CSHEF China Enterprises Ltd (CE)

A. SELECTED FINANCIAL DATA

The following table represents the selected consolidated financial information of the Company as of and for the years ended December 31, 2012, 2013, 2014, 2015 and 2016. The Consolidated Statements of Operations Data for each of the three years in the period ended December 31, 2016 and the Consolidated Balance Sheets Data as of December 31, 2015 and 2016 have been derived from the audited consolidated financial statements, or the “Consolidated Financial Statements”, included in Item 17 “Financial Statements” of this Annual Report. The Consolidated Statements of Operations Data for the years ended December 31, 2012 and 2013 and the Consolidated Balance Sheets Data as of December 31, 2012, 2013 and 2014, as set forth below, have been derived from audited consolidated financial statements not included in this Annual Report. The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States, or U.S. GAAP. The selected financial information should be read in conjunction with, and is qualified in its entirety by reference to, the respective consolidated financial statements and their accompanying notes.

Note:

Exchange Rate Information

The Consolidated Financial Statements are published and denominated in Renminbi. Where made for the convenience of the reader, conversion of amounts from Renminbi to U.S. Dollars has been made in this document at US$1.00 to Rmb6.9430, the noon buying rate certified by the Federal Reserve Bank of New York on December 31, 2016. For the purpose of this Annual Report, the latest practicable date with respect to share and certain exchange rate information is April 28, 2017. As of April 28, 2017, the noon buying rate certified by the Federal Reserve Bank of New York was US$1.00 to Rmb6.8900. No representation is made that the Renminbi amounts could have been, or could be, converted into U.S. Dollars at that or at any other rate.

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The following table sets forth the average unified exchange rates for each of the years ended December 31, 2012, 2013, 2014, 2015 and 2016:

The following table sets forth the high and low exchange rates for each month during the previous six months:

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

C. REASONS FOR THE OFFER AND PROCEEDS

Not applicable.

D. RISK FACTORS

Investing in our shares involves various risks, including the risks described below. You should carefully consider the following risks and the other information contained in this Annual Report before investing in our shares. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations, financial condition and our liquidity.

Risks Related to Our Business

AS A RESULT OF CHANGES IN THE COMPANY’S ASSETS AND SOURCES OF INCOME, THE COMPANY MAY BE AN INVESTMENT COMPANY FOR PURPOSES OF THE UNITED STATES INVESTMENT COMPANY ACT OF 1940

While the Company believes that in the past, through its subsidiaries and affiliates, it has actively engaged in operating businesses and did not meet the definition of an investment company for purposes of the United States Investment Company Act of 1940, or the 1940 Act, depending on the composition and valuation of the Company’s assets and the sources of the Company’s income from time to time, including after the consummation of the transactions during 2015 described in Item 4.A., History and Development of the Company, the Company may fall within the technical definition of the term “investment company” for purposes of the 1940 Act. The Company is not registered, nor is it eligible to register under the 1940 Act. As a result, if the Company is deemed to be an investment company under the 1940 Act, the Company’s operations and results may be negatively impacted. For example, among other possible effects and so long as the Company is an investment company, it would neither be able to raise capital through the offer and sale of its securities in the United States nor to conduct business in the United States. The Company may be unable to continue operating as it currently does and might need to acquire or sell assets that it would not otherwise acquire or sell in order to avoid continuing to be deemed an “investment company” as defined under the 1940 Act.

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THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT ITS BUSINESS STRATEGY, IN WHICH CASE ITS BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION WOULD SUFFER

In November 2011, the Company disposed of all of its interest in Hangzhou Zhongce and it ceased to be an equity method affiliate of the Company. In addition, all of the subsidiaries of the Company were inactive during fiscal years 2015 and 2016. Despite the Company’s efforts to identify new investments, it has had limited success in doing so and, if it does identify new investments, it may not be able to consummate their acquisition. Even if the Company successfully identifies and consummates the acquisition of new investments, the acquisition of new businesses and business lines carries substantial risk and uncertainties. Depending on the specific acquisition, there may be risks relating to the acquired business itself, risks relating to the industry in which the business operates and risks relating to the Company itself.

THE COMPANY MAY NOT BE ABLE TO FINANCE ACQUISITIONS, STRATEGIC INVESTMENTS OR OTHER EXPANSIONS OR MAY INCUR FINANCIAL OBLIGATIONS OR LIABILITIES IN CONNECTION WITH ANY ACQUISITION OR EXPANSION

Although as of December 31, 2016, the Company believes it had a strong cash position, the Company may experience difficulty in funding acquisitions, investments or expansion. The Company may fund any such activities through bank loans or other debt financing and could incur an increase in debt or other liabilities in connection with any acquisitions, strategic investments or other expansions.

FUTURE ACQUISITIONS OR STRATEGIC INVESTMENTS MAY NOT BE SUCCESSFUL AND MAY HARM OUR OPERATING RESULTS

Selective acquisitions or strategic investments form a large part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire or invest in other companies, ventures or businesses. Future acquisitions and the subsequent integration of new companies into ours would require significant attention from our management. Potential problems encountered by each organization during mergers and acquisitions would be unique, posing additional risks to the company. Future acquisitions or investments would expose us to potential risks, including risks associated with the assimilation of new operations, and could have a material adverse effect on our business and financial results because of possible charges for purchased technology, restructuring or impairment charges related to goodwill or amortization expenses associated with intangible assets; potential increases in our expenses and working capital requirements and the incurrence of debt and contingent liabilities; diversion or our capital and management’s attention to other business concerns; risks of entering markets or geographic areas in which we have limited prior experience; or potential loss of key employees of acquired organizations or inability to hire key employees necessary for expansion.

DIVERSIFICATION MAY RESULT IN LOWERED RESPONSIVENESS TO CYCLICAL CHANGES OF DIFFERENT BUSINESSES

Any diversification of the Company’s businesses, including through any investments in other businesses, will result in assets, resources and management being committed or allocated to businesses in different fields. As a result, the Company’s flexibility in responding to seasonal changes or periodic fluctuations in the business cycle in a particular business operation may be limited.

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THE COMPANY BELIEVES IT WAS CLASSIFIED AS A “PASSIVE FOREIGN INVESTMENT COMPANY” WHICH COULD HAVE A NEGATIVE IMPACT ON U.S. HOLDERS

U.S. investors in the Company’s common stock should be aware that the Company believes it was classified as a passive foreign investment company, or PFIC, during the tax year ended December 31, 2016, and based on current business plans and financial expectations, the Company believes that it may be a PFIC in subsequent tax years. If the Company is a PFIC for any year during a U.S. shareholder’s holding period, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of the Company’s common stock, or any so-called “excess distribution” received on such common stock, as ordinary income, and to pay an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective “qualified electing fund” election (“QEF Election”) with respect to such common stock. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. shareholders should be aware that the Company did not satisfy record keeping requirements that apply to a qualified electing fund for its tax year ended December 31, 2016 and there can be no assurance that the Company will in the future satisfy record keeping requirements that apply to a qualified electing fund, or that the Company will supply U.S. shareholders with information that such U.S. shareholders are required to report under the QEF Election rules, in the event that the Company is a PFIC and a U.S. shareholder wishes to make a QEF Election. Thus, U.S. shareholders may not be able to make a QEF Election with respect to their Company common stock. This paragraph is qualified in its entirety by the discussion below under the heading “Taxation — Certain Material U.S. Federal Income Tax Consequences.” Each U.S. shareholder should consult its own tax advisor regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition of the Company’s common stock.

CHANGES IN ACCOUNTING STANDARDS AND TAXATION REQUIREMENTS COULD AFFECT OUR FINANCIAL RESULTS

New accounting standards or pronouncements that may become applicable to us from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results for the affected periods. We also expect to become subject to income tax in jurisdictions in which we expect to commence generating revenues. Increases in income tax rates could reduce our after-tax income from affected jurisdictions, while increases in indirect taxes could affect our financial results.

FAILURE OF INFORMATION TECHNOLOGY COULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS

Growing standardization, more reliance on global systems, information technology services and increased regulations lead to a risk that our information technology systems may fail. This could affect the Company’s operational performance and financial position.

OUR OPERATIONS, ASSETS AND STAFF CAN BE EXPOSED TO RISKS RELATED TO EVENTS OF AN EXCEPTIONAL NATURE

The Company, including its assets and staff, could be exposed to risks related to events of an exceptional nature such as, but not limited to, severe weather, natural disasters, terrorist attacks, political unrest and accidents. Such events could have a significant effect on our financial condition, results of operations and cash flows.

FAILURE TO ESTABLISH AND MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING COULD HAVE A MATERIAL ADVERSE EFFECT ON THE ACCURACY IN REPORTING OUR FINANCIAL RESULTS OR PREVENTING FRAUD

Undetected internal control weaknesses or controls that function ineffectively represent a risk of loss or financial misstatement. Internal control over financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company fails to maintain the adequacy of its internal controls as it has at times in the past, including any failure to implement required new or improved controls, or if it experiences difficulties in the implementation of internal controls, the Company’s business and operating results could be harmed, and it could fail to meet its reporting obligations. As of December 31, 2014, for example, management concluded that the Company’s internal control over financial reporting was ineffective and identified a material weakness, similar to prior years, concerning the Company’s internal accounting staff’s lack of understanding of complex accounting issues related to U.S. generally accepted accounting principles, including accounting for income taxes. In response, the Company engaged external consultants to perform a number of tasks to prepare specific accounting analysis.

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Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important in helping prevent financial fraud. If we are not able to provide reliable financial reports on a timely basis or prevent financial fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

Because the Company is a non-accelerated filer, the Company is also not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As a result, investors may have less confidence in the assessment of the Company’s internal controls over financial reporting performed by management, and our stock may be less attractive.

Risks Related to Doing Business in China

THE COMPANY’S BUSINESS FOCUS ON THE GREATER CHINA REGION SUBJECTS THE COMPANY AND ITS BUSINESS TO THE POLITICAL, ECONOMIC AND OTHER DEVELOPMENTS IN THE REGION

As a result of the Company’s traditional business focus on the Greater China Region, the Company’s business and its financial and operating results may be affected by significant political, economic, social and cultural developments in the region. A substantial portion of the Company’s investment opportunities, major businesses which are located in China, are dependent in large part on the performance of the Chinese economy and Chinese government policy. As a result, the future financial condition and results of operations of the Company could be adversely affected by slowdowns in the Chinese economy, Chinese macroeconomic policies that de-emphasize the development of industries that utilize products or services of the Company or other governmental policies, including changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports or sources of supplies; or the expropriation or nationalization of private enterprises. Any measures or actions taken by the Chinese government to control industries that utilize products or services of the Company could restrict their business operations and adversely affect the financial positions of the Company.

Although the Company believes that the economic reforms and macroeconomic policies and measures adopted by the Chinese government will continue to have a positive effect on economic development in China and that the Company will continue to benefit from these policies and measures, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China’s political, economic and social life.

In addition, the Company’s financial results are significantly dependent on the economy in the region. The economy of the Greater China Region differs significantly from the economies of the United States and Western Europe in such respects as structure, level of development, growth rate, capital reinvestment, resource allocation, self-sufficiency, rate of inflation and balance of payments position, among others. Furthermore, the recent global economic downturn has had a significant impact on the region’s economic growth as it is primarily an export-oriented economy. Future adverse economic factors or changes in the policies of the Chinese government could have a material adverse effect on the overall economic growth of China. These developments could adversely affect the financial condition, results of operations and business of the Company by reducing the demand for the products and services of the Company.

As a member of the World Trade Organization, China’s economic activity is expected to become more and more export driven and China’s internal market is expected to see more competition through imports. The expected change in economic activity in China and the Greater China Region and a greater interdependence of the Chinese economy on the general world economy as a result of such changes could also impact the Company’s financial results.

RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR RESOURCES EFFECTIVELY

Any future restrictions on currency exchanges may limit our ability to use resources generated in Renminbi to fund our business activities outside China or other payments in Hong Kong dollars or other foreign currencies. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign invested enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. In addition, remittance of foreign currencies abroad and conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.

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FLUCTUATIONS IN THE VALUE OF THE RENMINBI COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS

Our reporting currency is the Renminbi as a substantial portion of our investments are denominated in Renminbi. Our remaining assets and liabilities and all of our operating expenses are denominated in Hong Kong dollars. As a result, we may be exposed to foreign exchange risk, and our results of operations may be negatively impacted by fluctuations in the exchange rate of Renminbi against other currencies. As our major assets and liabilities comprise a mixture of items that are denominated in Renminbi and Hong Kong dollars, our business and operating results may be materially affected in the event of a severe increase or decrease in the value of the Renminbi against other currencies.

The value of the Renminbi is subject to changes in China’s governmental policies and to international economic and political developments. Since January 1, 1994, the PRC government has used a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, publishes a daily base exchange rate with reference primarily to the supply and demand of Renminbi against U.S. dollars and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for Renminbi within a specified band around the PBOC’s daily exchange rate. On August 11, 2015, the PBOC cut the Renminbi exchange’s reference rate by a record of 1.9%, sparking the sharpest fall in the currency since the U.S. dollars peg ended a decade ago, in order to proceed further with reform of the Renminbi exchange rate regime. This cut could result in a further and more significant floatation in the RMB’s value against the U.S. Dollar. On January 6, 2017, the PBOC raised the exchange rate for the Renminbi against the U.S. dollar by 0.92%, the biggest one-day increase since July 2005, and comes as the Renminbi had flirted lately with the 7.0 to the U.S. dollar mark, a threshold not crossed in more than 8 years.

While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant fluctuation of the Renminbi against the U.S. dollar and other currencies.

NATURAL DISASTERS IN THE GREATER CHINA REGION COULD CAUSE SIGNIFICANT DAMAGE TO THE COMPANY’S BUSINESS AND FINANCIAL RESULTS

The Company’s investment opportunities are primarily located in the PRC. During the past several years, the PRC has experienced natural disasters, including floods, fires and earthquakes. A disaster could cause significant damage to the facilities of potential investees, which may not be adequately covered by insurance proceeds and could materially and adversely impact the business of the Company. The disaster relief and assistance in the PRC is not well developed and there can be no assurance that adequate government assistance would be available in the absence of sufficient insurance coverage.

OUR RESULTS COULD BE HARMED IF WE HAVE TO COMPLY WITH NEW ENVIRONMENTAL REGULATIONS

The operations of the Company could create environmentally sensitive waste depending on the nature of the operations of potential investees. The general issue of the disposal of hazardous waste has received increasing attention from Chinese national and local governments and foreign governments and agencies and has been subject to increasing regulation. Currently, relevant Chinese environmental protection laws and regulations impose fines on the discharge of waste materials and empower certain environmental authorities to close any facility that causes serious environmental problems. Although it has not been alleged by Chinese government officials that the Company have violated any current environmental regulations, there is no assurance that the Chinese government will not amend its current environmental protection laws and regulations. Our financial results could be materially and adversely affected if the Company was to increase expenditures to comply with environmental regulations affecting the operations of potential investees.

LEGAL SYSTEM DIFFERENCES BETWEEN THE GREATER CHINA REGION AND THE UNITED STATES OF AMERICA COULD IMPACT INVESTORS

Unlike common law systems in certain parts of the Western world, China has a civil law system based on written statutes and, therefore, decided legal cases are without binding legal effect, although they are often followed by judges as guidance. As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect the interests of foreign investors.

YOU MAY HAVE DIFFICULTY ENFORCING JUDGMENTS AGAINST US

We are a Bermuda holding company and all of our assets are located outside of the United States. Most of our current business is conducted in Hong Kong and in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors whom are not residents in the United States.

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OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S AUDIT DOCUMENTATION RELATED TO THEIR AUDIT REPORTS INCLUDED IN THIS ANNUAL REPORT MAY BE LOCATED IN THE PEOPLE’S REPUBLIC OF CHINA. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD CURRENTLY CANNOT INSPECT AUDIT DOCUMENTATION LOCATED IN CHINA AND, AS SUCH, YOU MAY BE DEPRIVED OF THE BENEFITS OF SUCH INSPECTION

Our independent registered public accounting firms that issue the audit reports included in our annual reports filed with the SEC as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States) (the “PCAOB”), are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the applicable laws of the United States and professional standards. Because the audit documentation relating to our audits is located in the People’s Republic of China, a jurisdiction where the PCAOB, notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without the approval of the Chinese authorities, such auditors, like other independent registered public accounting firms operating in China, are not currently inspected by the PCAOB. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the Chinese Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

PROCEEDINGS INSTITUTED BY THE SEC AGAINST FIVE PRC-BASED ACCOUNTING FIRMS COULD RESULT IN ADVERSE IMPACT ON OUR BUSINESS AND PRICE OF OUR STOCK

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the PRC-based units of five accounting firms. The Rule 102(e) proceedings initiated by the SEC relate to these firms’ failure to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the CSRC. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

In January 2014, the administrative judge reached an Initial Decision that the PRC-based units of the “big four” accounting firms should be barred from practicing before the SEC for six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. In February 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, public companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which may result in SEC’s revocation of the registration of their shares under the Exchange Act, including possible delisting. Moreover, although our independent registered public accounting firm was not named as a defendant in the above SEC administrative proceedings, any negative news about the proceedings against these audit firms may erode investor confidence in China-based, U.S. public companies, including us, and the market price of our shares may be adversely affected.

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WE MAY FACE UNCERTAINTIES REGARDING INDIRECT TRANSFERS OF EQUITY INTERESTS IN PRC RESIDENT ENTERPRISES BY A NON-RESIDENT ENTERPRISE

In connection with the EIT Law, the Ministry of Finance of the PRC and the SAT jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retrospectively on January 1, 2008. By promulgating and implementing these circulars, the PRC tax authorities have strengthened their scrutiny over the direct or indirect transfer of equity interest in a PRC resident enterprise by a non-resident enterprise. For example, Circular 698 specifies that the SAT is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed by abusing corporate structures for tax-avoidance purposes and without reasonable commercial intention. We may pursue acquisitions as one of our growth strategies, and may conduct acquisitions involving complex corporate structures. We cannot be assured that the PRC tax authorities will not, at their discretion, adjust the taxable capital gains of the seller, which may indirectly increase acquisition costs.

On February 3, 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets, may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in China. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10%, for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. In addition, the transferors and transferees may be subject to the tax filing obligation, while the PRC subsidiaries or affiliates may be requested to assist in the filing.

We may face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions, under Circular 698 and Public Notice 7. For the transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries or affiliates may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident enterprises in our group should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

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Risks Related to Our Capital Stock

LIMITED LIQUIDITY IN THE COMPANY’S SECURITIES MAY MAKE IT DIFFICULT TO SELL SHARES

The public trading market for our common stock is limited. Beginning in November 2002, our common stock was traded on the OTC Securities Marketplace. The OTC Securities Marketplace is an inter-dealer, over-the-counter market that provides significantly less liquidity than other markets. As a foreign private issuer whose business is substantially in China and other Asian markets, the Company has less exposure in the U.S. capital markets than comparable U.S. issuers. In addition, the Company has a relatively small public float of its securities. These and other general economic, industry or Company factors may result in low trading volumes or prices of the Company’s securities. Accordingly, shareholders of the Company bear risks regarding the liquidity of the Company’s shares and may not be able to sell shares in desired quantities, at desired times or desired prices, or a combination thereof.

POSSIBLE VOLATILITY OF SHARE PRICES WORLDWIDE MAY HAVE SIGNIFICANT EFFECTS ON THE COMPANY’S SHARE PRICE

The trading price of the Company’s shares has been and may continue to be subject to wide fluctuations. Capital markets worldwide have generally experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the listed companies themselves. There can be no assurance that trading prices and price earnings ratios previously experienced by the Company’s common shares will be matched and maintained. Broad market and industry factors may adversely affect the market price of shares in the Company, regardless of its operating performance.