As filed with the U.S. Securities and Exchange Commission on August 16, 2022.

 

Registration No. 333-262204

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 4

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

HENGGUANG HOLDING CO., LIMITED

(Exact name of registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   6411   Not Applicable

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number) 

 

(I.R.S. Employer

Identification Number)

 

1666 Chenglong Road,

Section 2, Building 2, 5th Floor

Longquanyi District,

Chengdu, Sichuan Province,

China 61000

c/o Jiulin Zhang

+86 (400) 028-1990

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 31st Floor

New York, New York 10036

(212) 930-9700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Jay Kaplowitz, Esq.

Huan Lou, Esq.

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 31st Floor

New York, New York 10036

Telephone: (212) 930-9700

Fang Liu, Esq.

VCL Law LLP

1945 Old Gallows Road, Suite 630

Vienna, VA 22182

Telephone: (703) 919-7285

 

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company [X]

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION  
PRELIMINARY PROSPECTUS DATED August 16, 2022

 

4,444,444 Class A Ordinary Shares

 

HENGGUANG HOLDING CO., LIMITED

 

 

This is an initial public offering of the Class A Ordinary Shares of Hengguang Holding Co., Limited (“Heng Guang Cayman”), a holding company incorporated in the Cayman Islands. Prior to this offering, there has been no public market for Heng Guang Cayman’s Class A ordinary shares, par value $0.001 per share (the “Class A Ordinary Share”). This offering is being made on a firm commitment basis. We expect the initial public offering price will be in the range of $4.00 to $5.00 per share. We reserved the symbol “HGIA” for purposes of listing the Class A Ordinary Shares on the Nasdaq Stock Market (“NASDAQ”) and applied to list the Class A Ordinary Shares on the Nasdaq Capital Market. The initial public offering is contingent upon receiving authorization to list the Class A Ordinary Shares on a national exchange. There is no guarantee or assurance that the Class A Ordinary Shares will be approved for listing on NASDAQ or any other national stock exchange.

 

There are 6,500,000 Class A Ordinary Shares and 3,500,000 Class B ordinary shares (the “Class B Ordinary Shares”) issued and outstanding immediately prior to this offering. In respect of matters requiring the votes of shareholders, each Class A Ordinary Share is entitled to one vote, and each Class B Ordinary Share is entitled to ten (10) votes and is convertible into one Class A Ordinary Share at any time requested by the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. The holders of our Class B Ordinary Shares will be able to exercise approximately 76% of the total outstanding voting power immediately following the completion of this offering, assuming the sale of 4,444,444 Class A Ordinary Shares and excluding the effects of any exercise of the Underwriter Warrants and the over-allotment option.

 

Our officers and directors of Heng Guang Cayman own and will continue to own at least 50% of the voting power of Heng Guang Cayman after the closing of this offering, therefore Heng Guang Cayman is a “controlled company” as defined under NASDAQ Listing Rules. However, even if Heng Guang Cayman qualifies as a “controlled company,” it does not intend to rely on the controlled company exemptions provided under NASDAQ Listing Rules.

 

Investing in our Class A Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” starting on page 16 to read about factors you should consider before buying the Class A Ordinary Shares.

 

Heng Guang Cayman is not a Chinese operating company but a holding company incorporated in the Cayman Islands. This is an offering of the ordinary shares of Heng Guang Cayman, the offshore holding company. You are not investing in any of the Affiliated Entities. “Heng Guang Insurance” or the “VIE” shall hereinafter refer to Sichuan Heng Guang Insurance Agency Co., Ltd., a company organized under the laws of the PRC and the operating entity, which has entered into a series of variable interest entity agreements (the “VIE Agreements”) with WFOE (as defined below), an indirect subsidiary of Heng Guang Cayman. “Heng Guang BVI” shall hereinafter refer to Heng Guang Shun Da Co., Ltd., a company formed under the laws of British Virgin Islands and a wholly-owned subsidiary of Heng Guang Cayman. “Heng Guang Hong Kong” shall hereinafter refer to Heng Guang Holdings Co., Ltd., a company formed under the laws of Hong Kong and a wholly-owned subsidiary of Heng Guang BVI. “WFOE” shall hereinafter refer to Chengdu Jiulin Kefu Technology Co., Ltd., a Chinese company and wholly-owned subsidiary of Heng Guang Hong Kong. “We,” the “Company” or the “Group” shall refer to the group of Heng Guang Insurance, Heng Guang Cayman, Heng Guang BVI, Heng Guang Hong Kong, and the WFOE. The “Affiliated Entities” shall refer to Heng Guang BVI, Heng Guang Hong Kong, WFOE, and Heng Guang Insurance.

 

As a holding company with no material operations of its own, Heng Guang Cayman conducts substantially all of its operations through Heng Guang Insurance, the operating entities established in the PRC, which has entered into the VIE Agreements with WFOE. See “Prospectus Summary- Contractual Arrangements Between Heng Guang Insurance And WFOE.” Neither Heng Guang Cayman nor its subsidiaries own any share in Heng Guang Insurance, which are hereinafter referred to as the “VIE.” The contractual arrangements with respect to the VIE and WFOE are not equivalent to an equity ownership in the business of the VIE and the investors may never hold equity interests in Heng Guang Insurance unless the VIE Agreements are replaced with the direct ownership of Heng Guang Insurance by the WFOE. Instead, for accounting purposes, Heng Guang Cayman is the primary beneficiary of Heng Guang Insurance’s business operations through the VIE Agreements, which enables us to consolidate the financial results of the VIE in our consolidated financial statements under U.S. GAAP. We have evaluated the guidance in Financial Accounting Standards Board Accounting Standards Codification 810 and determined that we are regarded as the primary beneficiary of the VIE for accounting purposes, as a result of our direct ownership in the WFOE and the provisions of the VIE Agreements. The VIE Agreements or the contractual structure is used to provide non-Chinese investors with exposure to foreign investment in China-based companies where Chinese laws impose certain restrictions on foreign ownership over such companies of certain categories. Consequently, the Company consolidates the accounts of VIE for the periods presented. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP. The VIE is consolidated for accounting purposes but is not an entity in which Heng Guang Cayman owns equity. Heng Guang Cayman does not conduct any active operations and is the primary beneficiary of the VIE for accounting purposes only.

 

In addition, the contractual agreements with the VIE have not been tested in court in mainland China and this structure involves unique risks to investors. For example, the PRC government could disallow the VIE Arrangements, which would likely result in a material change in the Group’s operations and structure and significant change in the value of the securities Heng Guang Cayman is registering for sale, including it could cause the value of such securities to significantly decline or become worthless. See “Risk Factors—Risks Relating to Doing Business in China.”

 

Heng Guang Cayman’s Class A Ordinary Shares offered in this prospectus are shares of the company incorporated in Cayman Islands, not the shares of the operating entities. Because of the Group’s corporate structure, the Company or Group is subject to the risks due to uncertainty of the interpretation and the application of the PRC laws and regulations. As of the date of this prospectus, there is no laws, regulations or other rules require a China based operating entity to obtain permission or approvals from any Chinese authorities to list its or the affiliate’s securities on U.S. stock exchanges, and neither Heng Guang Cayman nor Heng Guang Insurance has received or were denied such permission. However, there is no guarantee that Heng Guang Cayman or Heng Guang Insurance will receive or not be denied permission from Chinese authorities to list on U.S. exchanges in the future. For a description of our corporate structure and VIE contractual arrangements, see “Business - Corporate History and Structure” and also “Risk Factors - Risks Related to Our Corporate Structure.” 

 

In addition, as we conduct substantially all of the operations in China, we are subject to legal and operational risks associated with having substantially all of the operations in China, including risks related to the legal, political and economic policies of the Chinese government, the relations between China and the United States, and changes in Chinese laws and regulations, which could result in a material change in the operations and/or cause the value of our ordinary shares to significantly decline or become worthless and affect our ability to offer or continue to offer securities to investors. Recently, the PRC government initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. On December 28, 2021, thirteen governmental departments of the PRC, including the Cyberspace Administration of China (the “CAC”), issued the Cybersecurity Review Measures, which became effective on February 15, 2022. The Cybersecurity Review Measures provide that an online platform operator, which possesses personal information of at least one million users, must apply for a cybersecurity review by the CAC if it intends to be listed in foreign countries. Because the current operations do not possess personal information from more than one million users at this moment, we do not believe that we are subject to the cybersecurity review by the CAC. In addition, as of the date of this prospectus, we have not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor have we received any inquiry, notice, or sanction related to cybersecurity review under the Cybersecurity Review Measures. As of the date of this prospectus, no relevant laws or regulations in the PRC explicitly require us to seek approval from the China Securities Regulatory Commission (the “CSRC”) or any other PRC governmental authorities for our overseas listing plan, nor have we (including any of our subsidiaries or the VIE) received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other PRC governmental authorities. Also as of the date of this prospectus, we do not believe we are in a monopolistic position in the insurance intermediary industry. In summary, the recent statements and regulatory actions by China’s government related to the use of variable interest entities and data security or antimonopoly concerns, have not affected our ability to conduct the business, accept foreign investments, or list on a U.S. or other foreign exchange. However, since these statements and regulatory actions by the PRC government are newly published and official guidance and related implementation rules have not been issued, it is highly uncertain what the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on a U.S. or non-Chinese exchange. The Standing Committee of the National People’s Congress (the “SCNPC”) or other PRC regulatory authorities may in the future promulgate laws, regulations or implementing rules that would require Heng Guang Insurance, Heng Guang Cayman or any subsidiaries to obtain regulatory approval from Chinese authorities before listing in the U.S. See “Risk Factors - Risks Relating to Doing Business in China.”

 

Under our current corporate structure, to fund any cash and financing requirements Heng Guang Cayman may have, Heng Guang Cayman may rely on dividend payments from its subsidiaries. See “Summary Consolidated Financial Data” on page 14. Furthermore, none of Heng Guang Cayman, its subsidiaries, or the VIE has distributed any earnings or settled any amounts owed under the VIE Agreements, and nor does any of them have any plan to distribute earnings or settle amounts owed under the VIE Agreements in the foreseeable future. Additionally, the transfer of funds and assets between Heng Guang Cayman and the Affiliated Entities is subject to restrictions. The PRC government imposes controls on the conversion of the RMB into foreign currencies and the remittance of currencies out of the PRC. Heng Guang Insurance, the PRC operating entity, receives substantially all of its revenue in RMB. As such we may convert a portion of Heng Guang Insurance’s revenue into other currencies to meet the foreign currency obligations, such as payments of dividends, if any. Shortages in the availability of foreign currency may restrict the ability of Heng Guang Insurance to remit sufficient foreign currency to pay dividends or other payments to Heng Guang Cayman. However, there is no assurance that the Chinese government will not, in the future, intervene or impose further restrictions or limitations on Heng Guang Insurance’s ability to transfer cash out of mainland China and Hong Kong. See “Risk Factors - Risks Relating to Doing Business in China.” As of the date of this prospectus, none of Heng Guang Cayman’s subsidiaries or the VIE have made any dividends or distributions to Heng Guang Cayman and Heng Guang Cayman has made any dividends or distributions to its shareholders. We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. If Heng Guang Cayman determines to pay dividends on any of its Ordinary Shares in the future, as a holding company, it will be dependent on receipt of funds from Heng Guang Hong Kong. Heng Guang Hong Kong will rely on payments made from the WFOE and Heng Guang Insurance pursuant to the VIE Agreements. As of the date of this prospectus, no cash transfer or transfer of other assets has occurred between Heng Guang Cayman, any of its subsidiaries, and the VIE. As of the date of this prospectus, none of Heng Guang Cayman, its subsidiaries, or the VIE has a cash management policy. See “Prospectus Summary- Dividend Distribution.

 

Our Class A Ordinary Shares may be prohibited from trading on a national exchange or “over-the-counter” markets under the Holding Foreign Companies Accountable Act (the “HFCAA”) if the Public Company Accounting Oversight Board (“PCAOB”) determines that it is unable to inspect or fully investigate our auditor and as a result the exchange where our securities are traded may delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021, which found that the PCAOB was unable to inspect or investigate completely certain named registered public accounting firms headquartered in mainland China and Hong Kong. Our independent registered public accounting firm is headquartered in the State of California and has been inspected by the PCAOB on a regular basis and as such, it is not affected by or subject to the PCAOB’s Determination Report. Notwithstanding the foregoing, in the future, if there is any regulatory change or step taken by PRC regulators that does not permit our auditor to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including trading on the national exchange and trading on “over-the-counter” markets, may be prohibited under the HFCA Act. See “Risk Factors - Risks Relating to Doing Business in China.”

 

Heng Guang Cayman is an “emerging growth company” as used in the Jumpstart Our Business Startups Act of 2012, and as such, Heng Guang Cayman has elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings. See “Risk Factors” and “Prospectus Summary— Implications of Our Being an Emerging Growth Company”.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

  

Per Class A Ordinary

Share

  

Total Without
Over-Allotment
Option

  Total With
Over-Allotment
Option
 
Initial public offering price (1)  US $

4.50

  US $

20,000,000

  US $ 23,000,000
Underwriter’s discounts (2)  US $

0.3375

   US $

1,500,000

  US $ 1,725,000 
Proceeds to our company before expenses(3)  US $

4.16

   US $

18,500,000

  US $  21,275,000 

 

(1) Assumed an initial public offering price of $4.50 per share, the midpoint of the range set forth on the cover page of this registration statement
(2) See “Underwriting” in this prospectus for more information regarding our arrangements with the underwriter.
(3) The total estimated expenses related to this offering are set forth in the section entitled “Expenses Relating to This Offering”.

 

We expect our total cash expenses for this offering (including cash expenses payable to our underwriter for its out-of-pocket expenses) to be approximately $750,000, exclusive of underwriting discounts and non-accountable expense allowance. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

 

This offering is being conducted on a firm commitment basis. The underwriter is obligated to take and pay for all of the Ordinary Shares if any such shares are taken. We have granted the underwriter an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of our Ordinary Shares to be offered by us pursuant to this offering (excluding shares subject to this option), solely for the purpose of covering over-allotments, at the initial public offering price less the underwriting discount. If the underwriter exercises the over-allotment option in full, the total underwriting discounts payable will be $1,725,000 based on an assumed offering price of $4.5 per Class A Ordinary Share, and the total gross proceeds to us, before underwriting discounts and expenses, will be $23,000,000. If we complete this offering, net proceeds will be delivered to us on the closing date. We will not be able to use such proceeds in mainland China, however, until we complete capital contribution procedures which require prior approval from each of the respective local counterparts of China’s Ministry of Commerce, the State Administration for Industry and Commerce, and the State Administration of Foreign Exchange. See remittance procedures in the section titled “Use of Proceeds” beginning on page 36.

 

The underwriter expects to deliver the Class A Ordinary Shares against payment in New York, New York on [*], 2022.

 

Network 1 Financial Securities, Inc.

 

 

 

Prospectus dated [*], 2022

 

 
 

 

About this Prospectus

 

This prospectus is part of a registration statement we filed with the SEC. We and the underwriter have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Ordinary Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Other Pertinent Information

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

  “Affiliated Entities” are to Heng Guang BVI, Heng Guang Hong Kong, WFOE, and Heng Guang Insurance;
  “China” or the “PRC” are to the People’s Republic of China, including the special administrative regions of Hong Kong and Macau, and excluding Taiwan for the purposes of this prospectus only; the term “Chinese” has a correlative meaning for the purpose of this prospectus;
  “mainland China”, “mainland of PRC” or “mainland PRC” are to the mainland China of the PRC, excluding Taiwan, the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only; the term “mainland Chinese” has a correlative meaning for the purpose of this prospectus;
  “PRC government”, “PRC regulatory authorities”, “PRC authorities”, “PRC governmental authorities”, “Chinese government”, “Chinese authorities” or “Chinese governmental authorities” is to the government of mainland China for the purposes of this prospectus only; and the similar wordings have a correlative meaning for the purpose of this prospectus;
  “PRC laws and regulations”, “PRC laws”, “laws of PRC”, “Chinese laws and regulations” or “Chinese laws” are to the laws and regulations of mainland China; and the similar wordings have a correlative meaning for the purpose of this prospectus;
  “Class A Ordinary Shares” are to our Class A ordinary shares, par value US$0.001 per share;
  “Class B Ordinary Shares” are to our Class B ordinary shares, par value US$0.001 per share;
  “Heng Guang Insurance” are to Sichuan Heng Guang Insurance Agency Co., Ltd., a company organized under the laws of the PRC and the operating entity which has entered into the VIE Agreement with WFOE;
  “Heng Guang Insurance Shareholders” or “HG Shareholders” are to Chunlin Mao, Haibo Bai, and Xuefeng Huang, collectively, who have constituted all of the shareholders of Heng Guang Insurance as of the date of this prospectus.
  “Heng Guang Cayman” or the “Company” are to the registrant Hengguang Holding Co., Limited., an exempted company incorporated under the laws of Cayman Islands;
  “Heng Guang BVI” are to Heng Guang Shun Da Co., Ltd., a company formed under the laws of British Virgin Islands and a wholly-owned subsidiary of Heng Guang Cayman;
  “Heng Guang Hong Kong” are to Heng Guang Holdings Co., Ltd., a company formed under the laws of Hong Kong and a wholly-owned subsidiary of Heng Guang BVI;
  “shares”, “Shares” or “Ordinary Shares” as of the date hereof refer to our Class A and Class B ordinary shares, par value US$0.001 per share;
  “VIE” are to the variable interest entities including Heng Guang Insurance;
  “WFOE” are to Chengdu Jiulin Kefu Technology Co., Ltd., a Chinese company and wholly-owned subsidiary of Heng Guang Hong Kong;
  “we”, “us”, the “Company” or the “Group” are to Heng Guang Insurance, Heng Guang Cayman, Heng Guang BVI, Heng Guang Hong Kong, and the WFOE, as a group.

  

Our business is conducted by Heng Guang Insurance, the VIE in the PRC, and its branch offices, using Chinese dollars (the “RMB”), the legal currency of mainland China. Our consolidated financial statements are presented in United States dollars. In this prospectus, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations and the value of our assets, including accounts receivable.

 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
SUMMARY CONSOLIDATED FINANCIAL DATA 14
RISK FACTORS 22
USE OF PROCEEDS 42
DIVIDEND POLICY 43
CAPITALIZATION 43
DILUTION 44
ENFORCEABILITY OF CIVIL LIABILITIES 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 46
INDUSTRY 53
BUSINESS 56
REGULATIONS 72
MANAGEMENT 80
EXECUTIVE COMPENSATION 83
PRINCIPAL SHAREHOLDERS 84
RELATED PARTY TRANSACTIONS 85
DESCRIPTION OF SHARE CAPITAL 86
SHARES ELIGIBLE FOR FUTURE SALE 98
TAXATION 99
UNDERWRITING 104
EXPENSES RELATING TO THIS OFFERING 110
LEGAL MATTERS 110
EXPERTS 110
WHERE YOU CAN FIND MORE INFORMATION 110
INDEX TO FINANCIAL STATEMENTS F-1

 

We are responsible for the information contained in this prospectus and any free writing prospectus we prepare or authorize. We have not, and the underwriter has not, authorized anyone to provide you with different information, and we and the underwriter take no responsibility for any other information others may give you. We are not, and the underwriter is not, making an offer to sell our Ordinary Shares in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or the sale of any Ordinary Shares.

 

For investors outside the United States: Neither we nor the underwriter have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Ordinary Shares and the distribution of this prospectus outside the United States.

 

We are incorporated under the laws of PRC as an exempted company with limited liability and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or the SEC, we currently qualify for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the Securities and Exchange Commission, or the SEC, as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

All dealers that buy, sell or trade our Ordinary Shares, whether or not participating in this offering, may be required to deliver a prospectus 25 days after this registration agreement is declared effective. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 
 

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Ordinary Shares, discussed under “Risk Factors,” before deciding whether to buy our Ordinary Shares.

 

Overview

 

Heng Guang Cayman is a holding company incorporated in the Cayman Islands with no material operations. As a holding company with no material operations of its own, Heng Guang Cayman conducts substantially all of the operations through Heng Guang Insurance or the VIE, the operating entity established in the People’s Republic of China, which has entered into a series of the VIE Agreements with WFOE, an indirect subsidiary of Heng Guang Cayman. For accounting purposes, Heng Guang Cayman is the primary beneficiary of Heng Guang Insurance’s business operations through the VIE Agreements, which enables Heng Guang Cayman to consolidate the financial results of the VIE in our consolidated financial statements under U.S. GAAP. We have evaluated the guidance in Financial Accounting Standards Board Accounting Standards Codification 810 and determined that we are regarded as the primary beneficiary of the VIE for accounting purposes, as a result of our direct ownership in WFOE and the provisions of the VIE Agreements. “Prospectus Summary- Contractual Arrangements Between Heng Guang Insurance And WFOE.” Our Class A Ordinary Shares offered in this prospectus are shares of Heng Guang Cayman, our holding company incorporated in Cayman Islands, not the shares of Heng Guang Insurance, the operating entity.

 

The following diagram illustrates our current corporate structure and existing shareholders of each corporate entity listed herein as of the date of this prospectus:

 

 

For a detailed description of our corporate structure and VIE contractual arrangements, see “Business - Corporate History and Structure” and “Principal Shareholders.” See also “Risk Factors - Risks Related to Our Corporate Structure.

 

Heng Guang Insurance, which has entered into a set of variable interest entity agreements with WFOE, was established in 2004 and has developed a successful business strategy in the City of Guangan, Sichuan Province during its first ten years. In 2014, Heng Guang Insurance relocated its headquarters to Chengdu, the capital city of Sichuan and a business center in southwest China. In 2016, Heng Guang Insurance was granted with its mainland Chinese national insurance agency qualification and Internet insurance agency license, and formally established its corporate strategy of expanding its digital insurance agency services. In 2019, Heng Guang Insurance accelerated its digitalization process and began to develop a digital sales application platform- “Heng Kuai Bao (meaning fast insurance agency)”, aiming to enhance the insurance service efficiency, improve user experiences, and empower its agents with new technologies. In September 2020, after the auto insurance reform in China, Heng Guang Insurance was a pioneer insurance intermediary in launching the auto insurance one-click system in Heng Kuai Bao, which gained its popularity in the auto-insurance market. As of June 2022, Heng Guang Insurance grew from one branch office in Guangan City to fifty-four (54) locations sprawling in sixteen (16) provinces and municipalities in the Southwest and Northeast of the PRC. The contractual arrangements with respect to the VIE are not equivalent to an equity ownership in the business of the VIE and the investors may never hold equity interests in Heng Guang Insurance unless the VIE Agreements are replaced with the direct ownership of Heng Guang Insurance by the WFOE. Instead, for accounting purposes, Heng Guang Cayman is the primary beneficiary of Heng Guang Insurance’s business operations through the VIE Agreements, which enables Heng Guang Cayman to consolidate the financial results of the VIE in our consolidated financial statements under U.S. GAAP. We have evaluated the guidance in Financial Accounting Standards Board Accounting Standards Codification 810 and determined that we are regarded as the primary beneficiary of the VIE for accounting purposes, as a result of our direct ownership in WFOE and the provisions of the VIE Agreements. The VIE is consolidated for accounting purposes but not an entity in which Heng Guang Cayman owns equity. Heng Guang Cayman does not conduct any active operations and is the primary beneficiary of the VIE for accounting purposes.

 

In addition, the contractual agreements with the VIE have not been tested in court in mainland China and this structure involves unique risks to investors. For example, the PRC government could disallow the VIE Arrangements, which would likely result in a material change in the Group’s operations and structure and significant change in the value of the securities Heng Guang Cayman is registering for sale, including it could cause the value of such securities to significantly decline or become worthless. See “Risk Factors—Risks Relating to Doing Business in China.”

 

Heng Guang Insurance distributes a variety of insurance products, which are categorized into two major groups: (1) property and casualty insurance, such as automobile insurance, commercial property insurance, casualty and accident insurance, construction and engineering insurance, and liability insurance; and (2) life and health insurance. As an insurance agency firm, Heng Guang Insurance has limited underwriting capacity and primarily provides sales, distribution and ancillary services of insurance products underwritten by the insurance companies Heng Guang Insurance represents. Heng Guang Insurance derives its revenue primarily from commissions and fees paid by the partner insurance companies, typically calculated as a percentage of premiums paid by its customers to the insurance companies. As of the date of this report, Heng Guang Insurance has relationships with over 70 insurance companies in the PRC. Heng Guang Insurance helps consumers select the right insurance products for purchase, but represent the partner insurance companies in the transactions. For the year ended December 31, 2021, 61.78% of our total revenue were attributed to our top five insurance company partners, each accounted for 23.74%, 13.54%, 10.63%, 8.97% and 4.90%, respectively. For the year ended December 31, 2020, 70.61% of our total revenue were attributed to our top five insurance company partners, each accounted for 30.07%, 22.26%, 6.88%, 6.29% and 5.11%, respectively. Please see Section “Business-Customers” for details about our top insurance partners. We sell insurance products primarily through our sales force who are individual sales agents in our distribution and service network. As of the date of this prospectus, we had 54 locations or branch offices throughout China to sell the insurance products, including fifty branches currently in operation, two with pending insurance agency applications, and two branches incorporated in 2022 with no significance operations. A large component of our cost of revenues is commissions paid to our individual sales agents. Heng Guang Insurance established eighteen (18) new branch offices in the years 2019 through 2022 to further grow our sales and market share. Heng Guang Insurance has its mainland Chinese national insurance agency license granted by the China Bank and Insurance Regulatory Commission (the “CBIRC”), valid as of June 13, 2023 and subject to further extension. All of Heng Guang Insurance’s fifty operating branches have registered with the CBIRC’s insurance agency supervision information system, including twenty four branches in Sichuan Province, five branches in Zhejiang Province, three branches in Hebei Province, two branches in Chongqing Province, two branches in Yunnan Province, two branches in Hunan Province, two branches in Gansu Province, two branches in Henan Province, one branch in Jiangxi Province, one branch in Shanxi Province, one branch in Guizhou Province, one branch in Shandong Province, one branch in Jiangsu Province, one branch in Liaoning Province, one branch in Jilin Province, and one branch in Tibet Province. In addition, two of the branches have applied for insurance agency business licenses in Chongqing Province and Hebei Province which are pending from the relevant local authorities as of the date of this prospectus.

 

The Chinese insurance industry has grown substantially in the past decade. Historically, insurance companies in the PRC relied primarily on their exclusive individual sales agents and direct sales force to sell their products. However, in recent years, as a result of increased competition and consumers’ demand for more options, insurance companies gradually expanded their distribution channels to include insurance intermediaries, such as commercial banks and insurance intermediaries. In addition, because of the increasingly high costs for establishing and maintaining distribution networks of their own, more insurance companies choose to rely primarily on insurance intermediaries to distribute the insurance products and in return provide attractive monetary incentives to the insurance intermediaries.

 

Heng Guang Insurance intends to grow its business by expanding its distribution network through opening additional brick and mortar offices and branches in China, expanding its online operations, and training and recruiting additional skilled professional sales agents in the life and health insurance sector. Heng Guang Insurance will also continue to seek opportunities to offer innovative and premium services and products to its customers. In 2018, Heng Guang Insurance started the development of the mobile app Heng Kuai Bao, which provides sales support, training, agents’ commission management and instant insurance quotes to our agents. Heng Guang Insurance plans to further develop and enhance its mobile app and online platform to extend the digital services to its insurance purchasers, with the goal of allowing them to shop, compare and purchase insurance products, process insurance claims, and manage policies all through Heng Kuai Bao as the one-stop application. In addition, Heng Guang Insurance diversified its insurance products by tapping into the health and life insurance sector in 2019. Furthermore, Heng Guang Insurance is allocating additional human and financial resources to its claim adjustment department in anticipation of future surging demand of its claim adjustment services as it sees more and more insurance companies choose to outsource claim adjustment functions to insurance agencies to minimize the costs of claim and risk management.

 

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The following table illustrates the breakdown of our net commission revenues by insurance products for the years ended December 31, 2021 and 2020.

 

   Year ended December 31, 2021   Year ended December 31, 2020 (Restated) 
   Revenue   Percentage of Total commission revenue   Revenue   Percentage of Total commission revenue 
Automobile Insurance                    
Mandatory  $1,265,946    5.87  $1,038,399    5.30%
Other   11,618,603    53.88   13,854,192    70.70%
Property Insurance   386,809    1.79   90,770    0.46%
Liability Insurance   1,764,131    8.18   969,881    4.95%
Casualty Insurance   3,719,569    17.25   1,937,550    9.89%
Construction and Engineering Insurance   645,712    2.99   691,709    3.53%
Life and Health Insurance   1,076,366    4.99   901,389    4.60%
Cargo Transportation Insurance   907,884    4.21%   23,174    0.12%
Other   179,016    0.84   88,144    0.45%
Total commission revenue, net  $21,564,036    100.00%  $19,595,208    100.00%

 

Contractual Arrangements Between Heng Guang Insurance And WFOE

 

Heng Guang Cayman does not own any equity interest in Heng Guang Insurance, either directly or indirectly. Instead, for accounting purposes, Heng Guang Cayman is the primary beneficiary of Heng Guang Insurance’s business operation through a series of variable interest contractual arrangements, which enables us to consolidate the financial results of the VIE in our consolidated financial statements under U.S. GAAP. HG Shareholders (as defined below) and WFOE entered into a series of contractual arrangements, also known as VIE Agreements, on or about December 3, 2020. We have evaluated the guidance in Financial Accounting Standards Board Accounting Standards Codification 810 and determined that we are regarded as the primary beneficiary of the VIE for accounting purposes, as a result of our direct ownership in the WFOE and the provisions of the VIE Agreements. Consequently, the Company consolidates the accounts of the VIE for the periods presented. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP. The VIE is consolidated with Heng Guang Cayman for accounting purposes but is not an entity in which Heng Guang Cayman owns equity. Heng Guang Cayman does not conduct any active operations and is the primary beneficiary of the VIE for accounting purposes only.

 

According to the Exclusive Management Consulting and Service Agreement and its supplementary agreement which clarifies the calculation method of the service fee, Heng Guang Insurance is obligated to pay service fees to WFOE approximately equal to the net income of Heng Guang Insurance after (i) offsetting the losses (if any) of Heng Guang Insurance in previous years, and (ii) deducting the required operating costs, expenses, tax and other statutory expenses. As of the date, the no such service fees has been paid by Heng Guang Insurance.

 

The VIE Agreements include the following and are described in details below:

 

Exclusive Management Consulting and Service Agreement

 

Pursuant to the Exclusive Management Consulting and Service Agreement between Heng Guang Insurance and WFOE dated December 3, 2020, WFOE provides Heng Guang Insurance with technical support, consulting services, intellectual services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Heng Guang Insurance granted a fully-paid exclusive license to WFOE to use all of the intellectual properties of Heng Guang Insurance and WFOE will be the owner of any and all intellectual property to be developed in the future either by Heng Guang Insurance or WFOE from the date of this Exclusive Management Consulting and Service Agreement. For services rendered by WFOE to Heng Guang Insurance under this agreement and its supplementary agreement, WFOE is entitled to collect a service fee which is approximately equal to the net income of Heng Guang Insurance after (i) offsetting the losses (if any) of Heng Guang Insurance in previous years, and (ii) deducting the required operating costs, expenses, tax and other statutory expenses.

 

The Exclusive Management Consulting and Service Agreement shall remain in effect for ten (10) years with an automatic renewal of another ten (10) years, and can only be terminated earlier if WFOE defaults or WFOE enters into a bankruptcy or liquidation process (either voluntary or involuntary). WFOE is entitled to terminate this agreement by providing a written 30-day notice to Heng Guang Insurance.

 

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The CEO of WFOE, Mr. Jiulin Zhang, who is also the CEO of Heng Guang Insurance, is currently managing Heng Guang Insurance pursuant to the terms of the Exclusive Management Consulting and Service Agreement. WFOE has absolute authority relating to the management of Heng Guang Insurance, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. Upon establishment of Heng Guang Cayman’s audit committee at the consummation of this offering, Heng Guang Cayman’s audit committee will be required to review and approve in advance any related party transactions, including transactions involving WFOE or Heng Guang Insurance.

 

Equity Pledge Agreement

 

Under the Equity Pledge Agreement among WFOE, Heng Guang Insurance and each of the Heng Guang Insurance Shareholders, each Heng Guang Insurance Shareholder pledged all of his or her equity interests in Heng Guang Insurance to WFOE to guarantee the performance of Heng Guang Insurance and any of Heng Guang Insurance shareholders’ obligations under the VIE Agreements. Under the terms of the Equity Pledge Agreement, in the event that Heng Guang Insurance or any of Heng Guang Insurance Shareholders breaches its respective contractual obligations under the VIE Agreements, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends distributed from the pledged equity interests. All of the Heng Guang Insurance Shareholders also agreed that upon occurrence of any event of default, as set forth in the Equity Pledge Agreement, WFOE is entitled to dispose the pledged equity interest in accordance with applicable PRC laws. Each Heng Guang Insurance Shareholder further agreed not to dispose of the pledged equity interests or take any encumbrances on the equity interests that would prejudice WFOE’s interest.

 

The Equity Pledge Agreement is effective until (i) all payments due under the VIE Agreements have been paid or (ii) all the obligations under the VIE Agreements have been performed by Heng Guang Insurance and Heng Guang Insurance Shareholders. WFOE shall cancel or terminate the Equity Pledge Agreement upon Heng Guang Insurance’s full payment of the fees payable under the VIE Agreements.

 

The purposes of the Equity Pledge Agreement are to (1) guarantee the performance of Heng Guang Insurance and any of Heng Guang Insurance shareholders’s obligations under the VIE Agreements, (2) make sure any Heng Guang Insurance Shareholder does and will not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice WFOE’s interests without WFOE’s prior written consent, and (3) provide WFOE de facto control over Heng Guang Insurance, which is limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP. In the event that Heng Guang Insurance breaches its contractual obligations under the VIE Agreements, WFOE will be entitled to foreclose on and dispose all of Heng Guang Insurance’s issued and outstanding equity interests, have the right to (1) exercise its option to purchase or designate third parties to purchase part or all of Heng Guang Insurance’s equity interests and (2) terminate the VIE Agreements after acquisition of all equity interests in Heng Guang Insurance or form a new VIE structure with the third parties designated by WFOE.

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement dated December 3, 2020, each Heng Guang Insurance Shareholder irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC laws, once or at multiple times, at any time, part or all of its equity interests in Heng Guang Insurance. The option price is equal to the lowest price legally permitted by applicable PRC laws and regulations.

 

The Exclusive Option Agreement shall remain effective for a term of ten (10) years from the date of the Agreement, may be extended for another ten (10) years at the choice of the WFOE, and can only be terminated if WFOE defaults or by the WFOE unilaterally.

 

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Proxy Agreement

 

Under the Proxy Agreement dated December 3, 2020, each Heng Guang Insurance Shareholder authorized WFOE to act on its behalf as its exclusive agent and attorney with respect to all rights as shareholders of Heng Guang Insurance, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all of the shareholders’ rights that the shareholders are entitled to under PRC laws and the articles of association of Heng Guang Insurance, including but not limited to voting, the sale or transfer or pledge or disposition of shares of Heng Guang Insurance in part or in whole; and (c) designating and appointing on behalf of Heng Guang Insurance Shareholders the legal representative, the executive directors, supervisors, the chief executive officer and other senior management members of Heng Guang Insurance.

 

The Proxy Agreement shall remain effective for a term of ten (10) years from the date of the Agreement, can be automatically renewed in an increment of one (1) year each time after the end of the initial 10-year term unless terminated earlier by WFOE. The Proxy Agreement is irrevocable and continuously valid from the date of execution of the Proxy Agreement, so long as any of the Heng Guang Insurance Shareholders is the shareholder of Heng Guang Insurance. The sale or transfer of one Heng Guang Insurance Shaholder’s equity interest in Heng Guang Insurance shall not interfere with or affect the force and validity of the Proxy Agreement as to the remaining Heng Guang Insurance Shareholders.

 

For accounting purposes, the Exclusive Management Consulting and Service Agreement, together with the Equity Pledge Agreement, Exclusive Option Agreement, and the Proxy Agreement, enable WFOE to exercise effective control over Heng Guang Insurance, which in return enables us to consolidate the financial results of the VIE in our consolidated financial statements under U.S. GAAP. As a result of these VIE agreements, Heng Guang Cayman is currently the beneficiary of Heng Guang Insurance, and the Company as a group of corporate entities accordingly treats Heng Guang Insurance as its VIE under U.S. GAAP. We have evaluated the guidance in Financial Accounting Standards Board Accounting Standards Codification 810 and determined that we are regarded as the primary beneficiary of the VIE for accounting purposes, as a result of our direct ownership in WFOE and the provisions of the VIE Agreements. We consolidate the financial results of Heng Guang Insurance in our consolidated financial statements in accordance with U.S. GAAP.

 

Summary of challenges and risks involved in the VIE Arrangements and enforcing the VIE Agreements

 

Because Heng Guang Cayman does not hold equity interests in the VIE, we are subject to risks due to the uncertainty of the interpretation and application of the PRC laws and regulations, including but not limited to regulatory review of oversea listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the contractual arrangement with the VIE. We are also subject to the risks of the uncertainty that the PRC government could disallow the VIE structure, which would likely result in a material change in our operations, or a complete hindrance of Heng Guang Cayman’s ability to offer or continue to offer its securities to investors, and the value of Heng Guang Cayman’s Class A Ordinary Shares may depreciate significantly. The VIE Arrangements are less effective than direct ownership due to the inherent risks of the VIE structure and that Heng Guang Cayman may have difficulty in enforcing any rights Heng Guang Cayman may have under the VIE Agreements with the Heng Guang Insurance, its founders and shareholders in the PRC because all of the VIE Agreements are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, where the legal environment is uncertain and not as developed as in the United States, and where the Chinese government has significant oversight and discretion over the conduct of Heng Guang Insurance’s business and may intervene or influence Heng Guang Insurance’s operations at any time with little advance notice, which could result in a material change in our operations and/or the value of your Class A ordinary shares. Furthermore, these VIE Agreements may not be enforceable in China if the PRC authorities or courts take a view that such VIE Agreements contravene with the PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event Heng Guang Cayman is unable to enforce these VIE Agreements, it may not be able to exert effective influence over the VIE, Heng Guang Insurance, and Heng Guang Insurance’s ability to conduct its business may be materially and adversely affected. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP. See “Risk Factors — Risks Related to Our Corporate Structure”, “Risk Factors — Risks Related to Doing Business in China” and “Risk Factors — Risks Relating to This Offering and The Trading Market” for more information.

 

Dividend Distribution

 

Heng Guang Insurance, the PRC operating entity, receives substantially all of its revenue in RMB. Under our current corporate structure, to fund any cash and financing requirements Heng Guang Cayman may have, Heng Guang Cayman may rely on dividend payments from its subsidiaries. The WFOE may receive payments from Heng Guang Insurance, and then can remit payments to Heng Guang Hong Kong in accordance with its registration with the Chinese authority under the “Notice of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies” and pursuant to the VIE Agreements. Then Heng Guang Hong Kong may make distribution of such payments directly to Heng Guang Cayman as dividends to the holding company. See “Summary Consolidated Financial Data” on page 14.

 

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Under the existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (the “SAFE”) by complying with certain procedural requirements. Pursuant to the SAFE Circular 37, Heng Guang Insurance is allowed to pay dividends in foreign currencies to WFOE without prior approval from the SAFE, subject to the condition that the remittance of such dividends outside of the mainland PRC shall comply with certain procedures under the PRC foreign exchange regulations applicable to mainland PRC residents only. Approval from or registration with appropriate government authorities is, however, required where RMB is to be converted into a foreign currency and remitted out of mainland China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for Heng Guang Insurance’s accounts with little advance notice. Shortages in the availability of foreign currency may restrict Heng Guang Insurance’s ability to remit sufficient foreign currency to pay dividends or other payments to Heng Guang Cayman.

 

Current PRC regulations permit WFOE to pay dividends to Heng Guang Hong Kong only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, in accordance with Article 166 of the PRC Company Law, each of our subsidiaries in mainland China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each such entity in mainland China may further set aside a portion of its after-tax profits as the discretionary common reserve, although the amount to be set aside, if any, is determined at the discretion of such entities board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into and out of Hong Kong (including funds from Hong Kong to the mainland PRC), except for the transfer of funds involving money laundering and criminal activities. However, there is no guarantee that the Hong Kong government will not promulgate new laws or regulations that may impose such restrictions in the future.

 

As of the date of this prospectus, none of Heng Guang Cayman, its subsidiaries, or the VIE has a cash management policy. Neither Heng Guang Insurance nor any of Heng Guang Cayman’s other subsidiaries have ever paid dividends, made distributions, transferred cash or other assets by kind to Heng Guang Cayman or its shareholders directly or indirectly. The current laws and regulations of the PRC on currency exchange requires registration with or approval from the SAFE for conversion of RMB into foreign currency and remission out of mainland China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. However, there is no assurance that the Chinese government will not, in the future, intervene or impose restrictions or limitations on the Heng Guang Insurance’s ability to transfer cash out of mainland China and Hong Kong. Also Heng Guang Cayman has not made any distributions or paid dividends to its shareholders, including U.S. investors, as of the date of this prospectus. See “Summary Consolidated Financial Data” on page 14.

 

We intend to keep any future earnings to re-invest in and finance the expansion of our business in China. We do not have the intentions to distribute earnings or settle amounts owed under the VIE Agreements in the near future nor do we anticipate that any cash dividends will be paid or Heng Guang Insurance’s earnings will be distributed and transferred to the holding company in the foreseeable future. Under the Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business.

 

Cash dividends, if any, on our Class A Ordinary Shares will be paid in U.S. dollars. If we are considered a mainland PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as mainland-China sourced income and as a result may be subject to mainland PRC withholding tax at a rate of up to 10.0%.  Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5%. The 5% withholding tax rate, however, does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong resident enterprise must be the beneficial owner of the relevant dividends; and (b) the Hong Kong resident enterprise must directly hold more than 25% equity interest in the mainland PRC resident enterprise during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong resident enterprise must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower mainland PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to any dividends paid by the WFOE to its immediate holding company, Heng Guang Hong Kong. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Heng Guang Hong Kong may apply for the tax resident certificate if and when the WFOE intend to declare and pay dividends to Heng Guang Hong Kong.

 

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Industry Background

 

In recent years, the global insurance industry developed rapidly, with premium rising from $4.7 trillion in 2016 to $6.1 trillion in 2020, according to China Insurance Yearbook. The average insurance density in China, calculated as the ratio of total insurance premiums divided by the entire Chinese population, has risen from $387 in 1999 to approximately $687 in 2020, as indicated in China Insurance Yearbook. While the competition in the insurance industry worldwide has been intensive, the insurance companies in China have gained substantial market shares and established its significant position in the global insurance market. In 2020, Brand Finance, a leading brand valuation and strategy consulting agency, announced the “Top 100 Most Valuable Insurance Brands in the World in 2020” which assigned a total value of the top 100 insurance brands on the list US$463.2 billion. Among the companies on the top 100 list, 12 brands from the Greater China region (including mainland, Hong Kong and Taiwan) were on the list, valued at approximately $151.5 billion dollars, accounting for 32.7% of the total value of the 100 companies on such list. As per a report from Statista, insurance density is a used as an indicator for the development of insurance within a country and is calculated as ratio of total insurance premiums to whole population of a given country. Our reference to insurance density is in terms of reflecting to the number of insurance premiums sold in China in contrast to the number of people living in China.

 

Despite this substantial growth and scale, the development of China’s insurance market still lags behind certain developed countries, leaving Chinese insurance companies and insurance intermediaries huge market potential. For instance, the statistics from the Chinese National Bureau of Statistics showed that the insurance depth (the original insurance premium income / total GDP in a country) in China was 4.45% compared to 7.3% of the worldwide average insurance depth in the year of 2020, reflecting Chinese insurance depth being 64% lower than the world average as of December 2020. The low insurance depth rate relative to those of developed economies and world average rate in 2020 suggest that China’s insurance market has significant growth potential. We believe that continued economic growth and the aging of the Chinese population, among other factors, will drive the future growth of China’s insurance industry. In particular, we expect that changing demographics will generate substantial demand for life insurance products.

 

Within China’s insurance industry, independent insurance agencies, serving insurance carriers, and insurance brokers, serving policy holders, are referred to as “professional insurance intermediaries,” to differentiate them from entities that distribute insurance products as an ancillary business, such as commercial banks, postal offices and automobile dealerships. The professional insurance intermediary sector in China has also grown significantly in recent years. According to data released by the CIRC, total insurance premiums generated by independent insurance institutions increased from RMB 147.2 billion in 2014 to RMB 482.8 billion in 2018, with a four-year compound growth rate of 34.5% and the total premiums generated by independent insurance institutions in 2019 reached approximately RMB 540 billion, showing an annual increase of 10.91% compared to the total premiums in 2018. We believe that the professional insurance intermediary sector will continue to offer substantial growth opportunities for the following reasons:

 

  China’s insurance industry as a whole has significant growth potential due to its relatively low penetration rate compared to more developed countries;
     
  as competition among insurance companies intensifies, insurance companies will probably focus more on their core competencies and should increasingly outsource distribution of their products;
     
  as Chinese consumers become more sophisticated, they should increasingly seek a greater selection of insurance products and services from different insurance companies with the benefit of independent professional advice; and
     
  a favorable regulatory environment should benefit professional insurance intermediaries.

 

Despite rapid growth in recent years, we believe that the professional insurance intermediary sector in the PRC is still at the development stage. As of December 2021, there were 2,647 professional insurance intermediary firms in China, including 499 professional insurance agencies, as reported by Jinri Toutiao, a Chinese news and information content platform and subsidiary of ByteDance, on June 10, 2022.

 

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Our Strengths

 

We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

 

  Value added one stop shop services;
     
  Innovative digital marketing, operation and management;
     
  National distribution network;
     
  Experienced management team; and
     
  Rigorous training and human capital development.

 

Summary of Our Challenges and Risks

 

We are, and expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent to a development-stage business and in a heavily regulated industry in China. As a result, we must establish many functions necessary to operate our insurance intermediary business, including expanding our managerial and administrative structure, assessing and implementing our marketing program, conducting risk management and compliance, implementing financial systems and controls and personnel recruitment. Please read the Risk Factors section for the descriptions of the risks we face. These risks and challenges are, among other things:

 

Risks Related to Our Business and Industry

 

  We operate in an industry that is heavily regulated by relevant governmental agencies in China, and our business could be negatively impacted if we are unable to adapt our services to regulatory and policy changes in China. For further details please see “Risk Factors - Because our industry is heavily regulated, any material changes in the regulatory environment could change the competitive landscape of our industry or require us to change the way we do business. The administration, interpretation and enforcement of the laws and regulations currently applicable to us could change rapidly. If we fail to comply with applicable laws and regulations, we may be subject to civil and criminal penalties or lose our privilege to conduct insurance business, which could materially and adversely affect our business and results of operations.” on page 20.
     
  We may require additional capital to develop and expand our operations, which may not be available to us when we require it. For further details please see “Risk Factors - We are subject to all the risks and uncertainties in an industry which is still in development in China.” on page 17.
     
  Our insurance products marketing and growth strategy may not be successful. For further details please see “Risk Factors - Our business and prospects could be materially and adversely affected if we are not able to manage our growth successfully” on page 18; and “We may not be successful in implementing important new strategic initiatives and technologies, which may have an adverse impact on our business and financial results” on page 18
     
  Our business may be subject to significant fluctuations in operating results due to factors beyond our control, such as health epidemics, natural disasters or terrorist attacks. “Risk Factors - Unusual weather patterns, extreme weather conditions and natural disasters could adversely affect the operations of our system, in-person insurance services and results of our business operations” on page 16.
     
  Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers or insurance carrier partners and our financial results may be negatively affected. “Risk Factors - Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected” on page 17.
     
  If our investments in our online platforms are not successful, our business and results of operations may be materially and adversely affected. “Risk Factors - If our investments in our online platforms are not successful, our business and results of operations may be materially and adversely affected” on page 18.
     
  A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition. “Risk Factors - We are subject to all the risks and uncertainties in an industry which is still in development in China” on page 17; and “Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations” on page 24.

 

7
 

 

Risks Related to Our Corporate Structure and Operation

 

If the PRC government deems that the VIE Agreements in relation to the VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those Chinese operations, which are substantially all of our business operations. For further details please see “Risk Factors - Because we conduct our agent business through Heng Guang Insurance, a VIE entity, if we fail to comply with applicable law, we could be subject to severe penalties and our business could be materially and adversely affected” on page 20, and “Risk Factors - Our Shareholders are subject to greater uncertainties because we operate through a VIE structure due to restrictions on the direct ownership of the Chinese operating entities imposed by the CIRC even though the insurance agency industry falls within the permitted category in accordance with the Catalogue and the Negative List” on page 22.

 

We rely on contractual arrangements among WFOE and the VIE entity Heng Guang Insurance and HG Shareholders, which may not be as effective in providing operational control as direct ownership and whereby Heng Guang Cayman may have difficulty in enforcing its rights under the VIE Agreements. For further details please see “Risk Factors - We rely on contractual arrangements with Heng Guang Insurance, a VIE entity, and its shareholders for the China operations, which may not be as effective in providing operational control as direct ownership” on page 21.

 

The HG Shareholders may have potential conflicts of interest with Heng Guang Cayman which may adversely affect our consolidated business and financial condition. For further details please see “Risk Factors - The shareholders of the VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition” on page 23.

 

We rely on the business licenses, insurance agency business permit and certification and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations. For further details please see “Risk Factors - We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations” on page 28.

 

Risks Related to Doing Business in China

 

U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China. For further details please see “Risk Factors - As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, which may limit the information publicly available to our investors and afford them less protection than if we were an U.S issuer” on page 34.

 

Adverse regulatory developments in China may subject us to additional regulatory review and expose us to government interference, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements, and/or suspend or terminate our future securities offerings, making capital-raising more difficult. For further details please see “Risk Factors - PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably. Changes and uncertainty in PRC laws and interpretation may materially and adversely affect our business performance and impede our operations in China.” on page 26 and “Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations” on page 24.

 

The approval of the China Securities Regulatory Commission (the “CSRC”) and other compliance procedures may be required in connection with this offering, and, if required, we cannot predict whether we will be able to obtain such approval. For further details please see “Risk Factors - The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.” on page 27.

 

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Uncertainties with respect to the mainland PRC legal system could adversely affect us, the rules and regulations in China can change quickly with little advance notice, and such uncertainties materially and adversely affect our business and impede our ability to continue our operations in China. For further details please see “Risk Factors - PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably. Changes and uncertainty in PRC laws and interpretation may materially and adversely affect our business performance and impede our operations in China” on page 26

 

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities and we conduct offerings outside China. We are currently not required to obtain approval from Chinese authorities to list our Ordinary Shares on Nasdaq, however, if the Chinese authorities exert more stringent requirements on Heng Guang Insurance or our Cayman holding company regarding our offering, we may not be able to list or continue listing on Nasdaq, offer securities to investors, or such Chinese restrictions may significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to decline significantly or become worthless. For further details please see “Risk Factors - If we become subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve such matters, which could harm our business operations, stock price and reputation” on page 26.

 

Governmental control of currency conversion may affect the value of your investment. For further details please see “Risk Factors - Because our business is conducted in Chinese dollars or RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect the amount of proceeds we will receive after the currency exchange from U.S. dollars to RMB” on page 26.

 

We are a holding company and we rely for funding on dividend payments from our subsidiaries and VIE, which are subject to restrictions under PRC laws. For further details please see “Risk Factors - PRC regulations of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary and the VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business” on page 23.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in our securities, especially if such matter cannot be addressed and resolved favorably. For further details please see “Risk Factors - If we become subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve such matters, which could harm our business operations, stock price and reputation” on page 26.

 

PRC regulations relating to the establishment of offshore special purpose companies by mainland PRC residents may subject our mainland PRC resident shareholders to penalties and limit our ability to inject capital into our mainland PRC subsidiaries, limit our mainland PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us. For further details please see “Risk Factors - Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of mainland China, which could result in unfavorable tax consequences to us and our non- mainland PRC shareholders” on page 29.

 

PRC regulation of loans and direct investments by offshore holding companies to mainland PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our mainland PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business in the PRC. For further details please see “Risk Factors - Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law” on page 25.
   
 We face risks related to health epidemics, such as the COVID-19 outbreak, and other outbreaks, which could disrupt our business operations and adversely affect our business, financial condition and results of operations. “Risk Factors - We face risks related to epidemics, such as the COVID-19 outbreak originated in Wuhan, China at the end of 2019, and other outbreaks, which have disrupted and could in the future disrupt our operations and adversely affect our business, financial condition and results of operations” on page 25.
   
 Increases in labor costs or commission costs for sales agents in the PRC may adversely affect our business and our profitability. “Risk Factors - Increases in labor costs in the PRC may adversely affect our business and our profitability” on page 27.
   
 Current PRC regulations restrict currency conversion, which affects the cash flow within our corporate structure, and any further change in PRC regulations may further affect the cash flow within our corporate structure. “Risk Factors - To the extent cash or assets of our business, of the VIE, or of our mainland PRC or Hong Kong subsidiaries, is in the mainland PRC or Hong Kong, such cash or assets may not be available to fund operations or for other use outside of the mainland PRC or Hong Kong, due to interventions in or the imposition of restrictions and limitations by the PRC government to the transfer of cash or assets” on page 26.
   
 You may face difficulty in enforcing any civil rights judgment or claim against our management. “Risk Factors - You may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against us or our management named in the prospectus based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China.” on page 37.

 

Risks Related to an Investment in Our Ordinary Shares and This Offering

 

The recent joint statement by the SEC and The Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by The Nasdaq Stock Market LLC (“NASDAQ”), and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. On September 22, 2021, the PCAOB adopted a final rule implementing the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years. Pursuant to the HFCAA and AHFCAA, our Class A Ordinary Shares may be prohibited to trade on a national exchange if the PCAOB is unable to inspect or fully investigate our auditor for two consecutive years beginning in 2022. These developments could add uncertainties to our offering. For further details please see “Risk Factors - The newly enacted “Holding Foreign Companies Accountable Act” and proposed “Accelerating Holding Foreign Companies Accountable Act” both call for additional and more stringent criteria to be applied to restrictive market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering and if our auditors fail to permit the Public Company Accounting Oversight Board (“PCAOB”) to inspect the auditing firm, our class A ordinary shares may be subject to delisting” on page 27.

 

Investors purchasing Class A Ordinary Shares in this offering will experience immediate dilution. For further details please see “Risk Factors - You will experience immediate and substantial dilution in the net tangible book value of Class A Ordinary Shares purchased” on page 32.

 

We have no plans to pay dividends on our Ordinary Shares. For further details please see “Risk Factors - We do not intend to pay dividends on our Class A Ordinary Shares in the foreseeable future” on page 32.

 

There has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you pay for them, or at all. For further details please see “Risk Factors - There has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you have paid, or at all” on page 32.

 

We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against us. For further details please see “Risk Factors - As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, which may limit the information publicly available to our investors and afford them less protection than if we were an U.S issuer” on page 34.
   
 We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects. For further details please see “Risk Factors - Risks Relating to This Offering And The Trading Market - As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, which may limit the information publicly available to our investors and afford them less protection than if we were an U.S issuer” on page 34.

 

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Our Strategy

 

Our goal is to become a leading independent insurance agency in China and further develop our distribution network. To achieve this goal, we intend to capitalize on the growth potential of China’s insurance industry and insurance intermediary sub-sector, leverage our competitive strengths and pursue the following strategies:

 

  expand into the fast-growing life insurance sector while continuing to grow our property and casualty business;
     
  further expand our distribution network through opening new brick and mortar branches;
     
  further expand our online distribution channels;
     
  grow our managed general agency model;
     
  consolidate insurance products offered by different insurance companies to build a comprehensive insurance AI system;
     
  seek strategic acquisition targets; and
     
  continue to strengthen our relationships with leading insurance companies.

 

Corporate Information

 

Our principal executive office is located at 1666 Chenglong Road, Section 2, Chengdu Economic and Technological Development Zone, Building 2, 5th Floor, Longquanyi District, Chengdu, Sichuan Province, China. Our telephone number at this address is (400) 028-1990. Our registered office is at Ogier Global (Cayman) Limited, 89 Nexus Way, Camana Bay Grand Cayman KY1-9009, Cayman Islands. Our legal name of Heng Guang Cayman is Hengguang Holding Co., Limited and we operate our business under the commercial name “Heng Guang Bao Dai” or “HG-Insurance Agency.”

 

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website address is http://www.hgbaoxian.cn. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is Sichenzia Ross Ference LLP.

 

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Recent Regulatory Development

 

Insurance Agency Licenses and Chinese Auto Insurance Regulatory Reform

 

As of the date of this prospectus, to operate the insurance agent business (online or offline), Heng Guang Insurance has (i) obtained the relevant insurance agency business national permit issued by the China Bank and Insurance Regulatory Commission (the “CBIRC”) to its headquarters with such permit the expiring on June 13, 2023, (ii) completed the insurance agency branch registration recorded by the applicable Chinese local governmental agencies of each Heng Guang Insurance’s operating branch office, except Changshou branch and Tangshan branch, which have filed the insurance agency registration documents, and the recently established Ziyang branch office and Nanyang branch office, and (iii) completed the level III information system security registration in Chengdu Public Security Bureau on January 21, 2021. Despite of our compliance efforts, some of our branch offices have received regulatory letters and fines. Over the course of the past ten years (2011 to 2021), we have paid a total of RMB 270,000 (approximately $43,000 USD) of CBIRC fines for noncompliance with Chinese insurance laws and regulations. All of Heng Guang Insurance’s fifty operating branches have registered with the CBIRC’s insurance agency supervision information system, including twenty four branches in Sichuan Province, five branches in Zhejiang Province, three branches in Hebei Province, two branches in Chongqing Province, two branches in Yunnan Province, two branches in Hunan Province, two branches in Gansu Province, two branches in Henan Province, one branch in Jiangxi Province, one branch in Shanxi Province, one branch in Guizhou Province, one branch in Shandong Province, one branch in Jiangsu Province, one branch in Liaoning Province, one branch in Jilin Province, and one branch in Tibet Province. In addition, two of the branches have applied for licenses in Chongqing province and Hebei province which are pending from the relevant local authorities as of the date of this prospectus.

 

On September 1, 2021, the CBIRC announced a series of regulatory reforms targeting the Chinese auto insurance companies and intermediaries, pursuant to which providers of auto insurance products will have to lower certain fees and expense rates charged on various auto insurance products. While the changes are predicted to make the products more affordable for consumers and bring them in line with international rates, they are also expected to have a negative impact on insurance agents’ revenue in connection with auto insurance products as a result of the newly lowered maximum expense ratios. Therefore, we believe this reform will present our auto insurance segment challenges in the next few years.

 

Permissions from the PRC Authorities to Issue Our Class A Ordinary Shares to Foreign Investors

 

As of the date of this prospectus, our mainland PRC counsel has advised us that (1) since the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies is still in draft form and has not become effective, we, our subsidiaries and the VIE are not required to obtain permissions from China Securities Regulatory Commission (the “CSRC”) to operate the current business and offer to sell or issue our Class A Ordinary Shares being registered herein to non-Chinese investors, (2) based on that fact that none of Heng Guang Cayman, its subsidiaries, and the VIE collect, store or process customers’ information, Heng Guang Cayman, its subsidiaries, and the VIE are not required to obtain permissions under the Measures for Cybersecurity Review (2021) from Cyberspace Administration of China (the “CAC”) to operate the current business and offer to sell or issue Heng Guang Cayman’s Class A Ordinary Shares being registered herein to non-Chinese investors. As such, Heng Guang Cayman, its subsidiaries, the VIE believe that (1) we have received all requisite permissions or approvals to operate the business and offer to sell or issue Heng Guang Cayman’s Class A Ordinary Shares to non-Chinese investors and (2) none of Heng Guang Cayman, its subsidiaries or the VIE has been denied such permissions by any mainland PRC authorities. In reliance on the advice of Jingtian & Gongcheng, as of the date of this prospectus, we believe that we are not required to obtain any additional material permissions or approvals for our current business operations in mainland China and nor do we need any additional permission or approval to offer, sell or issue our Class A Ordinary Shares being registered herein to non-Chinese investors, but there is no guarantee that the Chinese authorities will not change their policy in future.

 

Nevertheless, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the July 6, 2021 Opinions, which were made available to the public on July 6, 2021. The July 6, 2021 Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. The CSRC issued the draft of Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies for comments on December 24, 2021. Given the current mainland PRC regulatory environment, it is uncertain whether and when Heng Guang Cayman, its subsidiaries or the VIE, will be required to obtain any permission from the PRC government to list on a U.S. stock exchanges in the future, and even when we obtain such permission, whether it will be denied or rescinded. If we (i) inadvertently concluded that any of such permission was not required or (ii) the applicable laws, regulations, or interpretations thereof changed and we were required to obtain such permissions or approvals in the future, Heng Guang Cayman, together with the subsidiary and the VIE, would actively seek such permissions or approvals. In the event that we failed to obtain such required approvals or permissions, it would be likely that Heng Guang Cayman’s securities would not be listed on a U.S. or other foreign exchange or would be delisted from such foreign exchange if already listed.

 

The Holding Foreign Companies Accountable Act

 

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. In June 2021, the Senate passed the AHFCAA, which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years

 

Our auditor, an independent registered public accounting firm that issues the audit report incorporated by reference by this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in the State of California, and has been inspected by the PCAOB on a regular basis. Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021, which found that the PCAOB was unable to inspect or investigate completely certain named registered public accounting firms headquartered in mainland China of the PRC and Hong Kong.

 

Our independent registered public accounting firm has been inspected by the PCAOB on a regular basis and as such, it is not subject to the PCAOB Determination Report. Notwithstanding the foregoing, in the future, if there is any regulatory change or step taken by PRC regulators that does not permit our auditor to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including trading on the national exchange and trading on “over-the-counter” markets.

 

The recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.

 

Implications of Heng Guang Cayman Being an “Emerging Growth Company”

 

As a company with less than $1.07 billion in revenue during the last fiscal year, Heng Guang Cayman qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company, Heng Guang Cayman:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A;
     
  is not required to provide a detailed narrative disclosure discussing its compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  not required to obtain an attestation and report from our auditors on its management’s assessment of its internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
     
  is not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  is exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
     
  is eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of its internal control over financial reporting until our second annual report on Form 20-F following the effectiveness of our initial public offering.

 

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Heng Guang Cayman intends to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Heng Guang Cayman’s election to use the phase-in periods may make it difficult to compare its financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

 

Under the JOBS Act, Heng Guang Cayman may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a prospectus declared effective under the Securities Act of 1933, as amended, herein referred to as the Securities Act, or such earlier time that it no longer meet the definition of an emerging growth company. The JOBS Act provides that Heng Guang Cayman would cease to be an “emerging growth company” if it has more than $1.07 billion in annual revenue, have more than $700 million in market value of its Ordinary Share held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Foreign Private Issuer Status

 

Heng Guang Cayman is a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, it is exempt from certain provisions applicable to United States domestic public companies. For example:

 

  it is not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, it is permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  it is not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  it is exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  it is not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
     
  it is not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Controlled Company

 

Upon completion of this offering, Heng Guang Cayman’s CEO and chairman of the board of directors, Jiulin Zhang, along with its CFO, Yao-te Wang, will beneficially own approximately 79% of the aggregate voting power of Heng Guang Cayman’s outstanding Ordinary Shares assuming no exercise of the over-allotment option, or 78% assuming full exercise of the over-allotment option. As a result, Heng Guang Cayman will be deemed a “controlled company” for the purpose of the Nasdaq listing rules. As a controlled company, Heng Guang Cayman is permitted to elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements, including:

 

  the requirement that its director nominees be selected or recommended solely by independent directors; and
     
  the requirement that it has a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees.

 

Although Heng Guang Cayman does not intend to rely on the controlled company exemptions under the Nasdaq listing rules, Heng Guang Cayman may elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

THE OFFERING

 

Class A Ordinary Shares offered by us   4,444,444 Class A Ordinary Shares, or 5,111,111 Class A Ordinary Shares if the underwriter exercises the over- allotment option in full.
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be between US$4.00 and US$5.00 per Class A Ordinary Share.
     
Over-Allotment   We have granted to the underwriter the option, exercisable for 45 days from the date this registration statement is declared effective, to purchase up to an additional 15% of the total number of Class A Ordinary Shares to be offered by Heng Guang Cayman.
     
Authorized Capital   As of the date of this prospectus, our authorized share capital is US$50,000 divided into 38,000,000 Class A Ordinary Shares of US$0.001 par value per share and 12,000,000 Class B Ordinary Shares of US$0.001 par value per share. See “Description of Share Capital.
     
Ordinary Shares outstanding prior to completion of this offering   As of the date of this prospectus, we have 6,500,000 Class A Ordinary Shares and 3,500,000 Class B Ordinary Shares outstanding, prior to completion of this offering.

 

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Ordinary Shares outstanding immediately after completion of the Offering  

10,944,444 Class A Ordinary Shares or 11,611,111 Class A Ordinary Shares if the underwriter exercises the over-allotment option in full; 3,500,000 Class B Ordinary Shares.

 

The numbers do not include any of the Class A Ordinary Shares underlying the Underwriter Warrants. Our authorized share capital as of this offering is US$50,000 divided into 38,000,000 Class A Ordinary Shares, US$0.001 par value per share and 12,000,000 Class B Ordinary Shares, US$0.001 par value per share. See “Description of Share Capital.

     
Voting Rights  

Each Class A Ordinary Share is entitled to one (1) vote per share and each Class B Ordinary Share is entitled to ten (10) votes per share.

 

Holders of Class A and Class B ordinary shares will vote together as a single class, unless otherwise required by law or our amended and restated memorandum and articles of association. Our CEO, Mr. Jiulin Zhang along with our CFO, Mr. Yao-Te Wang, will beneficially own approximately 79% to 78% of the total outstanding voting power, depending on whether the Underwriter exercises its over-allotment option in full or not, following the completion of this offering and will have the ability to control the outcome of matters submitted to our shareholders for votes, including the election of our directors and the approval of any change in control transaction. See the sections titled “Principal Shareholders” and “Description of Share Capital” for additional information.

     
Concentration of  Ownership   Upon completion of this offering, our executive officers and directors, and their affiliates, will beneficially own, in the aggregate, approximately 36% of the total votes for our issued and outstanding Ordinary Shares, assuming the underwriter does not exercise its over-allotment option.
     
Lock-up period  

Heng Guang Cayman, its directors and executive officers, and certain shareholders of the Ordinary Shares, have agreed with the underwriter not to sell, transfer or dispose of any Ordinary Shares for 180 days after the effective date of this registration statement, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.

     
Listing   We intend to apply to have our Ordinary Shares listed on Nasdaq Capital Market.
     
Nasdaq Capital Markets Symbol   We have reserved “HGIA” as our ticker symbol.
     
Transfer Agent   Transhare Corporation.
     
Use of proceeds   We intend to use the proceeds from this offering for working capital and general corporate purposes, including digital expansion of our operations, branding and marketing, and additional recruitment. See “Use of Proceeds” for more information.
     
Risk factors   Investing in our Class A Ordinary Shares involves a high degree of risk and purchasers of our Class A Ordinary Shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our Class A Ordinary Shares beginning on Page 16.

 

13
 

 

SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following historical statements of operations for the fiscal years ended December 31, 2021 and 2020, and balance sheet data as of December 31, 2021 and 2020, which have been derived from our audited financial statements for those periods. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in the prospectus.

 

Selected Balance Sheet Information

 

  

As of

December 31, 2021

  

As of

December 31, 2020

(Restated)

 
Total current assets  $5,443,443   $7,243,469 
Total non-current assets   1,129,991    1,352,187 
Total Assets   6,573,434    8,595,656 
Total current liabilities   1,827,708    2,819,905 
Total Liabilities   1,883,599    2,903,897 
Total Shareholders’ Equity   4,689,835    5,691,759 

 

Selected Statements of Operations Information

 

   YEAR ENDED DECEMBER 31, 
   2021  

2020

(Restated)

 
         
Revenues  $22,445,323   $21,883,400 
Gross profit   4,302,706    3,492,310 
Total operating expenses   5,527,410    3,915,151 
(Loss) income from operations   (1,224,704)   (422,841)
Income (loss) before income tax   (900,250)   72,392 
Net (loss) income   (1,123,608)   45,718 

 

14
 

 

Consolidated Balance Sheets Information 

 

   As of December 31, 2021 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
ASSETS                    
CURRENT ASSETS                         
Cash and cash equivalents  $-   $3,144,166   $819,266   $-   $3,963,432 
Accounts receivable             136,294         136,294 
Prepaid expenses        644    27,507         28,151 
Other receivables             29,194         29,194 
Prepaid commission cost             512,594         512,594 
Due from related parties        135    3,952,846    (3,179,203)   773,778 
Total current assets   -    3,144,945    5,477,701    (3,179,203)   5,443,443 
                          
NONCURRENT ASSETS                         
Restricted cash             784,609         784,609 
Right-of-use assets, net        34,366    78,777         113,143 
Deferred tax asset, net             31,629         31,629 
Investment in non-VIE subsidiaries   4,690,507              (4,690,507)   - 
Equity in the VIE through the VIE Agreements        4,721,429         (4,721,429)   - 
Property and equipment, net             128,467         128,467 
Intangible assets, net             72,143         72,143 
Total non-current assets   4,690,507    4,755,795    1,095,625    (9,411,936)   1,129,991 
TOTAL ASSETS  $4,690,507   $7,900,740   $6,573,326   $(12,591,139)  $6,573,434 
                          
LIABILITIES AND STOCKHOLDERS’ EQUITY                         
CURRENT LIABILITIES                         
Accounts payable  $-   $-   $705,329   $-   $705,329 
Advance from customers             1,010         1,010 
Accrued sales return liability             639,107         639,107 
Taxes payable             167,495         167,495 
Accrued liabilities and other payables        1,455    193,700         195,155 
Operating lease liabilities, current        11,509    32,639         44,148 
Due to related parties        3,178,531    75,464    (3,178,531)   75,464 
Total current liabilities   -    3,191,495    1,814,744    (3,178,531)   1,827,708 
                          
NONCURRENT LIABILITIES                         
Operating lease liabilities, non-current   -    18,738    37,153    -    55,891 
Total non-current liabilities   -    18,738    37,153    -    55,891 
                          
TOTAL LIABILITIES   -    3,210,233    1,851,897    (3,178,531)   1,883,599 
                          
COMMITMENTS AND CONTINGENCIES                         
                          
STOCKHOLDERS’ EQUITY                         
Common stock   10,000                   10,000 
Additional paid in capital   7,176,489                   7,176,489 
Share capital        7,186,489    7,186,489    (14,372,978)   - 
Accumulated deficit   (3,080,402)   (3,080,402)   (3,050,078)   6,130,480    (3,080,402)
Accumulated other comprehensive income   584,420    584,420    585,018    (1,170,110)   583,748 
TOTAL STOCKHOLDERS’ EQUITY   4,690,507    4,690,507    4,721,429    (9,412,608)   4,689,835 
                          
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $4,690,507   $7,900,740   $6,573,326   $(12,591,139)  $6,573,434 

 

15

 

 

   As of December 31, 2020 (Restated) 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
ASSETS                         
CURRENT ASSETS                         
Cash & equivalents  $-   $-   $807,380   $-   $807,380 
Accounts receivable             129,061         129,061 
Prepaid expenses        3,410    129,507         132,917 
Other receivables        1,533    192,911    (8,736)   185,708 
Prepaid commission cost             1,002,497         1,002,497 
Due from related parties             4,985,906         4,985,906 
Total current assets   -    4,943    7,247,262    (8,736)   7,243,469 
NONCURRENT ASSETS                         
Restricted cash             766,284         766,284 
Right-of-use assets, net        48,145    90,259         138,404 
Deferred tax assets             251,708         251,708 
Investment in non-VIE subsidiaries   5,691,759              (5,691,759)   - 
Equity in the VIE through the VIE Agreements        5,695,552         (5,695,552)   - 
Property and equipment, net             114,550         114,550 
Intangible assets, net             81,241         81,241 
Total non-current assets   5,691,759    5,743,697    1,304,042    (11,387,311)   1,352,187 
TOTAL ASSETS  $5,691,759   $5,748,640   $8,551,304   $(11,396,047)  $8,595,656 
                          
LIABILITIES AND STOCKHOLDERS’ EQUITY                         
CURRENT LIABILITIES                         
Accounts payable  $-   $-   $820,135   $-   $820,135 
Advance from customers             48,347         48,347 
Accrued sales return liability             1,207,828         1,207,828 
Taxes payable             73,696         73,696 
Accrued liabilities and other payables        8,736    455,649    (8,736)   455,649 
Operating lease liabilities        13,870    40,542         54,412 
Due to related parties             159,838         159,838 
Total current liabilities   -    22,606    2,806,035    (8,736)   2,819,905 
NONCURRENT LIABILITIES                         
Operating lease liabilities        34,275    49,717         83,992 
Total non-current liabilities   -    34,275    49,717    -    83,992 
                          
TOTAL LIABILITIES   -    56,881    2,855,752    (8,736)   2,903,897 
                          
COMMITMENTS AND CONTINGENCIES                         
                          
STOCKHOLDERS’ EQUITY                         
Common stock   50,000                   50,000 
Additional paid in capital   7,136,489                   7,136,489 
Share capital        7,186,489    7,186,489    (14,372,978)   - 
Accumulated deficit   (1,956,794)   (1,956,794)   (1,953,209)   3,910,003    (1,956,794)
Accumulated other comprehensive income   462,064    462,064    462,272    (924,336)   462,064 
TOTAL STOCKHOLDERS’ EQUITY   5,691,759    5,691,759    5,695,552    (11,387,311)   5,691,759 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $5,691,759   $5,748,640   $8,551,304   $(11,396,047)  $8,595,656 

 

16

 

 

Consolidated Statements of Operations Information

 

   For the Year Ended December 31, 2021 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
                     
Revenues, net                         
Commission  $-   $-   $21,564,036   $-   $21,564,036 
Claims Adjusting             881,287         881,287 
Total revenues, net   -    -    22,445,323    -    22,445,323 
Cost of revenues             18,142,617         18,142,617 
Gross profit   -    -    4,302,706    -    4,302,706 
                          
Operating expense                         
Selling             3,219,105         3,219,105 
General and administrative        26,768    2,281,537         2,308,305 
Total operating expenses   -    26,768    5,500,642    -    5,527,410 
                          
Loss from operations   -    (26,768)   (1,197,936)   -    (1,224,704)
                          
Non-operating income (expenses)                         
Interest income        62,037    2,114         64,151 
Other income             347,894         347,894 
Other expenses        (62,008)   (25,583)        (87,591)
Share of loss from subsidiaries   (1,123,608)             1,123,608    - 
Share of loss from VIE        (1,096,869)        1,096,869    - 
Non-operating income, net   (1,123,608)   (1,096,840)   324,425    2,220,477    324,454 
                          
Loss before income taxes   (1,123,608)   (1,123,608)   (873,511)   2,220,477    (900,250)
Income tax expense        -    223,358         223,358 
Net loss  $(1,123,608)  $(1,123,608)  $(1,096,869)  $2,220,477   $(1,123,608)

 

17

 

 

   For the Year Ended December 31, 2020 (Restated) 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
Revenues                         
Commission  $-   $-   $19,595,208   $-   $19,595,208 
Claim adjusting             2,288,192         2,288,192 
Total revenues, net   -    -    21,883,400    -    21,883,400 
Cost of revenues             18,391,090         18,391,090 
Gross profit   -    -    3,492,310    -    3,492,310 
                          
Operating expenses                         
Selling             2,446,244         2,446,244 
General and administrative        3,585    1,465,322         1,468,907 
Total operating expenses   -    3,585    3,911,566    -    3,915,151 
                          
(Loss) income from operations   -    (3,585)   (419,256)   -    (422,841)
                          
Non-operating income (expenses)                         
Interest income             69,481         69,481 
Other income             426,752         426,752 
Other expenses             (1,000)        (1,000)
Share of income from subsidiaries   45,718         -    (45,718)   - 
Share of income from VIE        49,303         (49,303)   - 
Non-operating income, net   45,718    49,303    495,233    (95,021)   495,233 
                          
Income before income tax   45,718    45,718    75,977    (95,021)   72,392 
Income tax expense             26,674         26,674 
Net income  $45,718   $45,718   $49,303   $(95,021)  $45,718 

 

18

 

 

Consolidated Cash Flows Information

 

   For the Year Ended December 31, 2021 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
                     
CASH FLOWS FROM OPERATING ACTIVITIES:                         
Net loss   (1,123,608)   (1,123,608)   (1,096,869)   2,220,477   $(1,123,608)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:                         
Depreciation and amortization             45,375         45,375 
Non-cash sales return allowance             1,248,064         1,248,064 
Non-cash cost of sales return allowance             (1,001,007)        (1,001,007)
Gain on disposal of fixed asset             (15,606)        (15,606)
Operating lease expense        16,122    52,117         68,239 
Deferred tax             223,358         223,358 
Share of loss from subsidiaries   1,123,608              (1,123,608)   - 
Share of loss from VIE        1,096,869         (1,096,869)   - 
Changes in assets and liabilities:                         
Accounts receivable             (4,096)        (4,096)
Other receivables        1,550    166,289         167,839 
Prepaid commission cost             1,508,655         1,508,655 
Prepaid expenses        2,813    103,823         106,636 
Accounts payable             (132,789)        (132,789)
Taxes payable             90,920         90,920 
Advance from customers             (47,905)        (47,905)
Accrued sales return liability             (1,838,425)        (1,838,425)
Operating lease liability        (20,191)   (60,994)        (81,185)
Accrued liabilities and other payables        1,443    (269,539)        (268,096)
Net cash used in operating activities   -    (25,002)   (1,028,629)   -    (1,053,631)
                          
CASH FLOWS FROM INVESTING ACTIVITIES:                         
Acquisition of fixed assets             (65,203)   -    (65,203)
Sale of fixed assets             35,298    -    35,298 
Net cash used in investing activities   -    -    (29,905)   -    (29,905)
                          
CASH FLOWS FROM FINANCING ACTIVITIES:                         
Due (from) to related parties        3,131,107    1,051,201    672    4,182,980 
Net cash provided by (used in) financing activities   -    3,131,107    1,051,201    672    4,182,980 
                          
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   -    6    75,599    (672)   74,933 
                          
NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   -    3,106,111    68,266    -    3,174,377 
                          
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR   -    -    1,573,664    -    1,573,664 
                          
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR  $-   $3,106,111   $1,641,930   $-   $4,748,041 

 

19

 

 

   For the Year Ended December 31, 2020 (Restated) 
   Parent   Non-VIE subsidiaries   The VIE   Elimination   Consolidated Total 
CASH FLOWS FROM OPERATING ACTIVITIES:                         
Net income  $45,718   $45,718   $49,303   $(95,021)  $45,718 
Adjustments to reconcile net income to net cash provided by operating activities:                         
Depreciation and amortization        -    31,717    -    31,717 
Non-cash sales return allowance        -    1,240,855    -    1,240,855 
Non-cash cost of sales return allowance        -    (1,029,910)   -    (1,029,910)
Deferred tax        -    26,673    -    26,673 
Share of income from subsidiaries   (45,718)             45,718    - 
Share of income from VIE        (49,303)        49,303    - 
Changes in assets / liabilities:             -    -    - 
Accounts receivable        -    6,985    -    6,985 
Other receivables        (1,448)   (163,258)   8,256    (156,450)
Prepaid commission cost        -    161,913    -    161,913 
Prepaid expenses        (3,223)   (76,855)   -    (80,078)
Accounts payable        -    533,963    -    533,963 
Taxes payable        -    10,716    -    10,716 
Advance from customers        -    44,948    -    44,948 
Accrued sales return liability        -    (197,438)   -    (197,438)
Accrued liabilities and other payables        8,256    253,157    (8,256)   253,157 
                          
Net cash provided by operating activities   -    -    892,769    -    892,769 
                          
CASH FLOWS FROM INVESTING ACTIVITIES:                         
Acquisition of fixed assets        -    (91,473)   -    (91,473)
Acquisition of intangible assets        -    (34,934)   -    (34,934)
Net cash used in investing activities   -    -    (126,407)   -    (126,407)
                          
CASH FLOWS FROM FINANCING ACTIVITIES:                         
Due (from) to related parties        -    (451,298)   -    (451,298)
Net cash used in financing activities   -    -    (451,298)   -    (451,298)
                          
EFFECT OF EXCHANGE RATE CHANGE ON CASH   -    -    96,129    -    96,129 
                          
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS   -    -    411,193    -    411,193 
                        - 
CASH & EQUIVALENTS & RESTRICTED CASH, BEGINNING OF YEAR   -    -    1,162,471    -    1,162,471 
                          
CASH & EQUIVALENTS & RESTRICTED CASH, END OF YEAR  $-   $-   $1,573,664   $-   $1,573,664 

 

20

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statements are likely to address our growth strategy, financial results and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

  future financial and operating results, including revenue, income, expenditures, cash balances and other financial items;
     
  our ability to execute our growth, and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  our ability to compete in an industry with low barriers to entry;
     
  the future growth of the Chinese insurance industry as a whole and the professional insurance intermediary sector in particular;
     
  our ability to continue to operate through the VIE structure;
     
  our capital requirements and our ability to raise any additional financing which we may require;
     
  negative impact on our business and financial results due to the COVID-19 pandemic;

 

21

 

 

  our ability to attract clients, further enhance our brand recognition; and
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in Chinese insurance industry; and
     
  other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

We describe material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance.

 

This prospectus contains statistical data that we obtained from various government and private publications. We have not independently verified the data in these reports. Statistical data in these publications also may include projections based on a number of assumptions. If any one or more of the assumptions underlying the statistical data turns out to be incorrect, actual results may differ from the projections based on these assumptions.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements except as required by applicable law.

 

RISK FACTORS

 

You should carefully consider the risks described below in conjunction with the other information and our consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. The trading price of our Class A Ordinary Shares could decline due to any of these risks, and as a result you may lose all or part of your investment. This prospectus also contains forward-looking statements relating to events subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements due to the material risks that we face described below.

 

Risks Related to Our Business and Our Industry

 

Our operating history and our experience in distributing insurance products, may not provide an adequate basis to judge our future prospects and results of operations.

 

The operating company in China, Heng Guang Insurance, was founded in 2004 under the former name Sichuan Sunshine Insurance Agency Co., Ltd., by, among five founding members, Mr. Jiulin Zhang, our current Chief Executive Officer and Chairman of the Board of Directors. Originally, our insurance agent business focused on the distribution of automobile and liability insurance products in Southwest China and has developed a recognizable regional brand in that sector. We attempted to expand our business into the life insurance sector some years ago but did not continue such initiative due to various reasons. In January 2018, we resumed our efforts to grow the distribution of insurance products outside the auto insurance sector, such as life and health insurance, property, and casualty insurance products. Due to our limited experience in distributing certain new insurance products in the life, health and property sectors, we cannot assure you that we will be able to maintain our growth in the long-standing automobile insurance sector or generate substantial economic growth in the life, health and property insurance sectors in the future.

 

Unusual weather patterns, extreme weather conditions and natural disasters could adversely affect the operations of our system, in-person insurance services and results of our business operations.

 

We are vulnerable to unusual weather patterns, extreme weather conditions and natural disasters. Catastrophes, such as wild fires, floods, typhoons, earthquakes, power outage, telecommunication failures, break-ins, wars, riots, terrorist attacks or similar events, may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of our data or malfunctions of our physical system, software or hardware as well as adversely affect our ability to provide insurance services.

 

Due to climate changes, extreme weather conditions occur more frequently than they do in the past decades. The in-person insurance services provided by our insurance agents are susceptible to severe weather patterns. Individual customers tend not to interact with our insurance agents in our branch offices under extreme weather conditions, such as heavy rains or snows, sand storms, and extremely high or low temperatures. As a result, the frequent occurrence of extreme weather conditions could impact our business operations and adversely affect the results of our operations.

 

In addition, extreme weather patterns and natural disasters may cause our insurance partners to increase the premiums of certain insurance products that cover the extreme weather and natural disaster risks. Therefore, we may encounter the risks that existing customers would opt for different insurance products of agreeable prices which we may not have available.

 

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We are subject to all the risks and uncertainties in an industry which is still in development in China.

 

We are, and expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent to a development-stage business and in a developing industry in China. As a result, we must establish many functions necessary to operate a business, including expanding our managerial and administrative structure, assessing and implementing our marketing program, implementing financial systems and controls. These risks and challenges are, among other things:

 

  we operate in the insurance industry that is heavily regulated by relevant governmental agencies in China, such as Sichuan Provincial Bureau of China Banking and Insurance Regulatory Commission;
     
  we may require additional capital to develop and expand our operations which may not be available to us when we require it;
     
  our marketing and growth strategy may not be successful;
     
  our business may be subject to significant fluctuations in operating results; and
     
  we may not be able to attract, retain and motivate qualified professionals.

 

We have been fined by the provincial insurance regulatory authorities in the past and may be fined for non-compliance with Chinese insurance laws and regulations in the future.

 

The insurance agent industry is heavily regulated in China. We have had over forty branch offices all over China for the past few years and from time to time a local branch office may be fined by the local or provincial authorities due to its failure to comply with the applicable laws and regulations. For instance, in 2016, the China Bank and Insurance Regulatory Commission (the “CBIRC”) fined Heng Guang Insurance approximately 120,000 RMB (approximately $20,000 USD) for lack of supervision and proper management procedures relating to the conducts of its former branch manager in Nanchong City, Sichuan Province. In January 2021, our Zhejiang branch office was fined by CBIRC in the amount of RMB 150,000 (approximately $23,000 USD) for its misuse of accounting records. The regulatory investigations and proceedings may divert the management’s attention from our daily operations and the regulatory penalties may adversely affect our reputation and employees’ morale and confidence in our operations. Although we make our best efforts to improve the internal control over and supervision of the business activities of our local branches, there is no guaranty that we will not be fined by the insurance authorities in the future. Any regulatory proceeding and penalty will likely negatively affect our business operations and financial performance.

 

Because the commission revenue we earn on the sale of insurance products is based on premiums and commissions and fee rates set by insurance companies, any decrease in these premiums, commission or fee rates may have an adverse effect on our results of operation.

 

We are an insurance agency and derive revenue primarily from commissions paid by the insurance companies whose policies our customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation and competitive factors that affect insurance companies. These factors, which are not within our control, include the capacity of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of alternative insurance products, such as government benefits and self-insurance plans, to consumers and the tax deductibility of commissions. In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance that each automobile owner in the mainland PRC is legally required to purchase, are tightly regulated by the CBIRC.

 

Because we do not determine, and cannot predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes may have on our operations. Since China’s entry into the WTO in December 2001, intense competition among insurance intermediary companies has led to a gradual decline in premium rate levels of some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our total sales volume, it also reduces the commissions we earned on each policy sold. Any decrease in premiums or commission and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures, dividend payments, loan repayments and other expenditures may be disrupted by unexpected decreases in revenue caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.

 

Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.

 

The insurance intermediary industry in China is highly competitive, and we expect competition to persist and intensify. We face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their products, from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal offices and automobile dealerships, and from other professional insurance intermediaries. We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial results may be negatively affected.

 

Quarterly and annual variations in our commission and fee revenue may have unexpected impacts on our results of operations.

 

Our income is subject to both quarterly and annual fluctuations as a result of the seasonality of our business, the timing of policy renewals and the net effect of new and lost business. These factors are not within our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future performance.

 

If our contracts with insurance companies are terminated or changed, our business and operating results could be adversely affected.

 

We primarily act as agents for our customers who seek insurance coverage from insurance companies. Our relationships with the insurance companies are governed by agreements between us and the insurance companies. Most of our contracts with insurance companies are entered into at a local level between their respective provincial, city and district branches and our local branches. Generally, each branch of these insurance companies has independent authority to enter into contracts with us, and the termination of a contract with one branch has no effect on our contracts with the other branches. See “Business—Customers—Collaboration with Insurance Companies.” These contracts establish, among other things, the scope of our authority, the pricing of the insurance products we distribute and our commission rates. These contracts typically have a term of one to three year and some of them can be terminated by the insurance companies with little advance notice. Moreover, before or upon expiration of a contract, the contracting insurance company may agree to renew it only with changes in its terms, including the amount of commissions we receive, which could result in a reduction in revenue from that contract.

 

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If our largest insurance company partners terminate or change the material terms of their contracts with us, it would be difficult for us to replace the lost commissions, which could adversely affect our business and operating results.

 

For the year ended December 31, 2020, our top five insurance company partners, after aggregating the business conducted between their local branches and our branch offices, accounted for 70.61% of our total revenue. In particular, Ping An Insurance accounted for 30.07% of our total revenue during the fiscal year of 2020. For the year ended December 31, 2021, our top five insurance company partners, after similar aggregation, accounted for 61.78% of our total revenue. During this period, Ping An Insurance accounted for 8.97% of our total revenue. The termination or any changes in the material terms of those contracts with our top insurance company partners could adversely affect our business and operating results.

 

The termination or any changes in the material terms of those contracts with our top insurance company partners could adversely affect our business and operating results.

 

Our business and prospects could be materially and adversely affected if we are not able to manage our growth successfully.

 

As of the date of this prospectus, our distribution network has expanded from our Sichuan Province headquarter to having 54 branches, and we plan to open more branches and further expand our mix of products and service offering. We anticipate significant growth in the future. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. To manage and support our continued growth, we must continue to improve our operational, administrative, financial and technological systems, procedures and controls, and expand, train and manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships with insurance companies, regulators and other third parties. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities, which in turn could have a material adverse effect on our results of operations.

 

We may not be successful in implementing important new strategic initiatives and technologies, which may have an adverse impact on our business and financial results.

 

There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations, which may result in an adverse impact on our business and financial results. Our online insurance sales platform “Heng Kuai Bao,” which became operational in 2019, is designed to enhance our insurance service efficiency, improve users’ experiences, improve our results of operations and drive long-term shareholder value. However, Heng Kuai Bao is currently available to our sales agents and management only while our technology development team and outside IT service provider are still developing Heng Kuai Bao’s functions for insurance purchasers. We obtained the Internet Insurance Agency Filing in June 2020 to conduct online insurance business through our website and the applications of Heng Kuai Bao and You Hui Bao, which is not being used. Our management team has limited experience with this online business strategy and cannot assure you that this online insurance business will bring sustainable growth and economic benefits to the Company and our shareholders.

 

Additionally, we have dipped our toes into life insurance business since 2018. We have been training our sales agents to be well versed in property and life insurance products since early 2020 and as of December 2020, we proudly announced that we had about 190 versatile agents with knowledge in both property and life insurance. However, we believe that it will take us substantial amount of time and capital to transform most of our property insurance agents into property and life insurance agents. As such, we may not be able to expand our life insurance agent business and realize the high profit margin associated therewith as we expected, and our business and financial results may be adversely impacted due to the expenses incurred by training of our salespersons.

 

If our investments in our online platforms are not successful, our business and results of operations may be materially and adversely affected.

 

We have devoted significant resources to developing our insurance website and applications Heng Kuai Bao and You Hui Bao, which allow our salespersons and management to streamline the insurance purchase process and are being developed to serve insurance purchasers in the future. In the next several years, we intend to continue to devote resources to maintaining and developing the technology and content of our website and applications. However, our efforts to develop our online platforms may not be successful or yield the benefits that we anticipate. In addition, our online expansion may depend on a number of factors, many of which are beyond our control, including but not limited to:

 

  the effectiveness of our marketing campaigns to build brand recognition among consumers and our ability to attract and retain customers to our brick mortar branches and online shopping site;
     
  the acceptance of third-party regarding e-commerce platforms as an effective channel to distribute insurance products;

 

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  public concerns over security of e-commerce transactions and confidentiality of information;
     
  increased competition from insurance companies and banks, which directly sell insurance products through their own websites, call centers, portal websites which provide insurance product information and links to insurance companies’ websites, and other professional insurance intermediary companies which may launch independent websites;
     
  further improvement in our information technology system; and
     
  further development and changes in applicable rules and regulations which may increase our operating costs and expenses, impede the execution of our business plan or change the competitive landscape.

 

On July 22, 2015, the China Insurance Regulatory Commission, or CIRC, promulgated the Interim Measures for the Supervision of Internet Insurance Business, or Interim Measures, which became effective on October 1, 2015, and set forth the qualifications and procedures for insurance intermediaries to operate internet insurance businesses in China. On December 7, 2020, the CBIRC issued the Measures for the Regulation of the Internet Insurance Business, which were implemented on February 1, 2021 and as a result superseded the Interim Measures for the Supervision of Internet Insurance Business. The Measures for The Supervision of Internet Insurance Business provide that the specialized insurance intermediaries shall comply with the relevant provisions of the CBIRC on the classification and supervision thereof. As advised by our mainland PRC counsel, we have obtained the necessary approvals and licenses for our online and offline insurance operations, except for the value added telecom business license which we have filed the application. Because online insurance emerged recently in China and is evolving rapidly, the CBIRC may promulgate and implement new rules and regulations to govern this sector from time to time. It can be costly to adjust our operations to comply with the constant changes and further development of regulations, to which our insurance business is subject. Any failure to obtain new permits or make required adjustments in response to future regulatory changes may have a material adverse impact on our growth, business prospects and results of operations.

 

Any significant failure in our information technology systems could have a material adverse effect on our business and profitability.

 

Our financial control, accounting, customer database, business website, proprietary insurance applications, customer services and other data processing systems, together with the communication systems of our local branches and our main offices in the City of Chengdu, function and operate based on our information technology network, which is critical to our insurance business. Cyber-attacks, software malfunction, computer virus attacks or unintended computer or internet errors may cause substantial delays or disruption to our daily operations and therefore may negatively affect our customer experiences, business reputation, and even long-term business relationships and business prospects if not resolved properly in a timely manner.

 

Our future success depends on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their services.

 

Our future success depends heavily upon the continuing services of the members of our senior management team and other key personnel, in particular Jiulin Zhang the CEO, the founding member and executive director of Heng Guang Cayman and Heng Guang Insurance. In addition, our dedicated and skilled professionals, such as sales, branding and technology development, play key roles in our operations. If one or more of our senior executives or other key personnel, including key training personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them with suitable candidates or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and key personnel is intense, the pool of qualified candidates is very small, and we may not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. We do not have insurance coverage for the loss of our senior management team or other key personnel’s services.

 

In addition, if any of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive trade information and key professionals and staff members. As of the date of this prospectus, we did not have any confidentiality or non-competition agreement or arrangement with any of our executive officers and key employees. See “Executive Compensation—Agreements with Named Executive Officers” for more information. If any of our executive officers or key employees joins a competitor of ours, we will face the risks of expending time and resources to find a suitable replacement and losing clients that may be taken away by the departing officer or key employee.

 

We do not currently have business insurance to cover our main assets and business. Any uninsured occurrence of business disruption, litigation or natural disaster could expose us to significant costs, which could have an adverse effect on our results of operations.

 

The insurance industry in China is still at the development stage, and insurance companies in China currently offer limited business-related insurance products. As such, we may not be able to insure against certain risks related to our assets or business operations despite of our intention to do so. The costs of insuring such risks and the difficulties associated with acquiring such insurance on commercially reasonable terms may make it impractical for us to have such insurance for our assets and operations. As of the date of this prospectus, we did not have any business liability or disruption insurance to cover our operations. As a result, any business disruption, litigation, natural disaster, or significant damages to our facilities could disrupt our business operations, and require us to incur substantial costs and divert significant resources to repair such uninsured damages. The uninsured damages could have an adverse effect on our results of operations and financial condition.

 

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Because our industry is heavily regulated, any material changes in the regulatory environment could change the competitive landscape of our industry or require us to change the way we do business. The administration, interpretation and enforcement of the laws and regulations currently applicable to us could change rapidly. If we fail to comply with applicable laws and regulations, we may be subject to civil and criminal penalties or lose our privilege to conduct insurance business, which could materially and adversely affect our business and results of operations.

 

We operate in a highly regulated industry. The laws and regulations applicable to us are constantly evolving and may change rapidly in the future. We could be required to spend significant time and resources on complying with material regulatory changes, which could disrupt the competitive landscape of our industry and cost us some or all of our competitive advantages or market shares. The attention of our management team could be diverted to these efforts to comply with an evolving regulatory or competitive environment. For example, the PRC Insurance Law and related regulations were materially amended in the following years: 2002, 2009, 2014 and 2015. The 2015 amendments involved a number of significant changes to the regulatory regime, including elimination of the requirement for any insurance agent, broker or claims adjusting practitioners to obtain a qualification certificate issued by the CIRC. The elimination of the certificate requirement may result in an unbridled increase in competition for our business and in misconduct by sales or service persons, including sales misrepresentation. In addition, the general increase in misconduct in the insurance agent industry could potentially harm the reputation of the industry and have an adverse impact on our business.

 

On March 13, 2018, CIRC and CBRC were combined to form the Chinese Banking and Insurance Regulatory Committee, or CBIRC. This new organization stepped into the shoes of both CIRC and CBRC as the regulator of both Chinese insurance industry and banking industry. There is uncertainty as to how the new authority, CBIRC will guide the insurance business in China. If we fail to adapt to any new rules and regulations promulgated by the CBIRC in the future, such failure could substantially and adversely affect our business and results of operations.

 

Additionally, errors created by our products or services may be determined or alleged to be in violation of the applicable laws and regulations. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability, adversely affect demand for our services, invalidate all or portions of some of our customer contracts; require us to change or terminate some portions of our business; tarnish our reputation; and therefore impose material and adverse effects on our business.

 

Although we have not had any material violations to date, we cannot assure you that our operations will always comply with the interpretation and enforcement of the laws and regulations implemented by the CBIRC. Any determination by a provincial or national government agency that our activities or those of our vendors or customers have violated any of these laws could subject us to substantial civil or criminal penalties, require us to change or terminate certain aspects of our operations or business, or disqualify us from providing services to insurance companies or other customers; and, thus could have an adverse effect on our business.

 

Sales agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.

 

Agent or employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:

 

  engaging in misrepresentation or fraudulent activities when marketing or selling insurance products to customers;
     
  hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses; or
     
  otherwise not complying with laws and regulations or our control policies or procedures.

 

For instance, in October 2015, one of Heng Guang Insurance’s branch office managers in Sichuan was found guilty and civilly liable for raising funds with the forged corporate seal of Heng Guang Insurance without any knowledge or involvement of Heng Guang Cayman. After this incident, our management adopted remediating procedures to supervise and monitor our employees and agents in the local branches. However, we cannot always deter agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We cannot assure you, therefore, that agent or employee misconduct will not lead to a material adverse effect on our business, reputation, results of operations or financial condition.

 

Risks Related to Our Corporate Structure

 

Because we conduct our agent business through Heng Guang Insurance, a VIE entity, if we fail to comply with applicable law, we could be subject to severe penalties and our business could be materially and adversely affected.

 

We operate our insurance agent business through Heng Guang Insurance, a VIE entity, pursuant to a series of contractual arrangements between WFOE and Heng Guang Insurance, as a result of which, under United States generally accepted accounting principles, the assets and liabilities of Heng Guang Insurance are treated as our assets and liabilities and the results of operations of Heng Guang Insurance are treated in all aspects as if they were the results of our operations. There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between WFOE and Heng Guang Insurance.

 

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If Heng Guang Insurance and WFOE or their ownership structure or the contractual arrangements are determined to be in violation of any existing or future PRC laws, rules or regulations, or Heng Guang Insurance fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

  revoking or suspending the business and operating licenses of Heng Guang Insurance;
     
  discontinuing or restricting the operations of Heng Guang Insurance;
     
  imposing conditions or requirements with which we or Heng Guang Insurance may not be able to comply;
     
  requiring us, our WFOE, or Heng Guang Insurance to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our Ordinary Shares;
     
  restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and
     
  imposing fines to WFOE or Heng Guang Insurance.

 

We cannot assure you that the PRC courts or regulatory authorities may not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable, and Heng Guang Insurance will not be treated as a VIE entity and we will not be entitled to treat Heng Guang Insurance’s assets, liabilities and results of operations as our assets, liabilities and results of operations, which could effectively eliminate the assets, liabilities, revenue and net income of Heng Guang Insurance from our balance sheet and statement of income. This would most likely require us to cease conducting our business and would result in the delisting of our Ordinary Shares from the stock market where the Ordinary Shares will be traded and a significant impairment in the market value of our Ordinary Shares.

 

We rely on contractual arrangements with Heng Guang Insurance, a VIE entity, and its shareholders for the China operations, which may not be as effective in providing operational control as direct ownership.

 

We have relied and expect to continue to rely on contractual arrangements with Heng Guang Insurance and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Business—Corporate History and Structure.These contractual arrangements may not be as effective as the control provided by having a direct ownership in Heng Guang Insurance. We have no direct or indirect equity interests in Heng Guang Insurance or any of its branches.

 

If we had direct ownership of Heng Guang Insurance, we could effect changes, subject to any applicable fiduciary obligations, at the management level. But under the current contractual arrangements, as a legal matter, if Heng Guang Insurance and its officers fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such VIE arrangements and rely on legal remedies under the PRC laws, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if Heng Guang Insurance refused to transfer its net profits to our WFOE, a wholly-owned subsidiary of Heng Guang Cayman, pursuant to the VIE agreements, or if Heng Guang Insurance were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to fulfill their contractual obligations.

 

Investors in this offering are not buying shares of Heng Guang Insurance, the operating company, but instead are buying class A ordinary shares of Heng Guang Cayman, a shell company that maintains VIE Agreements with Heng Guang Insurance.

 

Investors in this offering are not buying shares of Heng Guang Insurance, the operating company, but instead are buying class A ordinary shares of Heng Guang Cayman, a shell company that maintains a series of service and management agreements, or VIE Agreements, with the associated operating company, Heng Guang Insurance. Should any or part of the VIE agreements become invalid, illegal or unenforceable under the laws, regulations or policies of PRC, the market price of our class A ordinary shares shall be likely to be adversely affected and the value of such shall decline greatly or even become completely worthless. As a result, you may lose part or all of your investment in our class A ordinary shares.

 

If any of the affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

 

We currently conduct our operations in China through the VIE contractual arrangements. As part of these arrangements, substantially all of our assets that are significant to the operation of our business are held by Heng Guang Insurance. If Heng Guang Insurance becomes bankrupt and all or part of its assets become subject to the rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if any of the affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owners or third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business operations, financial performance and the market prices of our ordinary shares.

 

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Our Shareholders are subject to greater uncertainties because we operate through a VIE structure due to restrictions on the direct ownership of the Chinese operating entities imposed by the CBIRC even though the insurance agency industry falls within the permitted category in accordance with the Catalogue and the Negative List.

 

Investment in the mainland PRC by foreign investors and foreign-invested enterprises must comply with the Catalogue of Industries for Encouraging Foreign Investment (2020 Version), which was last amended and issued by MOFCOM and NDRC on December 27, 2020 and became effective since January 27, 2021, and the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), or the Negative List, which came into effect on January 1, 2022. The Catalogue and the Negative List contain specific provisions guiding market access for foreign capital and stipulate in detail the industry sectors grouped under the categories of encouraged, restricted and prohibited industries. The VIE structure has been adopted by many PRC-based companies, to conduct business in the industries that are currently subject to foreign investment restrictions in mainland China, or are on the Negative List, due to the applicable PRC laws under which direct foreign ownership of these companies are prohibited. Any industry not listed in the Negative List is a permitted industry unless otherwise prohibited or restricted by other PRC laws or regulations. Currently, although the insurance agent industry falls within the permitted category in accordance with the Catalogue and the Negative List, the Notice on Allowing Foreign Investors to Operate Insurance Agency Business in China (the “Foreign Insurance Agency Notice”), which became effective on June 19, 2018, limited the foreign shareholders of the insurance agencies to (i) overseas insurance professional agencies that have been operating insurance agency business for more than 3 years, and (ii) foreign insurance companies that have been in business for more than three years in China.

 

Due to the stringent and harsh approval conditions of China Securities Regulatory Commission, if a Chinese operating entity wants to list its securities directly on a capital market overseas, many Chinese companies use the VIE structure to avoid the constraints of the China Securities Regulatory Commission. Because Heng Guang Cayman lacks the qualification set forth in the Foreign Insurance Agency Notice, we have opted for a VIE structure instead of direct ownership. As a result, our corporate structure and contractual arrangements may be subject to greater scrutiny by various PRC government authorities, and therefore the PRC government scrutiny may subject our shareholders to greater uncertainty. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP

 

We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our mainland PRC legal counsel, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our WFOE, the VIE and its shareholders, is valid, binding and enforceable in accordance with its terms under the Chinese laws and regulations. However, as there are substantial uncertainty regarding the interpretation and application of PRC laws and regulations, there can be no assurance that the PRC government authorities, such as the Ministry of Commerce, or the MOFCOM, or other authorities would agree that our corporate structure or any of the above contractual arrangements comply with PRC regulatory requirements, existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

 

Contractual arrangements in relation to the VIE may be subject to scrutiny by the mainland PRC tax authorities and they may determine that we or the VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the mainland PRC tax authorities within ten years from the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the mainland PRC tax authorities determine that the contractual arrangements were not entered into at arm’s length in such as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and transfer pricing adjustments of the income of our subsidiaries and the affiliates. A transfer pricing adjustment could, among other things, result in a decrease of expense deductions recorded by the VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our subsidiary’s tax expenses. In addition, mainland PRC tax authorities may impose late payment fees and other penalties on the VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if the VIE’s tax liabilities increase or if Heng Guang Insurance is required to pay late payment fees and other penalties.

 

Any failure by the consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

Heng Guang Cayman, through WFOE in the PRC, has entered into a series of contractual arrangements with the consolidated VIE and its shareholders. For a description of these contractual arrangements, see “Business—Corporate History and Structure.” If the consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance, injunctive relief, and damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of the consolidated VIE refused to transfer its equity interests in the consolidated VIE to the WFOE or its designee when it exercises the purchase option pursuant to these contractual arrangements, then WFOE might have to take legal actions to compel the VIE and its shareholders to perform their contractual obligations.

 

All the VIE contractual arrangements are governed by PRC laws and provide for the resolution of disputes through litigation in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with mainland PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the U.S. As a result, uncertainties in the mainland PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and formal guidelines as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such litigation should legal action be taken. See “Risk FactorsRisks Related to Doing Business in China – Uncertainties with respect to the mainland PRC legal system could adversely affect us.”

 

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The shareholders of the VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The shareholders of the VIE may have actual or potential conflicts of interest with us. The shareholders of the VIE may refuse to sign or breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements the WFOE has with the VIE, which would have a material and adverse effect on Heng Guang Cayman’s ability to influence Heng Guang Insurance. For example, the shareholders may cause WFOE’s agreements with the VIE to be performed in a manner adverse to Heng Guang Cayman by, among other things, failing to remit payments due under the contractual arrangements to the WFOE on a timely basis. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP. We cannot assure you that if and when conflicts of interest arise any or all of these shareholders of the VIE will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between the shareholders of the VIE and our company. If we cannot resolve any conflict of interest or dispute between us and the shareholders of the VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of the disputes.

 

PRC regulations of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our mainland PRC subsidiary and the VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Any funds we transfer to WFOE or the VIE, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in mainland China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, the combined amount of offshore capital contributions and loans cannot exceed the FIE’s approved total investment amount. Any capital contributions to our mainland PRC subsidiary must be filed with MOFCOM or its local counterparts, and registered with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (a) any loan provided by us to WFOE, which is a FIE, cannot exceed the difference between its total investment amount and registered capital, and must be registered with SAFE or its local counterparts, and (b) any loan provided by us to the VIE, over a certain threshold, must be approved by the relevant government authorities and must be registered with SAFE or its local counterparts. Given that the registered capital and total investment amount of WFOE are currently the same, if we seek to make a capital contribution to WFOE we must first apply to increase both its registered capital and total investment amount, while if we seek to provide a loan to WFOE, we must first increase its total investment amount. Although we currently do not have any immediate plans to utilize the proceeds from this offering to make capital contribution to WFOE or provide any loan to WFOE or to the VIE, if we seek to do so in the future, we may not be able to obtain the required government approvals or complete the required registrations on a timely basis, if at all. If we fail to receive such approvals or complete such registrations, our ability to use the proceeds of this offering and to capitalize our mainland PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allowed FIEs to settle their foreign exchange capital at their discretion, but continued to prohibit FIEs from using funds denominated in RMB converted from any foreign currency for expenditures beyond their business scopes, providing entrusted loans or repaying loans between non-financial enterprises. Violations of SAFE Circular 19 could result in serious monetary or other penalties. SAFE Circular 19 and relevant foreign exchange regulatory rules may significantly limit our ability to use RMB denominated funds converted from the net proceeds of this offering to fund Heng Guang Insurance’s operations in mainland China, to invest in or acquire any other mainland PRC companies through our mainland PRC subsidiaries or the affiliates or to establish new affiliates in the mainland PRC, which may adversely affect our business, financial condition and results of operations.

 

On June 9, 2016, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or “SAFE Circular 16,” effective on June 9, 2016, which reiterates some rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-affiliated enterprises. On October 23, 2019, the SAFE issued the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, which, among other things, expanded the use of foreign exchange capital to domestic equity investment area. Foreign invested enterprises that are not classified as investment companies are allowed to make domestic equity investments by using their capital, provided that they are not in violation of the prevailing special administrative measures for access to foreign investments (negative list), and provided that the relevant domestic investment projects are authentic and in compliance with the relevant regulations.

 

If the VIE in PRC requires financial support from Heng Guang Cayman or its subsidiary in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to fund the VIE’s operations will be subject to statutory limits and restrictions, including those described above.

 

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As a “controlled company” under the rules of the NASDAQ Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.

 

Our directors and officers beneficially own a majority of the voting power of our outstanding Ordinary Shares. Under the NASDAQ Listing Rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the NASDAQ Listing Rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company” exemption under the NASDAQ Listing Rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Capital Market corporate governance requirements. Our status as a controlled company could afford less protection to our public shareholders than a non-controlled company due to the possibility of us opting for the “controlled company” exemption.

 

We have identified several significant deficiencies in our internal control over financial reporting. If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

 

We will be subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. These requirements will first apply to our annual report on Form 20-F for the fiscal year ending on December 31, 2021. In addition, an independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting when Heng Guang Cayman no longer qualifies as an emerging company. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

Prior to this offering, we have been a private company with limited accounting personnel with U.S. GAAP experience and other resources with which to adequately address our internal control over our financial closing and reporting process and other procedures. During the course of preparing our consolidated financial statements as of and for the years ended December 31, 2021 and 2020 in connection with this offering, we identified a number of control deficiencies, which included significant deficiencies, in our internal control over financial reporting. Many of the deficiencies noted below were communicated to us from our independent registered public accounting firm as observations which stemmed from their audit. However, as noted in their report, their audit included consideration of internal control over financial reporting as a basis for designing the audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of our internal control over financial reporting. The significant deficiencies identified include: (1) a lack of formal internal controls over financial closing and reporting processes; (2) a lack of a formal risk assessment process; (3) a lack of accounting personnel with knowledge of U.S. GAAP and SEC financial reporting requirements; and (4) a lack of regular preparation of U.S. GAAP consolidated management accounts. It is important to note that we did not undertake a comprehensive assessment of our internal controls for purposes of identifying and reporting control deficiencies as we will be required to do so after we are a public company. Had we undertaken such an assessment, additional significant deficiencies and/or material weaknesses may have been identified.

 

We plan to take a number of measures to remediate the control deficiencies identified, including: (1) preparing a comprehensive accounting policies and procedures manual that covers U.S. GAAP and ensuring that accounting personnel are familiar with and follow the manual; (2) establishing a risk assessment process that complies with the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission, a private sector organization dedicated to improving the quality of financial reporting; (3) hiring additional accounting personnel with external reporting experience, including knowledge of the SEC reporting requirements and U.S. GAAP, and investor relations personnel; and developing formal procedures to prepare U.S. GAAP consolidated financial information on a monthly basis.

 

We plan to remediate these significant deficiencies in time to meet the deadline for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If, however, we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our Ordinary Shares. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

 

Risks Related to Doing Business in China

 

Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations.

 

Substantially all of our assets and operations are currently located in China. Accordingly, our business, financial condition, results of operations, and prospects may be influenced, to a significant degree, by political, economic, and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, including the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industries by imposing regulatory guidance or policies. The Chinese government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policies, and providing preferential treatment to particular industries or companies.

 

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While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government, or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, reduce demand for our services, and weaken our competitive position. The Chinese government has implemented various measures to encourage economic growth and guided the allocation of various types of resources. Some of these measures may benefit the overall Chinese economy, but others may have a negative effect on our operations. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In the past, the Chinese government has implemented certain measures to control the pace of economic growth, such as interest rate adjustments. These measures may decrease the auto-mobile based transportation activities in China, which may adversely affect the overall auto insurance demands and our business.

 

Furthermore, Heng Guang Cayman and the China based operating entities, as well as our investors, face uncertainty about future actions by the Chinese government that could significantly affect our financial performance and operations in China, including the enforceability of the VIE contractual arrangements. If future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing VIE contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. If the PRC government determines that any part of the VIE structure and VIE Agreements do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, our ordinary shares may decline in value or become worthless if we are unable to assert our influence pursuant to the VIE Agreements over the assets of Heng Guang Insurance that conducts all or substantially all of the operations. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP.

 

In reliance on the advice of Jingtian & Gongcheng, as of the date of this prospectus, we believe that we are not required to obtain any additional material permissions or approvals for our current business operations in mainland China and nor do we need any additional permission or approval to offer, sell or issue our Class A Ordinary Shares being registered herein to non-Chinese investors, but there is no guarantee that the Chinese authorities will not change their policy in future.

 

We face risks related to epidemics, such as the COVID-19 outbreak originated in Wuhan, China at the end of 2019, and other outbreaks, which have disrupted and could in the future disrupt our operations and adversely affect our business, financial condition and results of operations.

 

Our business had been materially and adversely affected by the COVID-19 outbreak originated in Wuhan, China at the end of 2019. In 2020, the PRC and local governments implemented a series of temporary restrictions during the outbreak of COVID-19, including temporary travel bans among cities, towns and even local municipalities. Such travel restrictions substantially and directly hindered our in-person sales activities and limited our daily internal operations. Because our life insurance sales heavily relied on in-person services by our agents, COVID-19 affected our income generated by the life insurance sector the most. In addition, the negative psychological impacts of COVID-19 brought hesitation and concerns of new and existing customers about going to our branch offices to explore our insurance products and services. Furthermore, we believed that the job losses or decline of job security due to COVID-19 may discourage certain people from purchasing automobiles, which partially contributed to our decline in sales of auto insurance. As a result, our net loss was $1,123,608 for the year ended December 31, 2021, as compared to net income of $45,718 for the year ended December 31, 2020, reflecting a decline of $1,169,326, or 2,557.7%.

 

If COVID-19’s new variants, such as SARS-CoV2, become a larger threat to people in the PRC or other outbreaks affect the PRC, our business operations may be severely disrupted. In response to the COVID-19 outbreak, we have established and been operating through Heng Kuai Bao, the online platform, where customers and insurance agents can interact remotely and we communicate internally on a regular basis. Furthermore, we have developed a few new ancillary services catering corporate clients, including without limitation the trucking services, commercial passenger services, and online taxi booking. However, in general, our business operations depend on China’s overall economy and demand for insurance products, including auto insurance products, which could be negatively affected by reduced transportation during the era of an epidemic. A prolonged epidemic of COVID-19 and its variants would likely have a material adverse effect on our business operations and financial performance despite of counter-COVID actions and efforts.

 

As of the date of this prospectus, we think the COVID-19 outbreak is generally considered under control in China and we have been able to resume our ordinary level of business activities since May 2020. In light of the current circumstances and based on information currently available, we believe that the negative impacts of COVID-19 on our business temporary and mainly contained in the fiscal year of 2020. However, it is almost impossible to predict whether and when we will experience another epidemic or the damages and impacts caused thereby. Should we encounter another epidemic in the PRC, such outbreak may severely disrupt or completely shut down our business operations and therefore our share may worth less or become utterly worthless.

 

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

 

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which became effective on January 1, 2020. The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves space for interpretation, future laws, administrative regulations or provisions of the State Council to include contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our contractual arrangements with the VIE will not be deemed as a foreign investment under the Foreign Investment Law in the future. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP.

 

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment on a “negative list”. The Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), came into effect on January 1, 2022, further shortened the “negative list” compared to the 2020 edition.

 

The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our contractual arrangements with Heng Guang Insurance are deemed as foreign investment in the future, and any business of Heng Guang Insurance is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements may be deemed invalid and illegal, and we may be required to unwind such contractual arrangements and restructure our business operations, any of which may have material adverse effects on our business operations. Any references to control or benefits that accrue to Heng Guang Cayman because of the VIE Agreements are limited to, and subject to conditions we have satisfied for consolidation of the VIE under U.S. GAAP.

 

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with existing VIE contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

 

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Changes in the policies of the PRC government could have a significant impact upon our ability to operate profitably in the PRC.

 

Currently, we conduct all of our operations and all of our revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. Policies of the PRC government can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation.

 

To the extent cash or assets of our business, of the VIE,