issued by the competent telecommunications administrative
authorities, and such licence is titled as either the "Cross-locality
Value-add Telecommunications Business Licence" or the "Value-add
Telecommunications Business Licence" for operation within the scope of a
province, autonomous region, or centrally-administered municipality, as
applicable.

On the other hand, as
regards the “EDI” specifically inquired by PRCV, which by definition stands
for “Electronic
Data Interchange”, it shall be noted that the concept of of “B21
Online data processing and transaction processing services” (the “B21
Services”) under the Catalogue mostly resembles or overlaps with what
EDI means within the relevant business context in the PRC. Under the Catalogue,
the B21 Services are defined as “the services of online data processing and
transaction/affair processing provided for users through public communication
networks or the internet, by utilizing various kinds of data and
affair/transaction processing application platforms that are connected to
public communication networks or the internet”. It is provided in the Catalogue
that “the services of online data processing and transaction processing include
transaction processing services, electronic data exchange services and
network/electronic equipment data processing services”.

By the same token, pursuant
to the Telecommunications Business Permits Regulations”, enterprises engaging
in B21 Service (or phrased as EDI services) shall obtain a license issued by
the competent telecommunications administrative authorities, and such license
is titled as either the "Cross-locality Value-add Telecommunications
Business License" or the "Value-add Telecommunications Business License"
for operation within the scope of a province, autonomous region, or centrally-administered
municipality, as applicable.

(2)     As
regards Question (2): What are the currently applicable laws and regulations
on ICP/EDI for foreign investors?

Apart from the Telecommunications
Business Permits Regulations as well as any other generally-formulated laws and
regulations on ICP/EDI matters, the major regulations on this subject matter
are the Provisions on the Administration
of Foreign-invested Telecommunication Enterprises (2016 Revision) (promulgated
by the State Council and becoming effective as of February 6, 2016) (the “FITE
Provisions”). The provisions of the FITE Provisions which we identify
as among the most significant are as follows:

As regards
registered capital, the minimum registered capital of foreign-funded
telecommunications enterprises operating value-added telecommunications
businesses across provinces, autonomous regions or centrally-administered
municipalities shall be RMB10 million;
and, the minimum registered capital of foreign-funded telecommunications
enterprises operating value-added telecommunications businesses within a
province, an autonomous region or a centrally-administered municipality shall
be RMB1 million.

In respect of the
capital contribution ratio of foreign investors in a foreign-funded
telecommunications enterprise operating value-added telecommunications
businesses, generally, it is provided in the FITE Provisions that the capital
contribution ratio of foreign investors in a foreign-funded telecommunications
enterprise operating value-added telecommunications businesses (including
wireless paging business in basic telecommunications businesses) shall not
exceed 50% ultimately. It shall be noted, however, that the Special Administrative Measures (Negative List) for Foreign Investment
Access (Edition 2018) (the “Negative List”), which were promulgated later than FITE Provisions, have provided
more specifically for the limitation or cap on the sharing percentage of equity
interest held by foreign investors in the value-added telecommunications
businesses. In detail, in relation to “Internet and related Services” as
provided for in the Negative List, the Negative List has explicitly prohibited
foreign investment in the businesses of internet news content services,
internet publication services, internet video-audio program services, internet
culture operation (except for music) and internet public publication of
information service. In the case of value-added telecommunication services, the
Negative List provides that the sharing percentage of equity interest held by
foreign investors in the value-added telecommunications businesses shall not
exceed 50% (except for the electronic business). That is to say, when it comes
to B21 Service (or phrased as EDI services) that is in connection with the
electronic business which essentially involves online data processing and
transaction processing services, the Negative List has lifted or rescinded the
50% cap on the sharing percentage of equity interest held by foreign investors
in the value-added telecommunications businesses in connection with electronic
business (such as Taobao, for example). In addition, there are some specific
preferential policies or rules adopted or implemented in Shanghai Free Trade
Zone that lift or rescind some limitations or caps on the sharing percentage of
equity interest held by foreign investors in the value-added telecommunications
businesses in connection with some sub-category of B25 Information services
(such as APP shop businesses, in which case foreign investors’ shareholding may
reach up to 100%).

It is worth noting
that Article 10 of the FITE Provisions provides that the main foreign investor
of a foreign-funded telecommunications enterprise operating value-added
telecommunications businesses (i.e., the
foreign capital contributor whose capital contribution is highest among all the
foreign investors and constituting 30% or more of the total capital
contribution of all the foreign investors) (the “Main FI”) shall have a
good track record and operational experience in value-added telecommunications
businesses.

(3)     As
regards Question (3): What procedure and how long does it take for a start-up
(already with related licence to operate value-added telecommunication
businesses) to renew its licence in the case of receiving foreign investment?

Article 28 of the
Licensing Measures provides that, where a telecommunications business operator
or its authorized company undergoes merger or division and change in
shareholders etc. which result in change of operating entity, or in the event
of change of business scope, an application shall be submitted to the original licence-issuing
authorities within 30 days from the date of decision by the company to do or
transact the foregoing matters. Furthermore, under this Article 28, any such
change shall not lead to violation of the contentions or criteria to operate
the relevant value-added telecommunication businesses under the Article 6 of
the Licensing Measures, related provisions of the FITE Provisions (in the case
of being subject to licensing requirements imposed on foreign-invested
telecommunication enterprises, where applicable) and any other applicable legal
rules.

According to the Service Guidance on Foreign Investment in
Telecommunication Businesses (promulgated by the Information Communication
Development Bureau of the MIIT and becoming effective as of April 8, 2019) (the
“Guidance
on Foreign Investment in Telecommunication Businesses”), as regards the
Question (3), the applicant enterprise shall first determine whether its
situations fall within the scope of application of rules of the Notification as to Applicable Procedures of
Application for Operation of Telecommunication Businesses by Domestic Company
Directly Listed Overseas (the “Applicable Procedures of Application for
Operation of Telecommunication Businesses by Domestic Company Directly Listed
Overseas”) (An exception for the application of the Review and Approval
Procedure under the FITE Provisions is enshrined in the Applicable Procedures
of Application for Operation of Telecommunication Businesses by Domestic
Company Directly Listed Overseas, which provides that, in the case of a H-share
directly-listed company with the sharing percentage of foreign equity being
lower than 10% and with a shareholder holding the largest share of stock being
a Chinese investor, for such company or its domestic subsidiary to operate
telecommunication businesses in the PRC, related laws and regulations
applicable only to domestic enterprises shall apply.). If falling within the
scope, the review and approval procedures as provided in the Licensing Measures
for companies without foreign investment shall apply; if not, the review and
approval procedures as set out in the FITE Provisions shall apply to such
applicant enterprise.

Therefore, in the
case of the applicant enterprise to receive foreign investment is a start-up,
as opposed to a overseas directly-listed company, the review and approval
procedures of licensing as set out in the FITE Provisions (the “Review
and Approval Procedure”) shall apply to such an applicant enterprise
that is intended to receive foreign investment resulting in the change of
shareholder or equity structure thereof.

The first step of
the Review and Approval Procedure is concerned with obtaining the “Approval
Opinion for Foreign Investment in Telecommunication Business”. There
shall be two scenarios for the first step of the Review and Approval Procedure
in terms of whether related value-added telecommunication services are provided
within a province or on a cross-province basis. In the first scenario, according
to Article 11 of the FITE Provisions, for establishment of (or, conversion
into) a foreign-funded telecommunications enterprise to operate value-added
telecommunications businesses (in connection with ICP/EDI businesses, in the
present case) across provinces, autonomous regions or centrally-administered
municipalities, the main Chinese investor of the start-up applicant shall
submit an application with required documents to the industry and information
technology authorities of the State Council.
Upon receipt of an application, the industry and information technology
authorities of the State Council shall examine the relevant documents
stipulated in the preceding paragraph. In the case of an application for
value-added telecommunications businesses, examination shall be completed
within 90 days and a decision on
approval or non-approval shall be made. An “Approval Opinion for Foreign Investment
in Telecommunication Business” shall be issued to successful
applicants; unsuccessful applicants shall be notified in writing and the reason
shall be stated.  Or, alternatively, in the case of establishment of (or, conversion
into) a foreign-funded telecommunications enterprise to operate value-added
telecommunications businesses (in connection with ICP/EDI businesses, in the
present case) within a province, an autonomous region or a
centrally-administered municipality, the main Chinese investor of the
state-up applicant shall submit an application with required documents to the
telecommunications authorities of the province, autonomous region or
centrally-administered municipality. The telecommunications authorities of
the province, autonomous region or centrally-administered municipality shall
issue an opinion within 60 days from
receipt of an application. In the case of issuance of a consent opinion,
the application shall be forwarded to the industry and information technology
authorities of the State Council; in the case of issuance of a non-consent
opinion, the applicant shall be notified in writing and the reason shall be
stated. The industry and information technology authorities of the State
Council shall complete examination and decide on approval or non-approval of
the application for which a consent opinion is issued within 30 days from receipt of the application
documents forwarded by the telecommunications authorities of the province,
autonomous region or centrally-administered municipality. An “Approval Opinion for Foreign Investment in
Telecommunication Business” shall be issued to successful applicants;
unsuccessful applicants shall be notified in writing and the reason shall be
stated.

The second step of
the Review and Approval Procedure is concerned with obtaining the “Approval
Certificate for Foreign Investment Enterprises” to be issued by the commerce
authorities of the State Council or the commerce authorities of the People's
Government of the province, as applicable.
Pursuant to Article 15 the FITE Provisions, for establishment of (or,
conversion into) a foreign-funded telecommunications enterprise to operate
value-added telecommunications businesses across provinces, autonomous regions
or centrally-administered municipalities, the main Chinese investor shall
present the “Approval Opinion for Foreign Investment in Telecommunication
Business” to, and submit the contract and articles of association of the
proposed foreign-funded telecommunications enterprise to, the commerce
authorities of the State Council; whereas, for establishment of (or, conversion
into) a foreign-funded telecommunications enterprise to operate value-added
telecommunications businesses within a province, an autonomous region or a
centrally-administered municipality, the main Chinese investor shall present
the “Approval Opinion for Foreign Investment in Telecommunication Business” to,
and submit the contract and articles of association of the proposed
foreign-funded telecommunications enterprise to, the commerce authorities of
the People's Government of the province, autonomous region or
centrally-administered municipality.The
commerce authorities of the State Council or the commerce authorities of the
People's Government of the province, autonomous region or
centrally-administered municipality shall complete examination and decide on
approval or non-approval within 90 days
from receipt of the contract and articles of association of the proposed
foreign-funded telecommunications enterprise. An "Approval Certificate
for Foreign Investment Enterprises" shall be issued to successful
applicants; unsuccessful applicants shall be notified in writing and the reason
shall be stated.

The last step is for
the main Chinese investor of a foreign-funded telecommunications enterprise
(the start-up enterprise, in the present case) shall present the "Approval
Certificate for Foreign Investment Enterprises" to complete registration
formalities with the competent administration for industry and commerce, and then
present the "Approval Certificate for Foreign Investment Enterprises"
and business license to apply to the industry and information technology
authorities of the State Council for a “Telecommunications Business License”(value-added
telecommunication business license) .

As regards the time
frame for successfully going through the above procedures and obtaining the
related license, it is truly subject to case-by-case determination and is also
subject to related governmental authorities’ internal processing. Despite the foregoing,
related mandatory time limit set out above would most usually be abided by
related governmental authorities.

(4)     As
regards Question (4): Is there any legal ways not to undergo the procedure
as stated in the Question (3)?

a.
Some may propose the idea of circumventing
the Review and Approval Procedure in the case of an enterprise (a start-up
enterprise, in the present case) (other than a overseas directly-listed
company) receiving foreign investment resulting in the application of the FITE
Provisions by having a company incorporated in the PRC with immediate or direct
shareholder being established in the PRC but with direct or indirect foreign
investment or foreign equity interest.  But
the problem is that during the process of applying for the “Telecommunications Business License” (value-added
telecommunication business license), the applicant must submit the applicant’s
capitalization/equity-holding table that is required to reveal and traced to
any existing foreign natural person, legal person incorporated overseas or
other foreign organization (such as trust or charity foundation). And, as per
related provisions of the Licensing Measures and the FITE Provisions, in the
case of provision of false or forged qualification certificate(s) or
confirmation document(s) to obtain approval for establishment of a
foreign-funded telecommunications enterprise, the approval shall be void, and
the industry and information technology authorities of the State Council shall
impose a fine ranging from RMB200,000 to RMB1 million and revoke the
“Telecommunications Business License”; and the commerce authorities which is
the original issuing authority of the "Approval Certificate for Foreign
Investment Enterprises" shall revoke the “Approval Certificate for Foreign
Investment Enterprises”. Thus, the legal risks involved are huge and gross.

b.
One largely conceivable and legally feasible
way to not to undergo the Review and Approval Procedure in the case of an
enterprise (a start-up enterprise, in the present case) (other than a overseas
directly-listed company) receiving foreign investment resulting in the
application of the FITE Provisions is to have the start-up enterprise
structured as part of VIE structure, an operation company (the “OPCO”) with license to operate ICP/EDI
businesses and without any direct or indirect equity-interest thereof held by
foreign investor, with a foreign-invested enterprise controlling the profits,
voting power and the corporate control of the OPCO. Admittedly, the VIE
structure is to some extent legally controversial in the sense that there
exists suspension that such structuring is intended for “using legal form to
conceal illegal goals” (circumventing limitations on admission of foreign
investment). But it is also ture that the VIE structure is still widely
adopted, with the implicit consent or inactive response by related competent
governmental authorities in the PRC.

(5)     As
regards Question (5): Is there anything else worthy of being considered as to ICP/EDI?

a.
As mentioned above, during the process of
applying for the “Telecommunications
Business License” (value-added telecommunication business license), the
applicant must submit the applicant’s capitalization/equity-holding table that
is required to reveal and traced to any existing foreign natural person, legal
person incorporated overseas or other foreign organization (such as trust or
charity foundation). According to our communication with some staff working
with the Telecommunications Bureau or the MIIT, in the case of a company
operating ICP/EDI businesses and proposed to get listed on the A-share stock
exchange which has A-share listed shareholder, related governmental authorities
only require that the top 10 shareholders (in terms of shareholding in such
listed company) should be domestic companies in nature, and would not pay
attention to other shareholders thereof.

b.
Another issue worth being noted is concerned
with the statutory requirement as provided in the FITE Provisions and the Guidance
on Foreign Investment in Telecommunication Businesses that, in the case of
foreign investment in value-added businesses and application for related license,
the Main FI shall have a good track record and operational experience in
value-added telecommunications businesses. According to our communication with
some staff working with the Telecommunications Bureau or the MIIT, such foreign
investor’s pre-existing investment in value-added telecommunications businesses
may probably suffice for this requirement, subject to case by case
determination by the relevant governmental authorities. Thus, it is highly
recommended for related applicant to consult with the competent Telecommunications
Bureau or the MIIT in advance before formally submitting related application
materials.

We sincerely hope the above is helpful. We believe that we may better structure and
carefully plan your prospective transaction once we know more facts of some
potential deal.