LONG Elong ADS Representing 2 Ordinary Shares (MM)

Item 3: Key Information.

Selected Financial Data

You should read the following information in conjunction with our consolidated financial statements and related notes included in this annual report and “ Item 5: Operating and Financial Review and Prospects. ”

The selected consolidated statements of comprehensive loss (other than ADS data) and selected consolidated cash flow data for the years ended December 31, 2013, 2014 and 2015, and the selected consolidated balance sheet data as of December 31, 2014 and 2015, are derived from our audited consolidated financial statements included in this annual report and should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements. The selected consolidated statements of comprehensive income/loss (other than ADS data) and selected consolidated cash flow data for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011, 2012 and 2013 are derived from our audited consolidated financial statements which are not included in this annual report. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “ Item 5: Operating and Financial Review and Prospects ” in this annual report.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Our consolidated financial statements are expressed in Renminbi, the legal currency of China.

Exchange Rate Information

We conduct substantially all of our business in China, and our revenues and expenses are primarily denominated in Renminbi. Solely for the convenience of the reader, this annual report contains translations of Renminbi amounts into U.S. dollar amounts at specified rates. Translations of Renminbi amounts into U.S. dollar amounts are based on the noon buying rate in the City of New York for cable transfers of Renminbi as published by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi amounts to U.S. dollar amounts and from U.S. dollar amounts to Renminbi amounts in this annual report were made at a rate of RMB6.4778 to US$1.00, the rate in effect as of December 31, 2015. The rate as of March 31, 2016 was RMB6.4480 to US$1.00. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollar or Renminbi amounts at any particular rate, the rates stated herein, or at all. The Chinese government imposes controls over the conversion of Renminbi into foreign currencies. For discussion of the effects of currency controls and fluctuating exchange rates on the value of our shares and ADSs, see  “Item 3: Key Information-Risk Factors-Risks Related to Doing Business in the People’s Republic of China-Fluctuation in the value of the Renminbi may adversely affect our financial results and the value of our ADSs” and “ Item 3: Key Information-Risk Factors-Risks Related to Doing Business in the People’s Republic of China-Governmental control of currency conversion may affect the value of our ADSs and our ability to pay dividends .”

The table below sets forth the average exchange rates between Renminbi and U.S. dollars for each of the past five years, calculated by averaging the rates on the last day of each month.

The table below sets forth the high and low exchange rates between Renminbi and U.S. dollars for each of the six months from October 2015 through March 2016.

Risk Factors

You should carefully consider each of the following risks and uncertainties associated with our company and the ownership of our securities. You should pay particular attention to the fact that we conduct substantially all of our operations in China and are governed by a legal and regulatory environment that differs significantly from that of the United States. Additional risks referred to elsewhere in this annual report, and other risks which are not currently known to us or that we currently deem immaterial may also have a material adverse impact on our business operations and financial condition.

Risks Related to Our Business

We may continue to incur large losses, and may not be profitable in 2016 or any future period.

We sustained substantial net losses in 2014 and 2015. In 2015, we reported a loss from operations of RMB1.19 billion (US$184.0 million) and net loss attributable to eLong, Inc. of RMB1.02 billion (US$156.7 million), which were the largest annual operating and net losses in our history. In 2014, we reported a loss from operations of RMB315.9 million and net loss attributable to eLong, Inc. of RMB268.9 million. Due to the fiercely competitive PRC online and mobile travel market, we cannot assure you that we will report operating or net income during 2016 or any future period. If we continue to incur large losses our cash balance may significantly decline, and we may require additional sources of capital to fund our business.

A significant factor contributing to our large operating and net losses in 2014 and 2015 was growth of our service development as well as sales and marketing expenses. In 2015, our service development expenses increased by 57% year-on-year from RMB275.2 million to RMB432.4 million (US$66.8 million), and in 2014, our service development expenses increased by 55% year-on-year from RMB178.2 million to RMB275.2 million. We currently intend to continue to invest in our service development as well as our sales and marketing, and thus our expenses are likely to continue to increase in the future. Other factors contributing to our higher costs include higher employee compensation (including share-based compensation charges) and benefit costs. At the same time, our margins have decreased due to the growth of our eCoupon program and other promotions with significant discounts, declining commissions from our accommodation and transportation ticketing suppliers, an increasing proportion of lower-priced transactions, and the growth of room night transactions for which we take inventory risk and recognize revenue on a gross basis. These and other factors will likely cause us to incur additional losses in future periods, and such losses may be substantial.

We may not be able to compete successfully against our current or future competitors.

We face a highly dynamic and fiercely competitive market with rapid technological innovation and change and numerous sources of competition, including online travel agencies such as Ctrip; online travel agency and travel-search firm Qunar; groupbuy companies which provide hotel booking, such as Meituan; and Alitrip, which is a business unit of Alibaba Group Holding Limited. Some of our current and future competitors have competitive advantages over us, including more well-known brands, lower cost sources of internet traffic, larger mobile download application install bases, larger customer bases and greater financial, marketing, technology and other expertise and resources. Some of our competitors may offer a broader selection of travel-related products and services than we do, as we focus on lodging rather than being a “one-stop shop” for all travel-related services. In addition, some of our competitors may use new and different business models, which may have technology, cost structure, customer experience and other competitive advantages over us.

In addition, our current and future competitors may enter into mergers and acquisitions, alliances, equity investments or commercial arrangements with one another or with travel suppliers or marketing channels, which may limit our ability to reach commercial arrangements with such parties. For example, Ctrip, which is our largest shareholder and has representation on our board of directors, is also the largest and controlling shareholder of Qunar; is a large shareholder, with representation on the boards of directors, of two of China’s largest budget hotel chains, Home Inns & Hotels Management Inc. and China Lodging Group Ltd.; and has investments in several other travel companies, including Tuniu Corporation and Tongcheng Network Technology Share Co., Ltd.

We do not have long-term arrangements with our suppliers and our business involves relatively low fixed costs; accordingly, we also face a dynamic market and the threat of new competitors. Large state-owned companies, internet search engines, e-commerce companies and/or international travel companies may choose to enter our market, either as sole entrants or in cooperation with our current or future competitors. We cannot assure you that we will be able to successfully compete against our current or future competitors. If we are unable to compete successfully with our current or future competitors, our business and financial results will be materially and adversely affected.

A slow-down of economic growth in China may adversely affect our growth and financial performance.

Our financial results have been and will likely continue to be significantly affected by the condition of the economy and the travel industry in China. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during economic downturns. In recent years, the PRC economy has seen a slowdown related to the international financial crisis in 2008, and slower growth in 2014 and 2015. In 2016, economic conditions remain uncertain and unpredictable, with a lowering of the government’s economic growth target, and some forecasters predicting a significant slowdown. In addition, China is affected by global economic conditions, which have been volatile in recent years. The global financial markets have experienced significant disruptions since 2008, and currently face slow growth in Japan, a European debt crisis and a multitude of other uncertainties, including the long-term effects of expansionary monetary and fiscal policy. There have also been concerns over regional tensions, including those between China and Japan, between Russia and Ukraine, violent protests in Hong Kong and Iran’s and North Korea’s nuclear programs, as well as concerns relating to other countries, including those in the Middle East and Africa, which have resulted in volatility in oil and other markets. We believe that demand for travel services in China will continue to be linked to the condition of the broader PRC economy in the future. A slow-down of economic growth in China is likely to reduce expenditures for travel, which would have a material adverse effect on our revenues and results of operations.

We depend on our senior executives and other employees, and our business may be severely disrupted if we lose their services.

Our business operations depend on the continuing performance and service of our senior executive officers and other key employees. We rely on their expertise in operations, finance, technology and travel services, as well as their relationships with suppliers and regulators. In recent years, we have experienced substantial turnover at all levels of our company, including at the most senior levels of management. If our current CEO and Director, Hao Jiang, who replaced our former CEO, Guangfu Cui, or other senior executives or key employees are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and may incur additional expenses to recruit and train replacement personnel. Moreover, if any of our senior executives joins or forms a competitor, we may lose customers, relationships and suppliers. In addition, if any disputes arise between our departing senior executives or employees and us, we cannot assure you that the non-compete and confidentiality provisions in our employment agreements would be enforced in a manner which prevents those former senior executives or other employees from causing us competitive harm, or at all, due to uncertainties in the PRC legal system.

Conflicts of interest may arise between Ctrip, Ocean Imagination, Tencent and us.

Through ownership of ordinary shares and high-vote ordinary shares, Ctrip, through its subsidiary C-Travel, holds approximately 48% of our voting power; Ocean Imagination holds approximately 29% of our voting power; and Tencent, through its subsidiary TCH Sapphire, holds approximately 15% of our voting power. Conflicts of interest may arise between Ctrip or its affiliates, Ocean Imagination or its affiliates, Tencent or its affiliates, and us, including corporate opportunities, potential acquisitions as well as other types of transactions or matters. For example, Ctrip could initiate a sale of our company, or of all or a portion of its interest in our company, in order to raise capital or to acquire other assets, or could prevent a sale of our company, even if such actions would not be beneficial to our other shareholders. Similarly, Ocean Imagination or Tencent could choose to sell its equity stake in us in a manner which would not be beneficial to our other shareholders. We may be adversely affected by any conflicts of interest between Ctrip, Ocean Imagination, Tencent and us.

We do not have comprehensive off-site backup systems or business insurance.

Substantially all of our information technology and communications systems are located in our headquarters in Beijing, China and our customer service center in Hefei, China. Our infrastructure and systems are vulnerable to damage, instability or interruption from human error, equipment failure or other incidents, including computer viruses; electricity, internet or telecommunications outages; sabotage, hacker attack, terrorism, or vandalism; and natural disasters or other man-made or natural causes. We do not have comprehensive disaster recovery plans or systems, and do not carry business interruption insurance. In addition, we depend on our systems and information infrastructure to support all aspects of our business. If we are unable to maintain and upgrade our systems, experience hardware or software failures, or have our systems compromised due to employee or third-party error or malicious conduct, we may experience system outages, disruptions or slowdowns which may impair our customer service, or lead to inaccurate reporting or processing of information, and we may be unable to promptly restore our system operations and performance. Any of these factors may result in substantial losses and may materially and adversely affect our operations and results.

We may incur substantial losses if we are unable to sell prepurchased accommodation inventory for which we have inventory risk.

Beginning in 2014, we have increased prepurchases of accommodation inventory in order to obtain more competitively priced products for our customers. In accommodation prepurchase transactions, we act as a principal prepurchasing accommodation room inventory, which we then sell to our customers. As we have prepurchased the accommodation room inventory, we generally have greater flexibility to determine the final selling price of this inventory to our customers, and are able to offer a discount compared to the price of agency room nights. At the same time, because we have prepurchased the accommodation inventory, our potential loss is the full cost of the accommodation room night which we have paid, or committed contractually to pay, to the accommodation. By contrast, in an agency accommodation transaction, we do not commit to sell particular accommodation inventory, and thus incur no inventory risk or financial loss for failure to make such sales. Thus if due to forecasting error, competitive market conditions or other unforeseen circumstances, we are unable to sell our prepurchased accommodation inventory, we could incur significant losses which may have a material and adverse effect on our business results and financial performance.

Declines or disruptions in the travel industry may reduce our revenues.

Our business is affected by the condition of the overall travel industry in China. Trends or events that may reduce travel and therefore may reduce our revenues include:

As a result of any of these events, over which we have no control, our results of operations and financial condition could be materially and adversely affected.

We may incur losses for breaches of security on our websites, failure to protect confidential data or fraudulent transactions.

The internet industry in China faces significant challenges in the areas of information security and privacy, including the storage, transmission and sharing of confidential information. Our transactions are conducted through computers, mobile phones, tablet devices and other systems. In such transactions, the maintenance, storage and secure transmission of confidential information (such as itineraries, accommodation and other reservation information, personal information, account password, history and log-in information, and payment information) is essential to maintain consumer and supplier confidence. Due to rapidly advancing technology and the growing variety, sophistication and complexity of information security threats, our current security measures may not be adequate to prevent future data or privacy breaches and other types of system attacks. In addition, PRC legal requirements, consumer and supplier expectations relating to the collection, use and protection of consumer information have increased in recent years. Security breaches or improper collection, storage or use of information on our own, supplier, affiliate or other third-party systems could expose us to significant financial losses, adverse publicity, government action or litigation, which could harm our reputation and lessen our ability to attract and retain customers and suppliers. Reputational or financial harm could also be caused by security or information breaches of our partners, including banks and travel suppliers, related to transactions by our customers.

In addition, a growing portion of our business is prepaid by customers, including international accommodation and merchant accommodation. For merchant accommodation bookings as well as transportation tickets, our customers generally pay using credit cards, debit cards or online methods, and we then make payment to the travel suppliers. There have been and will likely continue to be attempts to use fraudulently obtained credit cards, fraudulent or stolen forms of online payment or fraudulent or stolen account information to pay for our products and services, to hack or otherwise compromise the security and confidentiality of our virtual cash, eCoupon and other systems and accounts, and to use other fraudulent or false schemes to steal from us. Frauds may be attempted by our employees, distribution partners, travel suppliers or other third parties acting individually or in concert with one another. New schemes and methods are likely to emerge in response to our increasing number and variety of marketing efforts and promotions, growing number of travel suppliers located throughout China, greater variety of products and services, and changes in our systems and processes. As fraudulent schemes, including but not limited to payment and transaction schemes and attacks on computer systems evolve and become more sophisticated, it may become increasingly difficult and costly for us to detect, minimize and prevent such fraud. Any fraud, theft or other compromise of the security of our systems or confidential data could cause us to incur significant and unforeseen financial and reputational losses.

We may receive less commission revenues than we are entitled to if our accommodation suppliers or customers fail to accurately report data concerning our customer accommodation stays.

A substantial majority of our revenues are generated through commissions received from accommodations for room nights booked through us. For the significant portion of our accommodation bookings, we do not receive direct payments for accommodation bookings from our customers; instead, we receive commissions from the accommodations after the completion of a customer’s stay. We maintain records of customer bookings and then verify these with each accommodation, generally on a monthly basis, in order to determine the commission payable to us. In this verification process, we rely on accommodations, other travel suppliers and customers to provide us accurate information regarding customer check-in and check-out dates. If our accommodations, other travel suppliers or customers provide us with inaccurate information with respect to actual accommodation stays, fraudulently generate orders where no accommodation stay has occurred, induce (or cooperate with our competitors to induce) our customers to cancel their accommodation orders and rebook directly with the accommodation or our competitors, or otherwise engage in any scheme to provide inaccurate data to us, we may receive less accommodation reservation revenues and have higher costs than would be the case if the data were accurate, which may materially and adversely affect our business performance and financial results.

We are dependent on our ability to establish and maintain favorable arrangements with our travel suppliers, internet search engines and distribution partners.

We are dependent on continued relationships on satisfactory commercial terms with accommodation, transportation ticketing and other service providers, as well as with internet search engines. For example, the ability to contract in advance for the availability of accommodation rooms is crucial to our business. However, we do not have long-term arrangements with our travel suppliers, and must renew our contracts on an ongoing basis. We also are dependent on our relationships and agreements with the TravelSky GDS for air fare searches, as well as certain third-party distribution partners, such as state-owned telecommunications companies and other private label partners to which we pay commissions for accommodation reservations. Any of these third parties may choose to terminate cooperation with us and work exclusively or on preferential terms with our competitors, or to impose new or greater requirements upon us. We cannot assure you that we will be able to maintain our current relationships, establish new ones, or obtain satisfactory commercial terms from our suppliers or other service providers.

In addition, we rely on the ability to advertise on major internet search engines in China, including Baidu and Qihoo. A suspension or reduction of the operations of Baidu or Qihoo, or our inability to advertise on these or other internet search engines or travel search providers on commercially acceptable terms, could have a material adverse effect on our results of operations in the future.

We may not be able to successfully execute investments, acquisitions or cooperative ventures or to effectively manage any acquired or investee assets or businesses.

We engage in investments, acquisitions and other ventures with businesses that may provide incremental revenue and support our development. These transactions, including but not limited to investments, acquisitions of minority or majority equity interests, and acquisitions of assets, are subject to significant risks and uncertainties and require a substantial commitment of management time, capital and other resources. We cannot assure you that we will be successful in identifying, negotiating and completing acquisitions or investments on commercially acceptable terms. As we complete acquisitions and investments, we may not be able to successfully integrate them into our operations, and they may not achieve our anticipated business performance or financial results. For example, in 2015 we incurred impairment charges of RMB40.4 million (US$6.2 million) related to goodwill and other intangible assets, which was significantly larger than the impairment charges of RMB5.5 million we incurred in 2014. In 2014, we incurred impairment charges of RMB35.1 million related to investments in non-consolidated affiliates, which was significantly larger than the impairment charge of RMB1.9 million we incurred in 2013. Investments, acquisitions or other ventures which are not successful may lead to additional financial losses and such losses may be substantial, as well as disputes which may be costly and consume significant management time and resources.

Our business may be harmed if we fail to strengthen our brand and provide high quality service to our customers and business partners.

We must successfully promote the eLong brand in order to grow our business, and ensure high levels of service in order for the brand to be associated with selection, value and convenience. With increasing competition in the online accommodation reservation marketplace, the cost of marketing efforts to build brand awareness among potential customers has increased in recent years and is likely to increase further in the future. In addition, marketing channels we utilize in the future may become more costly and provide lower returns than those we have used previously. If we fail to provide high quality service, strengthen our brand recognition among our current and potential customers and business partners, and manage our sales and marketing costs, our growth and operating results may be adversely affected.

Our business depends on the technology infrastructure of China’s internet and technology services provided by third parties.

Access to the internet in China is maintained through a network owned by state-owned Chinese telecommunications carriers under the regulatory supervision of China’s Ministry of Industry and Information Technology (the “MIIT”) and government security agencies. Networks in China connect to the internet through a government-controlled gateway, which is the only channel through which domestic Chinese users connect to the international internet network. We rely on this infrastructure and the state-owned telecommunications companies to provide bandwidth and data capacity. We would have no access to alternative networks and services, on a timely basis, if at all, in the event of any infrastructure interruption, suspension or failure.

We also rely on third-party computer systems, software and service providers, including the computerized reservation systems of accommodations, airlines and third-party service providers such as the TravelSky GDS as well as our distribution partners, to make reservations and confirmations, issue air tickets, make deliveries and receive payments. Third parties provide, for example, computer storage systems and software licensing, support and maintenance services and air ticket invoice delivery. In addition, third parties provide internet data centers which hold many of our servers and other technology systems, as well as many critical technical and support services linking our customer service centers in Beijing and Hefei. These third-party data centers may be subject to system downtime, hacker attack, fraudulent access, natural disaster, human error or other causes leading to unexpected business interruptions. Any interruption in these or other third-party services or deterioration in their performance could impair the quality of our service. Furthermore, if our arrangements with any of these third parties are suspended, terminated, or no longer available on commercially acceptable terms, we may not be able to find an alternate source of support on a timely basis and on satisfactory terms.

We may become involved in costly and time-consuming litigation or government inquiries.

From time to time, we may initiate litigation to enforce our contract, intellectual property or other rights, and third parties may initiate litigation against us for alleged breach or infringement of their rights. This litigation may be costly and time-consuming, and the results of litigation and arbitration in China or other jurisdictions are unpredictable. In the event of any successful legal claims against us, we may face significant financial penalties and costs, and our business could be materially and adversely affected.

Our websites and mobile applications contain information about accommodations, transportation tickets, travel destinations, and other topics, including user comments. In addition, some of our websites have online discussion forums. Third parties or government agencies, may take legal or regulatory action against us for making allegedly false, inaccurate, unauthorized, politically sensitive, or misleading information or content accessible on our websites or other technology systems, or for other alleged illegal or improper behavior. Such claims or actions could be expensive and time consuming, divert management’s attention and resources, and lead to temporary suspension of the operation of our internet systems. Any successful claims against us may require us to pay damages or penalties, which could be significant.

We may not use our cash, cash equivalents, restricted cash and short-term investments effectively.

Cash, cash equivalents, restricted cash and short-term investments comprise a significant portion of our total assets. We seek to use our cash, cash equivalents, restricted cash and short-term investments to grow our business and to earn interest yield, while maintaining the security of our principal and managing the risk of losses due to instability of financial institutions. Our failure to effectively manage our cash, cash equivalents, restricted cash and short-term investments could have a material adverse effect on our financial results, operations and competitive position.

Our results may fluctuate due to seasonality in the travel industry in China.

The travel service industry in China is characterized by seasonal fluctuations, and accordingly our revenues vary from quarter to quarter. Historically, the first quarter of each year generally has contributed a smaller portion of our annual revenues due to reduced business travel during the Chinese New Year holiday. The seasonality of the PRC travel market is affected by government regulation of public holidays, including for example, the decision by the State Council in 2008 to restructure the annual calendar of public holidays by adding a few shorter holidays and reducing the May 1st holiday from one week to three days. Our future results may continue to be affected by seasonality and regulatory adjustments to public holidays in China.

Risks Related to Doing Business in the People’s Republic of China

Substantial uncertainties exist with respect to the interpretation and application of PRC laws relating to our ownership structure, contractual arrangements and business operations.

eLong, Inc. is a Cayman Islands corporation, and is therefore treated as a foreign entity under applicable PRC laws and regulations. The PRC government extensively regulates internet access, the distribution of online information, and the provision of travel agency services through licensing requirements and other regulations. These regulations include provisions limiting foreign ownership in PRC companies providing information on the internet and other online internet services, transportation ticket booking services and travel agency services. As a result, we conduct our business through contractual arrangements between our subsidiaries, including eLong Information and eLong Hefei, and our consolidated affiliated entities, including Beijing Information, Beijing Air, Hangzhou Air and Beijing Travel, which hold licenses and approvals that are essential for our current business operations.

In the opinion of our PRC counsel, DaHui Lawyers, as of the date hereof, our ownership structure does not violate or breach PRC law, and the contractual arrangements among our subsidiaries, consolidated affiliated entities and nominee shareholders are binding and valid. There are, however, substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, we cannot guarantee that our ownership structure, contractual arrangements, businesses and operations will remain compliant with PRC law in the future, or that PRC authorities will not take a view contrary to the opinion of our PRC counsel. Neither can we assure you that we will be able to obtain any additional agreements, consents, approvals or licenses which may be required by PRC law or regulatory authorities in future.

We cannot assure you that the PRC government will determine that our current ownership structure and contractual arrangements comply with either current or future laws and regulations. New laws, regulations or interpretations of existing law and regulations may require us to modify or obtain approvals for our current structure or face severe consequences. In January 2015, the Ministry of Commerce released for public comment a Draft Foreign Investment Law of the PRC , or the Draft FIL. The Draft FIL utilizes the concept of “actual control” for determining whether an entity is considered to be a foreign-invested enterprise, and defines “control” broadly to include, among other things, voting or board control through contractual arrangements. It states that entities established in China but controlled by foreign investors will be treated as foreign-invested enterprises, while entities set up outside of China which are controlled by PRC persons or entities, would be treated as domestic enterprises after completion of market entry procedures. If the Draft FIL is enacted and goes into effect in its current form, because eLong, Inc. and our largest shareholders are non-PRC entities, the provisions regarding control through contractual arrangements could reach our VIE arrangements, and as a result our VIEs could become subject to restrictions on foreign investment, which may materially impact the viability of our current corporate structure and operations. Specifically, we may be required to modify our corporate structure, change our current scope of operations, obtain approvals or face penalties or other additional requirements, compared to entities which do have PRC controlling shareholders.

If we or any of our consolidated affiliated entities are found to be in violation of any existing or future PRC laws or regulations, the government authorities would have broad discretion in taking action, including, without limitation, requiring us and/or our consolidated affiliated entities to restructure our ownership structure or operations; requiring that we and/or our consolidated affiliated entities discontinue any or all portions of our internet content provision, transportation ticketing or travel agency businesses; levying fines or confiscating our income or the income of our consolidated affiliated entities; and revoking our business licenses or the business licenses of our consolidated affiliated entities. Any such actions taken by the PRC authorities could have retroactive effect.

In addition, in recent years, China-based companies which are publicly listed in the U.S. have been subject to short-seller and/or SEC inquiries and investigations related to accounting issues, including the consolidation of PRC entities. Following announcements of inquiries or investigations, the affected company’s stock price may decline significantly. Although we are not aware of any actual or threatened investigation, inquiry or other action by the SEC, Nasdaq or other regulatory authority with respect to our ownership structure or contractual arrangements and consolidation of our consolidated affiliated entities, we cannot assure you that we will not be subject to any such investigation or inquiry in the future. If we are subject to an investigation or inquiry relating to our consolidated affiliated entities, including the consolidation of such entities into our financial statements, or other matters, we may need to spend significant time and expense, and our reputation may be harmed regardless of the outcome, and the trading price of our ADS may materially decline or fluctuate.

Any of the above could cause significant disruptions to, and have a material adverse effect on, our business operations and financial performance.

The Public Company Accounting Oversight Board is not permitted to inspect independent registered public accounting firms operating in China, including our auditor, and as such, investors may be deprived of the benefits of such inspection.

Our independent registered public accounting firm, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our independent registered public accounting firm is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without receiving the required approval from the PRC authorities, our independent registered public accounting firm, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB. Inspections of other firms that 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. Since PCAOB cannot conduct inspections of independent registered public accounting firms operating in China without receiving the required approval from the PRC authorities, it is more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

We would be adversely affected by the cancellation, modification or discontinuation of preferential tax treatments currently available to us.

We currently benefit from a number of preferential tax treatments, any or all of which may be cancelled, modified or discontinued in the future, depending on future legislation, regulations and interpretations by the PRC tax authorities. China’s Corporate Income Tax Law, or the CIT Law, and related regulations impose a unified income tax rate of 25% for both domestic and foreign invested enterprises, but a lower 15% tax rate for qualified High New Technology Enterprises, or HNTE. eLong Information was qualified as HNTE in 2013 and renewed its HNTE status in 2014, and thus enjoyed, and will continue to enjoy, a reduced corporate income tax, or CIT, rate of 15% in 2014, 2015 and 2016. We cannot assure you that we, eLong Information or any other eLong subsidiary or affiliate will qualify for these or any other preferential tax treatments in future years.

The CIT Law also provides that enterprises established in foreign countries or regions for which the “de facto management bodies” are located within the PRC will be considered as PRC “resident enterprises” and will be subject to corporate income tax at the rate of 25% on their worldwide income. In 2009, the State Administration of Taxation issued a Notice on Issues Regarding Recognition of Overseas Incorporated Enterprises Controlled by PRC Domestic Enterprises as PRC Resident Enterprises Based on the De Facto Management Body Criteria , or the Tax Residency Notice. Under the Tax Residency Notice, which was retroactively effective as of January 1, 2008, an overseas enterprise will be deemed to be a PRC tax resident, and thus subject to PRC corporate income tax of 25% on its worldwide income, if it satisfies four specified conditions: (i) the company’s management responsible for daily operations is located in China, or the management team carries out its responsibilities in China; (ii) finance and personnel decisions are made or need approval by institutions or people in China; (iii) the company’s major property, accounting ledger, company seal and minutes of board meetings and shareholder meetings are kept in China; and (iv) at least half of the members of the board of directors with voting rights or the management team habitually live in China. We cannot assure you that the PRC tax authorities will not treat eLong, Inc. as a PRC resident enterprise, particularly in view of Expedia’s sale of its controlling interest in us on May 22, 2015, and, if so, we may be subject to PRC corporate income tax on our worldwide income, and such determination may have retroactive effect.

Our operations may be adversely affected if we (or any of our subsidiaries or consolidated affiliated entities) fail to obtain or maintain all relevant permits, licenses and approvals, or if the PRC government imposes additional restrictions in the future.

The PRC government extensively regulates the internet, air ticketing, train ticketing, travel agency and travel insurance related activities. In order to conduct our business, we, our subsidiaries or our consolidated affiliated entities must possess and maintain valid permits or approvals from the relevant regulatory authorities. Any failure to obtain or maintain any of the required permits or approvals may subject us to various penalties, such as fines or suspension of operations in these regulated businesses, could disrupt our business operations and have a material adverse effect on our financial performance.

Uncertainties and restrictions in the PRC legal system may have a material and adverse impact on our business and financial condition.

There are substantial uncertainties regarding the interpretation of current PRC laws and regulations, as well as with respect to the numerous new rules, regulations, notices and interpretations enacted by PRC government authorities each year. New laws, regulations, notices and interpretations may affect our existing and future businesses in ways which we cannot predict, mitigate or prevent, and any new laws, regulations, notices and interpretations may be applied retroactively. For example, the Draft FIL may materially impact our business, operations and structure if adopted in the future. The PRC authorities retain broad discretion in the interpretation of, and determination of violations of, laws and regulations, including levying fines and penalties, application of new rules or interpretations, revoking or narrowing the scope of business licenses and requiring other corrective actions. For example the PRC tax authorities retain broad discretion to modify interpretation of prior tax guidance, and there also exists the possibility of significant variation in interpretation of policies, rules and regulations in different local regions in China. New laws, regulations or other regulatory requirements, or revised interpretations of current or future laws, regulations or regulatory requirements could have a material adverse effect on our business, results of operations and financial condition.

Implementation of laws and regulations relating to data privacy in China could adversely affect our business.

Certain data and services collected, provided or used by us, or provided to and used by us or our users, are subject to PRC laws and regulations relating to privacy. Although the definition and scope of “privacy” and “trade secret” remain relatively ambiguous under PRC law, growing concerns about individual privacy and the collection, distribution and use of personal information have led to national and local regulations that could increase our expenses. Companies or their employees who illegally trade or disclose customer data may face civil penalties or criminal charges.

In December 2012, the Standing Committee of the National People’s Congress issued the Decision to Enhance the Protection of Online Information , or the Information Protection Decision. The Information Protection Decision, together with other recent rules and regulations, require internet service providers to expressly inform their users of the purpose, manner and scope of their collection and use of personal electronic information, publish their rules for collection and use of personal electronic information, and collect and use personal electronic information only with the consent of the users and only within the scope of such consent. These rules also mandate that internet service providers and their employees keep personal electronic information that they collect strictly confidential, and that they must take such technical and other measures as are necessary to safeguard the information against disclosure, damage and loss, and must not sell or illegally provide such personal electronic information to other parties. The rules provide that violators may face warnings, fines, confiscation of illegal gains, license revocations, filing cancellations, website closures and prohibition from engaging in internet business. Compliance with current and future regulatory requirements relating to privacy, as well as increased enforcement activities by regulatory agencies, may place increased demands on our systems and processes, and any failure to meet these requirements could have an adverse effect on our financial condition and operating results. In July 2015, the Standing Committee of the National People’s Congress released a draft Internet Security Law and began to solicit public opinion. The draft Internet Security Law, if enacted, will impose strict Internet security requirements on network operators, and will call for strengthened protection of user information and other information deemed to be private.

Fluctuation in the value of the Renminbi may adversely affect our financial results and the value of our ADSs.

The value of the Renminbi against the U.S. dollar and other currencies fluctuates and is affected by numerous factors, including changes in political and economic conditions in China and the U.S. The conversion of the Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. Currently, the Renminbi is permitted to fluctuate within a band managed by the PRC government. The trading band was widened beginning in early 2014. On August 11, 2015, the People’s Bank of China allowed the Renminbi to depreciate by approximately 2% against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in additional significant fluctuations between the Renminbi and the U.S. dollar. Further, the Renminbi was added to a group of global reserve currencies by The International Monetary Fund on November 30, 2015, which to some extent makes the Renminbi more susceptible to market forces. The PRC government may also adopt a more flexible currency policy in the future, which could result in increased exchange rate volatility and significant appreciation or depreciation of the Renminbi against the U.S. dollar. Although a substantial majority of our revenue-generating operations are transacted in Renminbi, historically a portion of our financial assets and liabilities have been denominated in U.S. dollars. We recorded a foreign currency exchange gain of RMB2.9 million (US$0.5 million) in 2015, but incurred foreign currency exchange losses of RMB4.1 million in 2014 and RMB1.9 million in 2013. If the Renminbi appreciates in the future, we may record additional foreign currency exchange losses on our U.S. dollar-denominated assets and such losses may be material. If the Renminbi depreciates in the future, we will incur higher Renminbi equivalent costs for U.S. dollar-denominated expenses, including for example, payments to Expedia for the provision of international accommodation inventory, which could have an adverse effect on our results of operations expressed in Renminbi.

We may be unable to collect loans to the shareholders of our consolidated affiliated entities and to our employees.

As of March 31, 2016, we had made long-term loans in an aggregate principal amount of RMB16.5 million (US$2.7 million) to the individual shareholders of our consolidated affiliated entities in order to fund the paid-in capital of these consolidated affiliated entities. We may in the future provide additional loans to the individual shareholders of our consolidated affiliated entities in connection with any increase in their capitalization to the extent necessary and permissible under applicable law. Our ability to collect these loans, which we eliminated upon consolidation, is uncertain and will depend on the profitability of these consolidated affiliated entities and their operational needs as well as the enforceability of the loan agreements.

In 2011, we launched an RMB100 million employee interest-free loan program, and as of December 31, 2015, we had distributed RMB30.0 million (US$4.6 million) of employee loans under this program. If our employees who borrow from us under this program fail to repay their loans, we may incur increased costs and bad debt charges.

Our contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.

As a result of our corporate structure and the contractual arrangements between eLong Information and our consolidated affiliated entities, we are subject to PRC value added tax (“VAT”), business tax and surcharges on revenues derived from the contractual arrangements between our subsidiaries and our consolidated affiliated entities, although these revenues are eliminated upon consolidation. We would be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between eLong Information and these consolidated affiliated entities were not on an arm’s-length basis. For example, the PRC tax authorities could request that our consolidated affiliated entities adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by increasing the tax expenses of our consolidated affiliated entities, which could subject our consolidated affiliated entities to additional tax owed, interest due on late payments and/or penalties for under-payment of taxes.

If our consolidated affiliated entities violate their contractual agreements with us, our business could be harmed, and the outcome of any litigation to enforce our contractual rights would be uncertain.

We depend on our consolidated affiliated entities to conduct our operations. While we have no direct ownership interest in these entities, we have established effective economic control through a series of contracts with these consolidated affiliated entities and their shareholders. These agreements provide less protection for us than direct ownership of these entities. The shareholders of our consolidated affiliated entities change from time to time due to changes in our senior management. In the event of any dispute with respect to our agreements with our consolidated affiliated entities or their shareholders, we would have to rely on the PRC legal system for remedies. Any legal or arbitral proceeding relating to such dispute could result in a material disruption of our business and operations, and the outcome of such litigation would be uncertain.

We and our employees may be subject to significant costs, fines and legal sanctions if we or our employees fail to comply with PRC tax and foreign exchange regulations relating to equity compensation grants.

In 2012, the PRC State Administration of Foreign Exchange, or SAFE, promulgated the SAFE Circular on Issues of Foreign Exchange Administration of Domestic Individual Participation in Stock Option Incentive Plans of Companies Listed Overseas , or the Stock Option Rule. Under the Stock Option Rule, individuals who receive equity grants from an overseas listed public company are required, through a PRC agent appointed by a PRC subsidiary, to register with SAFE and complete certain other banking and reporting procedures. In 2013, we completed registration procedures relating to our employee equity with both SAFE and the State Administration of Taxation; however, either agency may still impose sanctions or fines or require payment of additional amounts by us or our employees in the future, including with respect to periods prior to the date we completed the relevant registration procedures. The PRC tax authorities might choose to tax our equity compensation grants for such prior periods at normal wage income tax rates rather than lower preferential rates, and may require payment of additional individual income tax, fines and penalties by our current or former employees, or by us, and such amounts may be substantial.

Inflation in China may have an adverse effect on our financial condition and results of operations.

Historically, during certain periods, the Chinese economy has experienced rapid expansion together with price inflation. Inflation erodes disposable incomes and consumer spending, which may have an adverse effect on the Chinese economy and lead to a reduction in business and leisure travel, as the travel industry is sensitive to business and personal discretionary spending levels. In addition, inflation increases our costs by contributing to increased employee compensation, higher third-party service provider and system infrastructure costs, and to lower margins on our revenue from those travel suppliers which have fixed value commission contracts. Higher inflation in the future may adversely impact our financial condition and results of operations.

We may be required to withhold PRC income tax on any dividends we pay and any gain you realize on the transfer of ADSs or ordinary shares.

We may be treated as a PRC resident enterprise for PRC tax purposes. If we are so treated by the PRC tax authorities and we pay dividends considered derived from sources within the PRC, we would be obligated to withhold PRC income tax of up to 10% on payments of dividends on our ordinary shares and/or ADSs to investors that are non-resident enterprises of the PRC, unless a recipient is a tax resident of a foreign jurisdiction with which China has a tax treaty, and qualify as a beneficial owner of the corresponding dividends to be received by such recipient and meets the relevant conditions under the applicable tax treaty. For example, an investor who is a Hong Kong tax resident and beneficially holds directly at least 25% of the equity interests in a Chinese entity paying dividends and is considered to be the beneficial owner of the dividends to paid to such investor, may be entitled to a reduced dividend withholding tax rate of 5% instead of the statutory rate of 10% under the PRC-Hong Kong tax treaty. In addition, any gain realized by investors who are non-resident enterprises of the PRC from the transfer of ADSs or ordinary shares could be regarded as being derived from sources within the PRC and be subject to a 10% PRC withholding tax. Such PRC withholding taxes would reduce your investment return on ADSs or ordinary shares and may also adversely affect the price of our ordinary shares or ADSs.

Governmental control of currency conversion may affect the value of our ADSs and our ability to pay dividends.

We receive substantially all of our revenues in Renminbi, which is currently not a fully convertible currency. Under China’s existing foreign exchange regulations, payments of current account items, including profit distributions and interest payments, subject to the relevant registration at SAFE, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. The Chinese government, however, may restrict access in the future to foreign currencies for current account transactions. If this were to occur, we might not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, which could adversely affect the value of our ADSs.

PRC regulations limit our ability to transfer our funds held overseas into China.

In 2008, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises, or Circular 142, which regulates the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The circular provides that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. In July 2014, SAFE issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas , or Circular 36, which became effective on August 4, 2014. Circular 36 suspends the application of certain provisions of Circular 142 in certain areas of China and allows certain foreign-invested enterprises to use Renminbi capital converted from foreign currency registered capital for equity investments within the PRC. Circular 142 and any future regulations may limit our ability to transfer our existing cash to our consolidated affiliated entities, which may adversely affect our business development.

On March 30, 2015, SAFE issued the Circular on Reforming the Administration Approach Regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprises , or Circular 19, which became effective on June 1, 2015 and replaced Circular 142. Circular 19 provides that the conversion by a foreign-invested company of foreign currency into Renminbi may be done at the foreign-invested enterprise’s discretion. This means that the foreign currency capital of a foreign-invested enterprise which has been confirmed by the local foreign exchange bureau (or the book-entry of monetary contribution of which has been registered) can be withdrawn from banks where it is deposited and used in Renminbi based on actual operational needs. However, Circular 19 still prohibits a foreign invested enterprise from, among other things, using Renminbi capital converted from its foreign currency capital f or expenditures beyond its business scope.

Our subsidiaries and consolidated affiliated entities are subject to restrictions on paying dividends or making other payments to us, which may decrease our primary internal source of funds.

As a holding company incorporated in the Cayman Islands, we rely on dividends from our subsidiaries in China and consulting and other fees paid to us or our subsidiaries by our consolidated affiliated entities. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits generally subject to a 10% withholding income tax, if any, determined in accordance with Chinese accounting standards and regulations. Our wholly-owned foreign subsidiaries are required to provide for certain statutory reserves, namely a general reserve and a staff welfare and bonus fund. These subsidiaries are required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC GAAP to the general reserve and have the right to discontinue allocations to the general reserve if such reserve has reached 50% of registered capital on an individual company basis. These reserves are not distributable as cash dividends. Further, if our subsidiaries and consolidated affiliated entities incur debt in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which would limit our ability to pay dividends on our ordinary shares.

We and our shareholders face uncertainties with respect to indirect transfers of PRC taxable property in PRC resident enterprises by their non-PRC holding companies.

On February 3, 2015, China’s State Administration of Taxation (SAT) issued the Announcement of the State Administration of Taxation on Several Issues concerning the Enterprise Income Tax on the Indirect Transfers of Properties by Non-Resident Enterprises , or Circular 7, to provide further clarification on the administration of PRC corporate income tax on indirect transfers of equities and other properties of PRC resident enterprises, or PRC Taxable Property, by non-resident enterprises. Pursuant to Circular 7, where a non-resident enterprise indirectly transfers PRC Taxable Property to avoid tax liability by implementing arrangements without reasonable commercial purpose, such indirect transfer will be re-identified and recognized as a direct transfer of PRC Taxable Property. As a result, gains derived from such indirect transfer attributable to the PRC Taxable Property may be subject to PRC withholding income tax at a rate of up to 10%. In the case of the indirect transfer of property of unregistered establishments set up by a foreign enterprise in the PRC, the applicable tax rate would be 25%. Circular 7 imposes tax filing obligations on both parties of the transfer transaction, as well as the PRC resident entity being indirectly transferred. As a result, we and our subsidiaries may be obligated to provide certain documentation according to Circular 7 if requested by the PRC tax authorities, and may be required to expend valuable resources to comply with Circular 7 or to establish that we and our non-resident enterprises should not be taxed under Circular 7 for any previous or future restructuring or disposal of shares of offshore entities.

Risks Related to Ownership of Our ADSs or Ordinary Shares and Our Trading Market

Low trading volume of our ADSs may adversely affect the price of our ADSs.

Although publicly traded, the trading market in our ADSs has been less liquid than the ADSs or stock of many other companies quoted on the Nasdaq Global Select Market. Due to the low trading volume of our ADSs, which was less than 10,000 ADSs on some trading days in 2015, it may be difficult for you to sell or purchase our ADSs at the price or time of your choice, which may result in you receiving a lower price, or paying a higher price, for our ADSs than the price if our ADSs were more actively traded on the Nasdaq Global Select Market. We cannot assure you that the trading market of our ADSs will become more liquid in the future, or that the trading volume of our ADSs will not decrease further in the future.

Sales by our existing shareholders of a substantial number of our ordinary shares, high-vote ordinary shares or ADSs could adversely affect the price of our ADSs.

Due to our highly-concentrated share ownership and low trading volume, if any of our major shareholders, including, among others, C-Travel International Limited, Ocean Imagination L.P., Luxuriant Holdings Limited, TCH Sapphire, Purple Mountain Holding, or our former Chief Executive Officer Guangfu Cui, sell substantial amounts of our ordinary shares, high-vote ordinary shares or ADSs, the market price of our ADSs could fall. We cannot assure you that any of our major shareholders will not sell, transfer or otherwise dispose of a significant number of our shares in the future, and such share transfers may include ADSs which are publicly traded as well as ordinary shares and high-vote ordinary shares which are not publicly traded. For additional information on our major shareholders, see “ Item 7: Major Shareholders and Related Party Transaction s.”

The market price for our ADSs is volatile.

The market price of our ADSs has been volatile and is likely to continue to be so. Since our initial public offering in October 2004, the trading price of our ADSs has ranged from a low of US$3.15 per ADS to a high of $29.60 per ADS. On March 31, 2016, the closing price of our ADSs was US$17.53 per ADS. Our trading price may continue to be subject to wide fluctuations in response to various factors including, but not limited to, the following:

Any of these factors may materially and adversely affect the market price of our ADSs. In addition, companies with significant operations in China that are publicly-traded in the United States have experienced significant share price volatility in recent years, including substantial price declines. The trading performance of these securities may affect the attitudes of investors toward other Chinese companies listed in the United States, and thus may impact the trading performance of our ADSs. Negative news or perceptions of inadequate corporate governance, fraudulent accounting, misleading disclosure, or other matters related to companies with significant operations in China may negatively affect the attitudes of investors towards such companies more generally, including us. These market fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.

We may be a passive foreign investment company in any year, which would result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.

A non-U.S. corporation will be considered a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, for any taxable year if either (i) 75% or more of its gross income is passive income or (ii) 50% or more of the value of its assets (based on an average of the values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. The annual PFIC determination is inherently factual and there is limited guidance regarding the application of the PFIC rules to specific situations. We currently hold a substantial amount of cash and cash equivalents, restricted cash and short-term investments, and the value of our goodwill and other assets (indications of which may be evidenced by the trading prices of our ordinary shares or ADSs, which have experienced significant volatility) are uncertain and may be subject to significant volatility. The determination of our PFIC status is subject to factual uncertainties because it depends upon the relative values of our assets over time, our income, and because it is not clear how our contractual arrangements with our consolidated affiliated entities would be treated for purposes of the PFIC rules. Based on the composition of our assets, there is a significant risk that we were a PFIC for 2015, but we have not obtained valuations of our assets or otherwise made (and do not intend to make) a definitive determination of our PFIC status for 2015. As the determination of PFIC status is made on an annual basis and depends on variables over which we have limited control, there can be no assurance that we will not be a PFIC for any taxable year. A drop in the market price of our ADSs and associated decrease in the value of our goodwill would cause a reduction in the value of our non-passive assets for purposes of the asset test. Accordingly, we could become a PFIC if our market capitalization were to decrease significantly while we held significant cash and cash equivalents. If we are a PFIC in any year, U.S. Holders (as defined in Item 10 of this annual report) will be subject to certain adverse United States federal income tax consequences, as discussed in “ Item 10: Additional Information-Taxation-United States Federal Income Taxation-Passive foreign investment company rules .”

Failure to maintain effective internal controls could have a material and adverse effect on the trading price of our ADSs.

Our management has concluded that our internal control over financial reporting is effective, as of December 31, 2015. See “ Item 15: Controls and Procedures .” Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has issued an attestation report on our internal control over financial reporting, which is included in this annual report. Effective internal controls are necessary for us to produce reliable financial reports. Any failure to maintain the effectiveness of our internal controls over financial reporting, in addition to causing us to be unable to report in future annual reports that such internal controls are effective, could result in loss of investor confidence in the reliability of our financial statements, which in turn could adversely affect the trading price of our ADSs. Furthermore, we may need to incur additional costs and use additional management and other resources in an effort to maintain compliance with the Sarbanes-Oxley Act and other requirements of U.S. law.

We follow home country practice in lieu of complying with certain requirements of the Nasdaq Listing Rules, which provides you fewer shareholder rights and protections than if we had not adopted home country practice.

As a foreign private issuer whose ADSs are listed on the Nasdaq Global Select Market, we are permitted to follow home country corporate governance practices instead of certain Nasdaq Listing Rules requirements. We have elected to follow our home country practice in lieu of the requirements set forth in the Rule 5600 Series of the Nasdaq Listing Rules, with the exception of the requirement that we have an audit committee composed solely of independent directors and certain other requirements as to which home country practice may not be relied upon. For example, we have followed or expect to follow our home country practice in lieu of the requirements (i) to obtain shareholder approval for certain events, including the establishment or amendment of certain equity based compensation plans and arrangements, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in our company and certain acquisitions of the stock or assets of another company; (ii) that a majority of the members of our board of directors be independent; (iii) that we have a corporate governance and nominating committee composed entirely of independent directors; (iv) that we have a compensation committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (v) and that we conduct annual performance evaluations of the nominating and governance committee and of the compensation committee. See “ Item 16G: Corporate Governance. ” Our choosing to follow home country practice in lieu of following these requirements has the effect of affording our ADS holders fewer shareholder rights and protections than if we had not adopted home country practice.

You may be subject to limitations on transfer of your ADSs or the exercise of your voting rights as an ADS holder.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems appropriate. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it advisable to do so because of any requirement of law or of any governmental body, or under any provision of the deposit agreement, or for any other reason. As an ADS holder, you may exercise your voting rights with respect to the underlying ordinary shares only in accordance with the deposit agreement. If you provide your voting instructions in the form specified by the depositary pursuant to the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with your instructions. However, the depositary may not be able to send voting instructions to you or you may not receive the voting materials in time to instruct the depositary to vote your shares. Furthermore, the depositary will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote.

You may not be able to participate in future securities or rights offerings, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights or securities available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act, or an exemption from the registration requirements is available. Under the deposit agreement, the depositary bank will not make those rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. In addition, TCH Sapphire has pre-emptive rights with respect to certain types of future offerings of our securities. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

You may not receive distributions on ordinary shares (if any) if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions (if any) which it or the custodian receives on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. This means that you may not receive any distribution we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you.

You may face difficulties in protecting your rights and interests because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China, and our senior executive officers reside outside the United States.

We are incorporated in the Cayman Islands, and conduct our operations in China through our subsidiaries and consolidated affiliated entities. All of our senior executive officers and the majority of our directors reside outside the United States and all or a substantial portion of the assets of those persons are located outside of the United States. As a result, it may not be possible to effect service of process within the United States upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or state securities laws. It may also be difficult or impossible for you to bring an action against us or against our directors and officers in the Cayman Islands or in China. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally (subject to certain exceptions) recognize and enforce a non-penal, final and conclusive monetary judgment in program (except for a judgment for multiple damages or taxes) of a foreign court of competent jurisdiction without retrial on the merits. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

Our corporate affairs are governed by our articles of association and by the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and amended) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not necessarily binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

As a result of all of the above, holders of our ADSs or ordinary shares may have more difficulty in protecting their interests through actions against our senior executive officers, directors or major shareholders than would shareholders of a corporation incorporated within the United States.