RISK
FACTORS
Investment
in the securities involves significant risks. You should carefully consider the risks described below and under “Risk
Factors” in our 2020 Annual Report and our other public filings made with the SEC, and all other information contained in, or incorporated
by reference in, this prospectus and any prospectus supplement or related free writing prospectus before you decide to invest in the
securities. If any such risks actually occurs, then our business, prospects, financial condition, results of operations and cash flow
could be materially and adversely affected, thus potentially causing the trading price of any or all of our securities to decline and
you could lose all or part of your investment.
Such
risks are not exhaustive. We may face additional risks that are presently unknown to us or that we believe to be immaterial as of the
date of this prospectus. Known and unknown risks and uncertainties may significantly impact and impair our business operations.
As
a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken
by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated
in the United States.
Risks
Related to Doing Business in China
Changes
in the political and economic policies of the PRC government or in relations between China and the United States may materially and adversely
affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion
strategies.
Substantially
all of our operations are conducted in the PRC and substantially all of our revenues is sourced from the PRC. Accordingly, our financial
condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC or
changes in government relations between China and the United States or other governments. There is significant uncertainty about the
future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs.
The
PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, 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 PRC government continues to play a significant role in regulating industry development by imposing
industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions
and providing preferential treatment to particular industries or companies.
While
the PRC economy has experienced significant growth in the past four decades, growth has been uneven, both geographically and among various
sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of
resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition
and results of operation could be materially and adversely affected by government control over capital investments or changes in tax
regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest
rate increases, to control the pace of economic growth. These measures may cause decreased economic activity.
In
July 2021, the Chinese government provided new guidance on China-based companies raising capital outside of China. In light of such developments,
the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with the SEC. As substantially
all of our operations are based in China, any future Chinese, U.S. or other rules and regulations that place restrictions on capital
raising or other activities by China based companies could adversely affect our business and results of operations. If the business environment
in China deteriorates from the perspective of domestic or international investment, or if relations between China and the United States
or other governments deteriorate, our operations in China as well as the market price of our Common Shares may be adversely affected.
There
are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Substantially
all of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject
to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written
statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. In 1979,
the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The
overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign
investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations
may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by
PRC regulatory agencies. In particular, because these laws, rules and regulations, especially those relating to the internet, are relatively
new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws, rules
and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of
these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system
is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and may have
a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the
violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources
and management attention.
The
PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas. The Opinions
on Strictly Cracking Down on Illegal Securities Activities issued on July 6, 2021 called for:
| ● | tightening
oversight of data security, cross-border data flow and administration of classified information,
as well as amendments to relevant regulation to specify responsibilities of overseas listed
Chinese companies with respect to data security and information security; |
| ● | enhanced
oversight of overseas listed companies as well as overseas equity fundraising and listing
by Chinese companies; and |
| ● | extraterritorial
application of China’s securities laws. |
As
the Opinions on Strictly Cracking Down on Illegal Securities Activities were recently issued, there are great uncertainties as to how
soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations
and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will
have on companies like us, but among other things, our ability and the ability of our subsidiaries to obtain external financing through
the issuance of equity securities overseas could be negatively affected.
On
December 24, 2021, the CSRC released the Draft Rules Regarding Overseas Listing, which aim to establish a unified supervision system
and promote cross-border regulatory cooperation. The Draft Rules Regarding Overseas Listing lay out filing procedures for domestic companies
to record their initial public offerings and follow-on offerings abroad with the CSRC. Issuers are required to file follow-on offerings
with the CSRC within 3 business days after the closing of such offerings.
According
to the Q&A held by CSRC officials for journalists thereafter, the CSRC will adhere to the principle of non-retroactive application
of law and first focus on issuers conducting initial public offerings and follow-on offerings by requiring them to complete the registration
procedures. Other issuers will be given a sufficient transition period. The CSRC officials also noted that the regulation system contemplated
by the Draft Rules Regarding Overseas Listing differentiates between initial public offerings and follow-on offerings to take into account
overseas capital markets’ fast and efficient features and to reduce impacts on overseas financing activities by domestic companies.
If the Draft Rules Regarding Overseas Listing are enacted in their current forms, we expect to perform necessary registration filings
with the CSRC for our listing on the Nasdaq within the prescribed transition period and for any follow-on offering in the event that
it takes place after the Draft Rules Regarding Overseas Listing enter into force. However, it is uncertain when the Draft Rules Regarding
Overseas Listing will take effect or if they will take effect as in their current forms.
In
addition, our holding company structure involves unique risks to investors and you may never directly hold equity interests in our Chinese
operating entities. Although we believe our operating structure is legal and permissible under the Chinese law and regulations currently
in effect, Chinese regulatory authorities could take a different position on the interpretation and enforcement of laws and regulations
and disallow our operating structure, which would likely result in a material change in our operations and/or the value of our securities,
including that it could cause the value of such securities to significantly decline or become worthless.
Our
business is subject to complex and evolving laws and regulations regarding privacy and data protection. Compliance with China’s
new Data Security Law, Cybersecurity Review Measures, Personal Information Protection Law, as well as additional laws, regulations and
guidelines that the Chinese government promulgates in the future may entail significant expenses and could materially affect our business.
Regulatory
authorities in China have implemented and are considering further legislative and regulatory proposals concerning data protection. China’s
new Data Security Law went into effect on September 1, 2021. The Data Security Law provides that the data processing activities must
be conducted based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits
entities in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval
by the Chinese government. The Data Security Law sets forth the legal liabilities of entities and individuals found to be in violation
of their data protection obligations, including rectification order, warning, fines of up to RMB5 million, suspension of relevant business,
and revocation of business permits or licenses.
In
addition, the PRC Cybersecurity Law provides that personal information and important data collected and generated by operators of critical
information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation
and additional security obligations on operators of critical information infrastructure. According to the Cybersecurity Review Measures
promulgated by the CAC and certain other PRC regulatory authorities in April 2020, which became effective
in June 2020, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and
services which do or may affect national security. Any failure or delay in the completion of the cybersecurity review procedures may
prevent the critical information infrastructure operator from using or providing certain network products and services, and may result
in fines of up to ten times the purchase price of such network products and services. The PRC government recently launched cybersecurity
reviews against a number of mobile apps operated by several U.S.-listed Chinese companies and prohibiting these apps from registering
new users during the review periods. We do not believe that we constitute a critical information infrastructure operator under the Cybersecurity
Review Measures that took effect in June 2020.
On
July 10, 2021, the CAC issued the Cybersecurity Review Measures (revised draft for public comments), which
proposed to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may
affect national security. The PRC National Security Law covers various types of national security, including technology security and
information security. The revised Cybersecurity Review Measures took effect on February 15, 2022. The revised Cybersecurity Review Measures
expand the cybersecurity review to data processing operators in possession of personal information of over 1 million users if the operators
intend to list their securities in a foreign country. Under the revised Cybersecurity Review Measures, the scope of entities required
to undergo cybersecurity review to assess national security risks that arise from data processing activities would be expanded to include
all critical information infrastructure operators who purchase network products and services and all data processors carrying out data
processing activities that affect or may affect national security. In addition, such reviews would focus on the potential risk of core
data, important data, or a large amount of personal information being stolen, leaked, destroyed, illegally used or exported out of China,
or critical information infrastructure being affected, controlled or maliciously used by foreign governments after such a listing. An
operator that violates these measures shall be dealt with in accordance with the provisions of the PRC Cybersecurity Law and the PRC
Data Security Law. As advised by our PRC counsel, we believe that the cybersecurity review requirement under the revised Cybersecurity
Review Measures for online platform operators in possession of personal information of over one million users going public in a foreign
country does not apply to us or any of our PRC subsidiaries, because we became a public company with shares listed on Nasdaq before such
Measures entered into force on February 15, 2022. However, there remains uncertainty as to the interpretation and implementation of the
revised Cybersecurity Review Measures and we cannot assure you that the CAC will reach the same conclusion as our PRC counsel.
On
November 14, 2021, the CAC released the Regulations on Network Data Security (draft for public comments) and accepted public comments
until December 13, 2021. The draft Regulations on Network Data Security provide more detailed guidance on how to implement the general
legal requirements under legislations such as the Cybersecurity Law, Data Security Law and the Personal Information Protection Law. The
draft Regulations on Network Data Security follow the principle that the state will regulate based on a data classification and multi-level
protection scheme. We believe that we or any of our PRC subsidiaries do not constitute an online platform operator under the draft Regulations
on Network Data Security as proposed, which is defined as a platform that provides information publishing, social network, online transaction,
online payment and online audio/video services. None of our PRC subsidiaries is an online platform operator themselves, nor is any of
them required to obtain an ICP license for their current operations.
On
August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection
Law which became effective on November 1, 2021. The Personal Information Protection Law provides a comprehensive set of data privacy
and protection requirements that apply to the processing of personal information and expands data protection compliance obligations to
cover the processing of personal information of persons by organizations and individuals in China, and the processing of personal information
of persons in China outside of China if such processing is for purposes of providing products and services to, or analyzing and evaluating
the behavior of, persons in China. The Personal Information Protection Law also provides that critical information infrastructure operators
and personal information processing entities who process personal information meeting a volume threshold to be set by Chinese cyberspace
regulators are also required to store in China personal information generated or collected in China, and to pass a security assessment
administered by Chinese cyberspace regulators for any export of such personal information. Lastly, the Personal Information Protection
Law contains proposals for significant fines for serious violations of up to RMB 50 million or 5% of annual revenues from the prior year
and may also be ordered to suspend any related activity by competent authorities. We have access to certain information of our customers
in providing services and may be required to further adjust our business practice to comply with new regulatory requirements.
Interpretation,
application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through
new legislation, amendments to existing legislation or changes in enforcement. Compliance with the PRC Cybersecurity Law and the PRC
Data Security Law could significantly increase the cost to us of providing our service offerings, require significant changes to our
operations or even prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we
may operate in the future. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy,
data protection and information security, it is possible that our practices or service offerings could fail to meet all of the requirements
imposed on us by the PRC Cybersecurity Law, the PRC Data Security Law and/or related implementing regulations. Any failure on our part
to comply with such law or regulations or any other obligations relating to privacy, data protection or information security, or any
compromise of security that results in unauthorized access, use or release of personally identifiable information or other data, or the
perception or allegation that any of the foregoing types of failure or compromise has occurred, could damage our reputation, discourage
new and existing counterparties from contracting with us or result in investigations, fines, suspension or other penalties by Chinese
government authorities and private claims or litigation, any of which could materially adversely affect our business, financial condition
and results of operations. Even if our practices are not subject to legal challenge, the perception of privacy concerns, whether or not
valid, may harm our reputation and brand and adversely affect our business, financial condition and results of operations. Moreover,
the legal uncertainty created by the Data Security Law and the recent Chinese government actions could materially adversely affect our
ability, on favorable terms, to raise capital, including engaging in follow-on offerings of our securities in the U.S. market.
PRC
laws and regulations establish complex procedures in connection with certain acquisitions of China-based companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions or mergers in China.
On August 8, 2006, six PRC regulatory agencies, including the Ministry
of Commerce, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the State Administration
for Industry and Commerce, the CSRC, and the State Administration of Foreign Exchange, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and were
amended on June 22, 2009. The M&A Rules include, among other things, provisions that purport to require that an offshore special purpose
vehicle formed for the purpose of an overseas listing of securities of a PRC company obtain the approval of the CSRC prior to the listing
and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published
on its official website procedures regarding its approval of overseas listings through special purpose vehicles. However, substantial
uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles.
The
regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China
by foreign investors more time consuming and complex, including requirements in some instances that the Ministry of Commerce be notified
in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval
from the Ministry of Commerce of the PRC (“MOFCOM”) be obtained in circumstances where overseas companies established or
controlled by PRC enterprises or residents acquire affiliated domestic companies.
Moreover,
according to the Anti-Monopoly Law of the People’s Republic of China promulgated on August 30, 2007 and the Provisions on Thresholds
for Reporting of Concentrations of Undertakings (the “Prior Reporting Rules”) issued by the State Council in August 2008
and amended in September 2018, the concentration of business undertakings by way of mergers, acquisitions or contractual arrangements
that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance
to the anti-monopoly enforcement agency of the State Council when the applicable threshold is crossed and such concentration shall not
be implemented without the clearance of prior reporting. In addition, the Regulations on Implementation of Security Review System for
the Merger and Acquisition of Domestic Enterprise by Foreign Investors (the “Security Review Rules”) issued by the MOFCOM
that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense
and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic
enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any
activities attempting to bypass a security review by structuring the transaction through, among other things, trusts, entrustment or
contractual control arrangements.
We
may grow our business in part by acquiring other companies operating in our industry. Compliance with the requirements of the regulations
to complete such transactions could be time-consuming, and any required approval processes, including approval from the Ministry of Commerce,
may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our
market share.
The
approval of the CSRC or other Chinese regulatory agencies may be required in connection with our overseas capital-raising activities
under Chinese law.
The
M&A Rules purport to require offshore special purpose vehicles that are controlled by Chinese companies or individuals and that have
been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of Chinese domestic companies
or assets in exchange for the shares of the offshore special purpose vehicles shall obtain CSRC approval prior to publicly listing their
securities on an overseas stock exchange.
Based
on our understanding of the Chinese laws and regulations currently in effect and in the opinion of our PRC legal counsel, we will not
be required to submit an application to the CSRC for its approval of any of our offerings of securities to foreign investors under the
M&A Rules. However, there remains some uncertainties as to how the M&A Rules will be interpreted or implemented, and its opinions
summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating
to the M&A Rules. We cannot assure you that relevant Chinese government agencies, including the CSRC, would reach the same conclusion.
Furthermore,
on July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council
jointly promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities, pursuant to which Chinese regulators are
required to accelerate rulemaking related to the overseas issuance and listing of securities, and update the existing laws and regulations
related to data security, cross-border data flow, and management of confidential information. Numerous regulations, guidelines and other
measures have been or are expected to be adopted under the umbrella of or in addition to the Cybersecurity Law and Data Security Law.
As
part of such efforts, the CAC issued the Cybersecurity Review Measures (revised draft for public comments) on July 10, 2021, which went
into effect on February 15, 2022. The current Cybersecurity Review Measures expand the cybersecurity review to online platform operators
in possession of personal information of over one million users if the operators intend to list their securities in a foreign country.
And such reviews will focus on the potential risk of core data, important data, or a large amount of personal information being stolen,
leaked, destroyed, illegally used or exported out of China, or critical information infrastructure being affected, controlled or maliciously
used by foreign governments after a listing outside China. As advised by our PRC counsel, we believe that the cybersecurity review requirement
under the Cybersecurity Review Measures currently in effect for online platform operators in possession of personal information of over
one million users going public in a foreign country does not apply to us or any of our PRC subsidiaries and we or any of our PRC subsidiaries
are not required to apply to the CAC for a cybersecurity review, because we became a public company with shares listed on Nasdaq before
the effective date of the Cybersecurity Review Measures on February 15, 2022. However, there remains uncertainty as to the interpretation
and implementation of the revised Cybersecurity Review Measures and we cannot assure you that the CAC will reach the same conclusion
as our PRC counsel.
We
believe that we and our PRC subsidiaries are compliant with the regulations and policies that have been issued by the CAC to date and
will continue to closely monitor the interpretation, enforcement and implications of such regulations and policies as well as any new
regulations and rules that the CAC or other Chinese regulatory agencies may issue in the future.
As
there are still uncertainties regarding the interpretation and implementation of such regulatory guidance, we cannot assure you that
we will be able to comply with new regulatory requirements relating to our future overseas capital-raising activities and we may become
subject to more stringent requirements with respect to matters including data privacy and cross-border investigation and enforcement
of legal claims. Notwithstanding the foregoing, as of the date of this prospectus, we are not aware of any Chinese laws or regulations
in effect requiring that we obtain permission from any Chinese authority to issue securities to foreign investors, and we have not received
any inquiry, notice, warning, or sanction in relation to the listing and trading of our Common Shares on Nasdaq from the CSRC, the CAC
or any other Chinese authorities that have jurisdiction over our operations.
We
are advised by our PRC counsel that based on the Chinese laws and regulations currently in effect, as of the date of this prospectus,
we are not required to submit an application to the CSRC, the CAC or any other PRC regulatory authority for the approval of our offerings
of securities to foreign investors or trading of our Common Shares on Nasdaq. Neither ReTo nor any of its subsidiaries has obtained the
approval or clearance from either the CSRC, the CAC or any other Chinese regulatory authority for the offering that we may make under
this prospectus and any applicable prospectus supplement. However, there remains significant uncertainty inherent in relying on an opinion
of our PRC counsel as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings
and other capital markets activities. The PRC regulatory agencies, including the CSRC or the CAC, may not reach the same conclusion as
our PRC counsel. If we do not receive or maintain the approvals, or we inadvertently conclude that such approvals are not required but
the CSRC or other PRC regulatory body subsequently determines that we need to obtain the approval for this offering or if the CSRC or
any other PRC government authorities promulgates any interpretation or implements rules subsequently that would require us to obtain
CSRC or other governmental approvals for this offering, we may not be able to proceed with this offering, and may face adverse actions
or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties
on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering
into the PRC or take other actions that could have a material adverse effect on our business, financial condition, the value of our securities,
as well as our ability to offer or continue to offer securities to investors or cause such securities to significantly decline in value
or become worthless. In addition, if the CSRC, the CAC or other regulatory agencies later promulgate new rules requiring that we obtain
their approvals for any of our offerings, we cannot assure you that we can obtain the approval, authorizations, or complete required
procedures or other requirements in a timely manner, or at all, or obtain a waiver of the requisite requirements if and when procedures
are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have
a material adverse effect on the value of the securities that we are registering.
PRC
regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion
may restrict or prevent ReTo from making additional capital contributions or loans to its PRC subsidiaries.
ReTo,
as an offshore holding company, is permitted under PRC laws and regulations to provide funding to its PRC subsidiaries through loans
or capital contributions. However, loans by ReTo to its PRC subsidiaries to finance their activities cannot exceed statutory limits and
must be registered with the local counterpart of the State Administration of Foreign Exchange and capital contributions to its PRC subsidiaries
are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and
registration with other governmental authorities in China.
The
State Administration of Foreign Exchange promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration
of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement
of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign
Currency Capital of Foreign- Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning
Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues
Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to Circular 19, the flow and use of the
RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital
may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of bank loans that
have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered
capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB
converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes
beyond its business scope. Thus, it is unclear whether the State Administration of Foreign Exchange will permit such capital to be used
for equity investments in the PRC in actual practice. The State Administration of Foreign Exchange promulgated the Notice of the State
Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account,
or Circular 16, effective on June 9, 2016, which reiterates some of the 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 grant loans to non-associated enterprises. Violations of Circular 19 and Circular
16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign
currency ReTo holds to its PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business
in the PRC.
In
light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding
companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government
approvals on a timely basis, if at all, with respect to future loans or future capital contributions by us to our PRC subsidiaries. As
a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries when needed. If we fail to
complete such registrations or obtain such approvals, our ability to use foreign currency and to capitalize or otherwise fund our PRC
operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our
business.
We
rely to a significant extent on dividends and other distributions on equity paid by our PRC subsidiaries to fund offshore cash and financing
requirements and any limitation on the ability of our PRC subsidiaries to make remittance to pay dividends to us could limit our ability
to access cash generated by the operations of those entities.
We
rely to a significant extent on dividends and other distributions on equity paid by our PRC subsidiaries for our offshore cash and financing
requirements, including the funds necessary to pay dividends (subject to ReTo’s M&A and the Act) and other cash distributions to
our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. The laws, rules and
regulations applicable to our PRC subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in
accordance with applicable accounting standards and regulations.
Under
PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its after-tax
profits each year, after making up for previous years’ accumulated losses, if any, to fund certain statutory reserves, until the
aggregate amount of such fund reaches 50% of its registered capital. As a result of these laws, rules and regulations, our subsidiaries
incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends.
As of December 31, 2021 and 2020, these restricted assets totaled $48,035,523 and $46,119,381, respectively.
Limitations
on the ability of our PRC subsidiaries to make remittance to pay dividends to us could limit our ability to access cash generated by
the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends
to our shareholders (subject to ReTo’s M&A and the Act) or otherwise fund and conduct our business.
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC
plan participants or us to fines and other legal or administrative sanctions.
Under
current PRC law, PRC citizens and non-PRC citizens who reside in China for a continuous period of no less than one year who participate
in any stock incentive plan of an overseas publicly listed company offered to the director, supervisor, senior management and other employees,
and any individual who has labor relationship with its domestic affiliated entities, are required to register with SAFE through a domestic
qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition,
an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the
purchase or sale of shares and interests. In addition, SAFE Circular 37 stipulates that PRC residents who participate in a share incentive
plan of an overseas non-publicly-listed special purpose company may register with SAFE or its local branches before they obtain the incentive
shares or exercise the share options. We and our executive officers and other employees who are PRC citizens or who reside in the PRC
for a continuous period of not less than one year and who have been or will be granted incentive shares or options are or will be subject
to these regulations. Failure to complete the SAFE registrations for our employee incentive plans may subject our PRC resident personnel
to fines and legal sanctions, and there may be additional restrictions on the ability of them to exercise their stock options or remit
proceeds gained from sale of their stock into the PRC, and may also limit our ability to contribute additional capital into our PRC subsidiaries
and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict
our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.
Our Common Shares may be delisted under the Holding Foreign Companies
Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our Common Shares, or the threat of their being delisted,
may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives
our investors with the benefits of such inspections.
The HFCA Act was enacted on December 18, 2020. The HFCA Act states
if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection
by the PCAOB for three consecutive years, the SEC shall prohibit our shares or Common Shares from being traded on a national securities
exchange or in the over the counter trading market in the U.S.
On
March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements
of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year
under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act,
including the listing and trading prohibition requirements described above. Furthermore, on June 22, 2021, the U.S. Senate passed a bill
which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years
required for triggering the prohibitions under the HFCA Act from three years to two. On September 22, 2021, the PCAOB adopted a final
rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act,
whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction
because of a position taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC issued amendments to finalize
rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies
as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction
and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions. On
December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely
registered public accounting firms headquartered in: (i) China, and (ii) Hong Kong. This list does not include our auditor, YCM CPA Inc.
Furthermore,
various equity-based research organizations have recently published reports on China-based companies after examining their corporate
governance practices, related party transactions, sales practices and financial statements, and these reports have led to special investigations
and listing suspensions on U.S. national exchanges. Any similar scrutiny on us, regardless of its lack of merit, could cause the market
price of our Common Shares to fall, divert management resources and energy, cause us to incur expenses in defending ourselves against
rumors, and increase the premiums we pay for director and officer insurance.
Our
auditor, the independent registered public accounting firm that issues the audit report included in our 2020 Annual Report incorporated
by reference in 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 currently registered with the PCAOB and subject to PCAOB inspections. However,
the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities 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
the audit of our financial statements.
The
SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on
August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors
from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five
recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory
mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations
were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the
transition period before a company would be delisted would end on January 1, 2022.
The
SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act
and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will
become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition
to the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our Common Shares to be materially
and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than
would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting
would substantially impair your ability to sell or purchase our Common Shares when you wish to do so, and the risk and uncertainty associated
with a potential delisting would have a negative impact on the price of our Common Shares.
The
PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of
our independent registered public accounting firm. As a result, we and investors in our securities are deprived of the benefits of such
PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness
of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside
of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our Common Shares to lose
confidence in our audit procedures and reported financial information and the quality of our financial statements.
In
May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the 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 in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. 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.
The
PRC government’s significant oversight over our business operation could result in a material adverse change in our operations
and the value of our Common Shares.
We
conduct our business in China primarily through our PRC subsidiaries. Our operations in China are governed by PRC laws and regulations.
The PRC government has significant oversight over the conduct of our business, and it regulates and may intervene our operations, which
could result in a material adverse change in our operation and/or the value of our Common Shares. Also, the PRC government has recently
indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers.
Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. In
addition, implementation of industry-wide regulations directly targeting our operations could cause our securities to significantly decline
in value or become worthless. Therefore, investors of ReTo face potential uncertainty from actions taken by the PRC government affecting
our business.
Risks
Related to Our Newly Acquired Businesses and Related Industries
The
integration of newly acquired businesses may not provide the benefits anticipated at the time of acquisition.
In
line with our strategy to expand our operations and services in markets in which we currently operate as well as into new and emerging
markets, leveraging our existing know-how and infrastructure, in December 2021, we acquired REIT Mingde, and we may make future acquisitions.
We are required to devote management attention and resources to integrating business practices and operations of REIT Mingde. Potential
difficulties we may encounter in the integration process include the following:
| ● | the
inability to successfully integrate the businesses, including operations, technologies, products
and services, in a manner that permits us to achieve the anticipated cost savings, revenue
synergies and business growth, which could result in the anticipated benefits of the Acquisition
not being realized partly or wholly in the time frame currently anticipated or at all; |
| ● | lost
sales and customers as a result of certain customers of any of the businesses deciding not
to do business with us, or deciding to decrease their amount of business in order to reduce
their reliance on a single company; |
| ● | the
necessity of coordinating geographically separated organizations, systems and facilities; |
| ● | potential
unknown liabilities and unforeseen increased expenses, delays or regulatory conditions following
the Acquisition; |
| ● | integrating
personnel with diverse business backgrounds and business cultures, while maintaining focus
on providing consistent, high-quality products and services; |
| ● | consolidating
and rationalizing information technology platforms and administrative infrastructures as
well as accounting systems and related financial reporting activities and difficulty implementing
effective internal controls over financial reporting and disclosure controls and procedures
in particular; and |
| ● | preserving
important relationships of the Company and REIT Mingde and resolving potential conflicts
that may arise. |
Furthermore,
it is possible that the integration process could result in the loss of key employees or skilled workers of REIT Mingde. The loss of
key employees and skilled workers could adversely affect our ability to successfully conduct the newly acquired business because of their
experience and knowledge of REIT Mingde’s businesses. In addition, we could be adversely affected by the diversion of management’s
attention and any delays or difficulties encountered in connection with the integration of REIT Mingde’s businesses. The process
of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our operations. If
we experience difficulties with the integration process, the anticipated benefits of the Acquisition may not be realized fully or at
all, or may take longer to realize than expected. These integration matters could have an adverse effect on our business, results of
operations, financial condition or prospects during this transition period and for an undetermined period after completion of the Acquisition.
We
have a limited operating history in the newly acquired businesses and may be unable to achieve or sustain profitability or accurately
predict the future results of such businesses.
Hainan
Yile IoT commenced the RSA services operations in 2020 and the development and sales of software solutions in May 2019. Because its businesses
and the market for its services are both new and evolving, evaluating the current business and its future performance is difficult and
based upon limited historical data, a changing market, and its ability to influence the market. This applies to predictions of both revenue
and expenses.
Building
its businesses to date, Hainan Yile IoT has accumulated losses. The continued investment in new technology and services will add to its
operating expenses. We cannot assure you that Hainan Yile IoT will be profitable, that it will be able to sustain profitability, or of
the magnitude of its profitability. Our financial performance may be adversely impacted if we fail to address the “Risk Factors”
described in this section, or any other risks and challenges that we may face. If its assumptions for addressing the risks that Hainan
Yile IoT has identified and other business conditions are incorrect, our plans for operating the business may be impacted and it may
not achieve our planned and expected results.
Growing
the newly acquired businesses requires us to continue investing in technology, resources, and new business capabilities; these investments
may contribute to losses, and we cannot guarantee that any will be successful or contribute to profitability.
Our
plans for operating the newly acquired businesses and leading further growth of its RSA services and software solution offerings. These
plans include developing new products and services. These investments could contribute to losses, and we cannot guarantee whether or
when any of the new products and services will become operational, be successful with customers, or whether they will be profitable.
Any
failure to offer high quality services and support may adversely affect our relationships with our customers and prospective customers,
and adversely affect our business, results of operations and financial condition.
Our
software solutions clients depend on our customer support team to assist them in deploying the solutions effectively, to help them to
resolve post-deployment issues quickly, and to provide ongoing support. If we do not devote sufficient resources or are otherwise unsuccessful
in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could discourage prospective
customer from purchasing and using our software solutions. We may be unable to respond quickly enough to accommodate short-term increases
in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with
changes in the support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could
increase costs and adversely affect our business, results of operations and financial condition. Any failure to maintain high quality
customer support, or a market perception that we do not maintain high quality customer support, could erode customer trust and adversely
affect our reputation, business, results of operations and financial condition.
The
software and information technology service market in which we participate is competitive, and if we do not compete effectively, our
business, results of operations and financial condition could be harmed.
The
software and information technology service market is competitive and rapidly evolving. The principal competitive factors in our market
include completeness of product offerings, level of customization of solutions, credibility with developers, global reach, ease of integration
and programmability, product features, platform scalability, reliability, security and performance, brand awareness and reputation, the
strength of sales and marketing efforts, customer support, as well as the cost of deploying and using our products.
Some
of our existing competitors and potential competitors have larger scale, greater brand name recognition, longer operating histories,
more established customer relationships and greater resources than we do. As a result, our competitors may be able to respond more quickly
and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors
may offer products, solutions or services that address one or a limited number of functions at lower prices, with greater depth than
our products or in different geographies. Our current and potential competitors may develop and market new products, solutions and services
with comparable functionality to ours, and this could force us to decrease prices in order to remain competitive. With the introduction
of new products, solutions and services and new market entrants, we expect competition to intensify in the future. In addition, some
of our customers may choose to use our products and solutions and our competitors’ products and solutions at the same time.
Hainan
Yile IoT receives a substantial portion of its revenues from a limited number of customers, and the loss of, or a significant reduction
in usage by, one or more of its customers would result in lower revenues and could harm our business.
Our
future success is dependent on establishing and maintaining successful relationships with a diverse set of customers. Hainan Yile IoT
currently receives a substantial portion of its revenues from a limited number of customers, i.e. four insurance companies. In the years
ended December 31, 2021 and 2020, total revenues generated from the four insurance company customers accounted for 54.3% and 8.5% of
the total revenues of Hainan Yile IoT in the same periods, respectively. It is likely that we will continue to be dependent upon a limited
number of customers for a significant portion of our revenues for the foreseeable future and, in some cases, the portion of our revenues
attributable to one single customer may increase in the future. The loss of one or more significant customers or a reduction in usage
by any significant customers would reduce our revenues. If we fail to maintain existing customers or develop relationships with new customers,
our business would be harmed.
We
operate in an emerging and evolving markets. If our market does not grow as we expect, or if we fail to adapt and respond effectively
to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements or preferences,
our products and solutions may become less competitive.
The
software and information technology service market in China is at an early stage of development. There are uncertainties over the size
and rate at which this market will grow, as well as whether our solutions and products will be widely adopted. Moreover, the industry
is subject to rapid technological change, evolving industry standards, changing regulations, as well as changing customer needs, requirements
and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on
a timely basis. If we are unable to develop new solutions and products that satisfy our customers and provide enhancements and new features
for our existing products that keep pace with rapid technological and industry change, our business, results of operations and financial
condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower
prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively.
Our
solutions must also integrate with a variety of network, hardware, software platforms and technologies, and we need to continuously modify
and enhance our products and solutions to adapt to changes and innovation. For example, if customers adopt new software platforms or
infrastructure, we may be required to develop new versions of our products to be compatible with those new software platforms or infrastructure.
This development effort may require significant resources, which would adversely affect our business, results of operations and financial
condition. Any failure of our products and solutions to operate effectively with evolving or new software platforms and technologies
could reduce the demand for our products and solutions. If we are unable to respond to these changes in a cost-effective manner, our
products and solutions may become less marketable and less competitive or obsolete, and our business, results of operations and financial
condition could be adversely affected.
Security
incidents and attacks on our products or solutions could lead to significant costs and disruptions that could harm our business, financial
results, and reputation.
Our
business is dependent on providing our customers with safe, reliable and high-quality software solutions. Maintaining the security and
availability of our systems, network, and the security of information we hold is a critical issue for us and our customers. Attacks on
our customers and our own network are frequent and take a variety of forms. Malicious actors can attempt to fraudulently induce employees
or suppliers to disclose sensitive information through spamming, phishing, or other tactics. We may be subject to cyber-attacks from
third parties. If attacks like these were to occur in the future and if we do not have the systems and processes in place to respond
to them, our business could be harmed.
The
costs incurred by us to avoid or alleviate cyber or other security problems and vulnerabilities may be significant. However, our efforts
to address these problems and vulnerabilities may not be successful. Any significant breach of our security measures could:
| ● | lead
to the dissemination of proprietary information or sensitive, personal, or confidential data
about us, our employees, or our customers—including personally identifiable information
of individuals involved with our customers and their end-users; |
| ● | lead
to interruptions or degradation of performance in our products and solutions; |
| ● | threaten
our ability to provide our customers with access to our products and solutions, and negatively
affect our abilities to retain existing customers; |
| ● | generate
negative publicity about us; |
| ● | result
in litigation and increased legal liability or fines; or |
| ● | lead
to governmental inquiry or oversight. |
The
occurrence of any of these events could harm our business or damage our brand and reputation, lead to customer credits, loss of customers,
higher expenses, and possibly impede our present and future success in retaining and attracting new customers. Security incidents or
attacks on our infrastructure would be damaging to our reputation and could harm our business.
Similar
security risks exist with respect to our business partners and our third-party suppliers for information technology support services
and administrative functions. As a result, we are subject to the risk that cyber-attacks on our business partners and third-party suppliers
may adversely affect our business even if an attack or breach does not directly impact our systems. It is also possible that security
breaches sustained by our competitors could result in negative publicity for our entire industry that indirectly harms our reputation
and diminishes demand for our platform.
A
significant portion of our revenues were derived from customers in the insurance industry. The intensifying competition, change in sector
trend and landscape and government policies may have a direct impact on the insurance industry and negatively affect the stability of
our clients, which may subsequently have negative impact on our business.
A
significant portion of our revenues were derived from insurance companies in Hainan province. Any change in the competitive landscape,
market trend or user behaviors in such sector may have a negative impact on our customers, thus harm their ability to make payments and
maintain and increase the usage of our services. In addition, the insurance industry in China is highly regulated by the PRC government
and numerous regulatory authorities of the central PRC government are empowered to issue and implement regulations governing various
aspects of the industry. As the laws and regulations are evolving and some of them are relatively new, changes to the current laws and
regulations may harm our business and results of operation. In addition, interpretation and enforcement of such laws and regulations
involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may
be deemed to be in violations of applicable laws and regulations. If these laws and regulations or the uncertainty associated with their
interpretation negatively impact the insurance industry where our customers operate, our business may be adversely affected as well.
Changes
in practices of insurance companies in the markets in which we provide, and sell, our SVR and RSA and emergency home repair products
services could adversely affect our revenues and growth potential.
We
depend on the practices of insurance companies in the markets in which we provide our RSA services. The majority of our RSA customers
are insurance companies, which in turn sell our RSA services to their policy holders as policy benefits. Other customers of our RSA services
are drivers without any insurance coverage for RSA services. Therefore, we rely on insurance companies’ continued practice of offering
RSA services as benefits under its policies and accepting our RSA services.
If
any of these policies or practices change, for regulatory or commercial reasons, or if market prices for these services fall, revenues
from our RSA services could decline, which could adversely affect our revenues and growth potential.
Defects
or errors in our products or solutions could diminish demand for our products or solutions, harm our business and results of operations
and subject us to liability.
Our
customers use our products or solutions for important aspects of their businesses, and any errors, defects or disruptions to our products
and solutions and any other performance problems with our products or solutions could damage our customers’ businesses and, in
turn, hurt our brand and reputation. We provide regular updates to our products or solutions, which have in the past contained, and may
in the future contain, undetected errors, failures, vulnerabilities and bugs when first introduced or released. Real or perceived errors,
failures or bugs in our products or solutions could result in negative publicity, loss of or delay in market acceptance of our products
or solutions, loss of competitive position, lower customer retention or claims by customers for losses sustained by them. In such an
event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct
the problem. In addition, we do not carry insurance to compensate us for any losses that may result from claims arising from defects
or disruptions in our products. As a result, our reputation and our brand could be harmed, and our business, results of operations and
financial condition may be adversely affected.
In
addition, our solutions and products must interoperate with our customers’ existing internal networks and infrastructure. These
complex internal systems are developed, delivered, and maintained by the customer and a myriad of vendors and service providers. As a
result, the components of our customers’ infrastructure have different specifications, rapidly evolve, utilize multiple protocol
standards, include multiple versions and generations of products, and may be highly customized. We must be able to interoperate and provide
products to customers with highly complex and customized internal networks, which requires careful planning and execution between our
customers, our customer support teams and, in some cases, our channel partners. Further, when new or updated elements of our customers’
infrastructure or new industry standards or protocols are introduced, we may have to update or enhance our technologies and infrastructure
to allow us to continue to provide our products or solutions to customers. Our competitors or other vendors may refuse to work with us
to allow their products to interoperate with our products and solutions, which could make it difficult for our products and solutions
to function properly in customer internal networks and infrastructures that include these third-party products.
We
may not deliver or maintain interoperability quickly or cost-effectively, or at all. These efforts require capital investment and engineering
resources. If we fail to maintain compatibility of our solutions and products with our customers’ internal networks and infrastructures,
our customers may not be able to fully utilize our solutions and products, and we may, among other consequences, lose or fail to increase
our market share and experience reduced demand for our products or solutions which would materially harm our business, results of operations,
and financial condition.
We
face challenges from the evolving regulatory environment and user attitude toward data privacy and protection. Actual or alleged failure
to comply with data privacy and protection laws and regulations could materially and adversely affect our business and results of operations.
We
operate in the regulatory environment in which data privacy and protection is evolving. We cannot assure you that relevant governmental
authorities will not interpret or implement the laws or regulations in ways that negatively affect the software and information technology
service industry, our clients and us. Regulatory investigations, restrictions, penalties and sanctions, whether targeted at us or not,
may negatively affect the market environment in which we operate, our existing or potential clients, and our products and services, which
may in turn have a material adverse effect on our business, results of operations and financial condition. It is also possible that we
may become subject to additional or new laws and regulations regarding data privacy and protection in connection with the data we have
access to and the data products and services we provide to our clients. Moreover, we may become subject to regulatory requirements as
a result of utilization of our products and services by residents of, or travelers who visit, certain jurisdictions, such as the General
Data Protection Regulation of the European Union, or the GDPR. Complying with additional or new regulatory requirements could force us
to incur substantial costs or require us to change our business practices. Moreover, if a high profile security breach occurs with respect
to our competitors, people may lose trust in the security of software solutions providers generally, including us, which could damage
the reputation of the industry, result in heightened regulation and strengthened regulatory enforcement and adversely affect our business
and results of operations.
Our
business partners and customers may be subject to regulations related to the handling and transfer of certain types of sensitive and
confidential information. Any failure of our partners or customers to comply with applicable laws and regulations would harm our business,
results of operations and financial condition.
Our
business partners and customers that use our products may be subject to privacy- and data protection-related laws and regulations that
impose obligations in connection with the collection, processing and use of personal data, financial data, health data or other similar
data.
Any
failure or perceived failure by our business partners or customers to comply with applicable laws and regulations could result in their
reputational damage or governmental investigations, inquiries, enforcement actions and prosecutions, private litigation, fines and penalties
or adverse publicity, which may harm our business partnership and have a negative impact on our business.
We
could be harmed by data loss or other security breaches.
Because
we process, store, and transmit data, including personal information, failure to prevent or mitigate risks of data loss or other security
breaches, including breaches of our vendors’ or customers’ technology and systems, could expose us or our customers to a
risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us,
deter customers from using our products and services, and otherwise harm our business and reputation. We use third-party technology and
systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery
to customers, back-office support, and other functions. Some of our systems have experienced past security breaches, and, although they
did not have a material adverse effect on our operating results, there can be no assurance of a similar result in the future. Although
we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches,
including systems and processes designed to reduce the impact of a security breach at a third-party vendor or customer, such measures
cannot provide absolute security. Moreover, in the event of a major system disruption, hardware malfunction or damages to data centers
and servers caused by technologies failures, natural disasters or man-made problems, we may experience significant loss of data which
would materially and adversely affect our business, financial condition and results of operations.
Changes
in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our products
and solutions, and could adversely affect our business, results of operations and financial condition.
The
future success of our business depends upon the continued use of the internet as a primary medium for commerce, communications and business
applications. Chinese or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations
affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our products
and solutions in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose
additional taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could
limit the growth of internet-related commerce or communications generally, or result in reductions in the demand for internet-based products
and services such as our products and solutions. In addition, the use of the internet as a business tool could be adversely affected
due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security,
reliability, cost, ease-of-use, accessibility and quality of service. The performance of the internet and its acceptance as a business
tool has been adversely affected by “viruses,” “worms,” and similar malicious programs. If the use of the internet
is reduced as a result of these or other issues, then demand for our products or solutions could decline, which could adversely affect
our business, results of operations and financial condition.
Our
services rely on the stable performance of servers, and any disruption to our servers due to internal and external factors could diminish
demand for our products or solutions, harm our business, our reputation and results of operations and subject us to liability.
We
rely in part upon the stable performance of our servers for provision of our solutions, products and services. Any disruption to our
servers may happen due to internal and external factors, such as inappropriate maintenance, defects in the servers, cyber-attacks targeted
at us, occurrence of catastrophic events or human errors. Such disruption could result in negative publicity, loss of or delay in market
acceptance of our solutions and products, loss of competitive position, lower customer retention or claims by customers for losses sustained
by them. In such an event, we may need to expend additional resources to help with recovering. In addition, we may not carry insurance
to compensate us for any losses that may result from claims arising from disruption in servers. As a result, our reputation and our brand
could be harmed, and our business, results of operations and financial condition may be adversely affected.
Our
use of open source or third-party software could negatively affect our ability to sell our products and solutions, and subject us to
possible litigation.
Our
products and solutions incorporate open source software, and we expect to continue to incorporate open source software in our products
and solutions in the future. Courts have interpreted few of the licenses applicable to open source software, and there is a risk that
these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize
our products and solutions. Moreover, although we have implemented policies to regulate the use and incorporation of open source software
into our products and solutions, we cannot be certain that we have not incorporated open source software in our products or solutions
in a manner that is inconsistent with such policies. If we or our employees fail to comply with open source licenses, we may be subject
to certain requirements, including requirements that we offer our products that incorporate the open source software for no cost, that
we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software
and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other
third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of
these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant
damages, enjoined from generating revenues from customers using products that contained the open source software and required to comply
with onerous conditions or restrictions on these products. In any of these events, we and our customers could be required to seek licenses
from third parties in order to continue offering our products and solutions and to re-engineer our products or solutions or discontinue
offering our products to customers in the event re-engineering cannot be accomplished on a timely basis. Any of the foregoing could require
us to devote additional research and development resources to re-engineer our products or solutions, could result in customer dissatisfaction
and may adversely affect our business, results of operations and financial condition.
We
could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual
property could adversely affect our business, results of operations and financial condition.
Our
success depends, in part, on our ability to protect our brand and the proprietary methods and technologies that we develop under patent
and other intellectual property laws in China so that we can prevent others from using our inventions and proprietary information. As
of the date of this prospectus, we have registered 28 patents, 55 pending patent applications, 38 trademarks, 14 software copyrights,
and ten domain names in China related to our newly acquired businesses. There can be no assurance that any patents that have been issued
or that may be issued in the future will provide significant protection for our intellectual property. If we fail to protect our intellectual
property rights adequately, our competitors might gain access to our technology and our business, results of operations and financial
condition may be adversely affected. There can be no assurance that the particular forms of intellectual property protection that we
seek, including business decisions about when to file trademark applications and patent applications, will be adequate to protect our
business. We may have to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary
in the future to enforce our intellectual property rights, determine the validity and scope of our proprietary rights or those of others,
or defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management,
result in a diversion of significant resources, the narrowing or invalidation of portions of our intellectual property and have an adverse
effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be
met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging
that we infringe the counterclaimant’s own intellectual property. Any of our patents, copyrights, trademarks or other intellectual
property rights could be challenged by others or invalidated through administrative process or litigation.
We
also rely, in part, on confidentiality agreements and non-compete agreements with our business partners, employees, consultants, advisors,
customers and others in our efforts to protect our proprietary technology, processes and methods. These agreements may not effectively
prevent disclosure of our confidential information, and it may be possible for unauthorized parties to copy our software or other proprietary
technology or information, or to develop similar software independently with us lacking an adequate remedy for unauthorized use or disclosure
of our confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in
these cases we would not be able to assert any trade secret rights against those parties. Costly and time-consuming litigation could
be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection
could adversely affect our competitive business position. In addition, to the extent we expand our international activities, our exposure
to unauthorized copying, transfer and use of our proprietary technology or information may increase.
We
cannot be certain that our means of protecting our intellectual property and proprietary rights will be adequate or that our competitors
will not independently develop similar technology. If we fail to meaningfully protect our intellectual property and proprietary rights,
our business, results of operations and financial condition could be adversely affected.
The
estimates of market opportunity, forecasts of market growth included in this prospectus may prove to be inaccurate, and any real or perceived
inaccuracies may harm our reputation and negatively affect our business. Even if the market in which we compete achieves the forecasted
growth, our business could fail to grow at similar rates, if at all.
Market
opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions
and estimates that may not prove to be accurate. The variables that go into the calculation of our market opportunities are subject to
change over time, and there is no guarantee that any particular number or percentage of addressable companies covered by our market opportunities
estimates will purchase our products and solutions at all or generate any particular level of revenues for us. Even if the market in
which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow for a variety of
reasons, including reasons outside of our control, such as competition in our industries.