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.