My China Tech Law Newsletter

Welcome to the first issue of my newsletter on China Tech Law! I've been a frequent (if sometimes sporadic) poster on Linkedin on many things technology law + China, and am thrilled to have the chance to do that more consistently through this newsletter format.

I've been in China for 15 years as a cross-border technology lawyer helping mostly foreign companies do business here. The challenge and fun in operating in this space is that, yes, the laws here are open to a lot of interpretation, unlike where I was trained back in the US.

But being able to speak and read Chinese and understand the context of the rules and how they are applied in reality, especially to technology companies (and having the chance to explain that to a fellow Western audience) is what makes it still so interesting after all these years.

ABOUT THE NEWSLETTER

Back to the newsletter, I'm going to do my best to share on a biweekly basis some developments and learnings I get working with real-life clients and the issues they encounter everyday. I'll be covering:

(1) Software and SaaS - be prepared to hear a lot about ICP licenses!

(2) Corporate Structures - think VIE structures and other partnership possibilities.

(3) Data Privacy & Security - on the Cybersecurity Law and the new Data Security and Personal Information Protection Law, and a lot of the related implementing rules coming out these days.

(4) Global Export Control Rules - From the US, EU, etc. as they apply to Chinese companies (especially in the semiconductor industry) or companies doing business with them. Will be calling on some help from some guest lawyers I work with week in and week out for client matters.

(5) Medical Device Regulations - there are a lot of opportunities we are seeing for foreign companies here. We'll get into some of the regulatory challenges involved.

(6) Intellectual Property and Licensing. - sharing some best practices on protecting and licensing IP in China.

(7) Venture Capital - tangentially we'll get into this as it relates to funding for early stage tech companies here.

TOPIC #1 SaaS in China

Okay, you've made it this far, now finally on to the main event topic for this initial post:

Yes, foreign SaaS companies are definitely still coming to China.

As Mark Twain famously wrote: "The reports of my death are greatly exaggerated."

We have seen a very noticeable increase in the number of SaaS companies coming here, starting from this past summer. I had had discussions with several of these companies over the previous couple of years as they were weighing their options. In those discussions, the uncertainty of COVID + US-China trade/tech friction + the regulatory gray area that governs SaaS companies in China seemed to be causing companies to take a wait-and-see approach.

I think businesses have now adjusted and, for better or worse, gotten used to those first two challenges, and now are focused more on the opportunity upsides of the nascent China SaaS market outweighing the regulatory uncertainty. There are so many niche SaaS applications where foreign players have a much more competitive and advanced service to offer here.

As I've said in many a client call and webinar like the one I did here recently for Amazon Web Services Europe and its clients, the market for B2B SaaS companies in China is open for business.

The three main legal hurdles companies must get comfortable with are (1) whether their business requires an Internet Content Provider license (or one of its VATS cousins), (2) data compliance issues (including, e.g., local consent and storage requirements), and (3) protection of IP.

I find with all three of these issues, that there is a tremendous amount of confusion and misconceptions in the market. Let me save more space on data compliance and IP protection for a future post.

Internet Content Provider License

On ICP licenses - yes, despite what the foreign investment catalogue says otherwise, an ICP License as a practical matter is virtually impossible for a foreign company to apply for directly and obtain in China. This is typically the threshold, gating question that holds many SaaS companies from coming here. Because if an ICP license required, the only way to operate is to essentially borrow someone else's license by having them "publish" the software on your behalf on a local server or by setting up a somewhat unorthodox (although very common in China) structure which is not easy for foreign companies to get comfortable with.

But as my firm R&P China Lawyers colleague Robin Tabbers and I discussed in this American Chamber of Commerce piece with our good friends Chris De Angelis and Chad Catacchio of Alliance Development Group (ADG), not all SaaS businesses automatically need an ICP license to operate in China. Ambiguity in the regulations can cut both ways as well, and allow companies to take some reasonable amount of risk in deciding whether a license applies to their situation. And there are also workaround models through partnerships working with companies like our good friend Rich Bishop at AppInChina.

We are also seeing things get relaxed a bit on the ICP question in our discussions with regulators. Historically, some officials we've spoken with at the Ministry of Industry and Information Technology (MIIT) have defaulted to the position that any company (1) operating a website (2) where third party information is somehow used to (3) generate revenue (including for example, advertising fees) for a (4) locally hosted (i.e. inside the Great Firewall) site/service over the internet is considered the provision of "commercial internet-based information services" and subject to ICP license requirements.

Instead, we have seen regulators in our recent discussions going back to an emphasis on "publishing" (broadly speaking) of content over the internet for commercial gain and that (for purposes of a requiring an ICP License) this publishing (发布）is limited to situations where third party information itself is the product or service. That is to say, where substantial processing of that information takes place and analysis is added to it before being presented in some other format to the customer - that this is actually publication of the SaaS company's own information rather than a third party (and thus not subject to ICP license requirements).

I'll say it again, whether your company needs an ICP license or not matters a lot. I'll also discuss this more in a future post. Suffice it to say, if you are clearly in ICP land, you need to entertain alternative structures to get access to such a license including looking at that Variable Interest Entity (VIE) structure I alluded to earlier. Most Chinese tech companies have historically used this structure to list overseas although that path is definitely becoming more and more difficult in a post-Didi world and with new regulations just announced.

VIE Structures

If you want to learn more on VIEs, you can wait for me to discuss in a future post or you can check out the podcast I did with Ma Xiaohu on an episode of the Ganbei show I host here. These VIE structures have survived a long and tortured existence even with some uncertainty surrounding their continued use for overseas IPOs by Chinese tech companies. As for their more general use beyond IPOs, different commentators have different interpretations, but I still fall into the same Mark Twain camp - reports of the VIE's death have also been at least a bit overexaggerated.

Thanks again for making it to the end of this post. As you can see a discussion of one China Tech Law issue easily leads into 2 or 3 more. Stay tuned as I try to flesh those issues out for you in future newsletter editions.

And while we're on the subject, please subscribe to this newsletter to stay up to date on posts as they come out every two weeks. Thanks for all the encouragement, and see you in 14 days!