(Yicai Global) Dec. 29 -- China's branding of Jia Yueting, founder of the cash-strapped Chinese tech firm LeEco, as a "dishonest debtor" probably will not affect his financing activities in the US, a lawyer told Yicai Global.
"The credit systems in China and the US are not connected," said Yao Zhen, a vice president at JPMorgan Chase & Co.'s credit policy division. If Jia or his company applies for a loan in the US, a lender can only access US credit records, said Yao, who previously served as chief advisor at the actuarial analysis department of Fair Isaac Corp., the US's largest credit rating agency.
The billionaire has been embroiled in controversy since his LeEco conglomerate approached rock bottom earlier this year, amassing debts of over CNY20 billion (USD3 billion). He and his companies have been on the receiving end of several lawsuits after missing repayments to an array of lenders, and Chinese courts have labeled him a "dishonest debtor" for not repaying loans he can afford to.
Jia's status in China does not change his US credit record or prevent him from spending money there.
"The term 'dishonest debtor' is the Chinese equivalent of 'individual failing to abide by an effective judgment to repay a debt' in the US," an American lawyer said. "If the record could be found at American courts, it would certainly have serious implications for personal credit, but the countries don't have any cross-border credit system in place."
The Beijing branch of the China Securities Regulatory Commission recently ordered Jia to return to China before Dec. 31 to fulfill his obligations as the actual controller of Leshi Internet Information & Technology Corp. [SHE:300104], LeEco's listed arm, to help it solve problems, handle risks and protect investors' rights.
Jia resigned as chairman of Leshi Internet in July to focus on its US-based electric vehicle unit Faraday & Future Inc. LeEco defaulted on loan repayments after the Beijing-based company's rapid expansion led to a cash crunch last year, sending its shares plunging.
The US would not extradite Jia to China just because Chinese authorities demand his return. The US Securities and Exchange Commission can impose a fine on an offender or ban him or her from taking part in financial activities. Bankruptcy filings are not considered in financing deal reviews.
"In the US, all financing deals must pass 'bad actor' checks," said Chen Fei, a partner at New York-based law firm Pryor Cashman LLP.
An amendment to US securities laws opened the door for bad actor reviews in 2013 with the aim of averting future global financial crises. 'Bad actors' are individuals who have been convicted by an American court for financial or securities related offenses during the observation period (lasting five to 10 years depending on the nature of the offense) prior to the proposed financing event.
Any company planning to raise capital through private share placement must supply background information about all its shareholders with a stake of more than 20 percent. If any of them is found to be a bad actor, authorities will block the deal.
"Bad credit records should be disclosed regardless of whether the capital is publicly or privately raised and whether it is in China or the US," Chen said. "Few investment banks are willing to underwrite funding transactions for these companies, and their valuations will be affected, unless investors ignore the reports or skip due diligence checks."
The US does not consider Jia a bad actor, as a Chinese court -- not an American one -- put him in bad standing, she said. The consensus among legal professionals is that offenders convicted under foreign laws are not automatically considered bad actors.
American laws provide that only people who have committed criminal offenses can be defined as bad actors and prohibited from financing activities, and personal bankruptcy and civil disputes do not warrant a ban from financing operations.
"Unlike banks, private equity funds typically look at applicants' business propositions and if they have good business ideas," JPMorgan Chase's Yao said.
"American PE funds seldom check a foreign business owner's credit records in his home country or abroad," Yao added. "An effectively packaged Chinese company may find favor with US private equity firms even if it has a poor credit history back home. But Jia Yueting is the exception because his story has been exposed by the US press, and this will more or less impact his American financing plan."