United States securities and exchange commission logo
May 27, 2022
Feng Zhou
Chief Executive Officer
Youdao, Inc.
No. 399, Wangshang Road
Binjiang District, Hangzhou 310051
People s Republic of China
Re: Youdao, Inc.
Post-Effective
Amendment No. 2 to Form F-3
Filed April 28,
2022
File No. 333-252936
Dear Dr. Zhou:
We have limited our review of your registration statement to
those issues we have
addressed in our comments. In some of our comments, we may ask you to
provide us with
information so we may better understand your disclosure.
Please respond to this letter by amending your registration
statement and providing the
requested information. If you do not believe our comments apply to your
facts and
circumstances or do not believe an amendment is appropriate, please tell
us why in your
response.
After reviewing any amendment to your registration statement and
the information you
provide in response to these comments, we may have additional comments.
Post-Effective Amendment No. 2 to Form F-3 filed April 28, 2022
Cover Page
1. Where you discuss legal
and operational risks associated with being based in or having the
majority of the
company's operations in China, please expand to provide the following
disclosure:
Clarify whether
these risks could result in a material change in your operations and/or
the value of the
securities you are registering for sale or could significantly limit or
completely hinder
your ability to offer or continue to offer securities to investors and
cause the value of
such securities to significantly decline or be worthless;
Feng Zhou
FirstName LastNameFeng Zhou
Youdao, Inc.
Comapany
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Address how recent statements and regulatory actions by China
s government, such
as those related to the use of variable interest entities and
data security or anti-
monopoly concerns, have or may impact the company s ability to
conduct its
business, accept foreign investments, or list on a U.S. or other
foreign exchange;
Where you discuss the Holding Foreign Companies Accountable Act
("HFCAA"),
please discuss the Accelerating HFCAA and disclose whether your
auditor is subject
to the determinations announced by the PCAOB on December 16,
2021;
For each legal and operational risk discussed, provide more
detailed risk factors in a
separately captioned section in your prospectus and provide
cross-references to the
individual risk factors.
2. Where you describe how you will refer to the holding company,
subsidiaries, and VIEs,
we note you are defining "we," "us," "our," or "Youdao" to refer to
Youdao, the U.S.
holding company, in certain contexts, and to refer to the VIEs and
their subsidiaries in
other contexts. Please revise your disclosure throughout the
prospectus to clearly
differentiate, at all times, between the holding company and the
operating subsidiaries,
and refrain from using terms such as we or our when
describing activities or functions
of a VIE. The meaning of a defined term should not depend on the
context in which
the term is used, but instead should be clear on its face. For
example, throughout the
prospectus, it should be explicit that your operations are conducted
by your
operating subsidiaries and not by your holding company. Disclose, if
true, that your
subsidiaries and/or the VIE conduct operations in China, that the VIE
is consolidated for
accounting purposes but is not an entity in which you own equity, and
that the holding
company does not conduct operations. Disclose clearly the entity
(including the domicile)
in which investors are purchasing an interest.
3. We note your disclosure that the Cayman Islands holding company
depends on certain
contractual arrangements with the VIEs to operate a significant
portion of its business and
that this structure allows it to exercise effective control over the
VIEs and be considered
the primary beneficiary of the VIEs. However, neither the investors in
the holding
company nor the holding company itself have an equity ownership in,
direct foreign
investment in, or control of, through such ownership or investment,
the VIEs.
Accordingly, please refrain from implying that the contractual
agreements are equivalent
to equity ownership in the business of the VIEs. Any references to
control or benefits that
accrue to you because of the VIEs should be limited to a clear
description of the
conditions you have satisfied for consolidation of the VIEs under U.S.
GAAP.
Additionally, your disclosure should clarify that you are the primary
beneficiary of the
VIEs for accounting purposes.
4. Where you discuss how cash is transferred through your organization:
In addition to dividends, state whether any transfers or
distributions have been made
to the holding company, its subsidiaries, and consolidated VIEs,
or to investors, and
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quantify the amounts where applicable. We note your disclosure
that in 2020 and
2021, Youdao, Inc. extended loans to Youdao Information. Expand
your disclosure
to quantify the amounts of these loans and quantify any other
transfers or
distributions that have been made from the holding company to its
subsidiaries,
consolidated VIEs, or to investors where applicable;
State that, to the extent cash in the business is in the PRC or
a PRC entity, the
funds may not be available to fund operations or for other use
outside of the PRC due
to interventions in or the imposition of restrictions and
limitations on the ability of
you, your subsidiaries, or the consolidated VIEs by the PRC
government to transfer
cash. Please amend your disclosure here and in the summary risk
factors and risk
factors sections to contain this disclosure and on the cover
page, provide cross-
references to these other discussions; and
Provide cross-references to the condensed consolidating
schedule, discussed below,
and the consolidated financial statements. In addition, where you
discuss whether
there are limitations on your ability to transfer cash between
you, your subsidiaries,
the consolidated VIEs or investors, provide a cross-reference to
your discussion of
this issue in your summary, summary risk factors, and risk
factors sections, as well.
5. Please revise the cover page, prospectus summary and risk factors to
state that you have
been included on the conclusive list of issuers identified under the
HFCAA on our
website, and acknowledge the ramifications of such identification,
including volatility in
the trading price of your ADSs.
Prospectus Summary, page i
6. Please revise to add a prospectus summary and address the following
comments in that
section.
7. Disclose clearly that the company uses a structure that involves a VIE
based in China and
what that entails, and provide early in the summary a diagram of the
company s corporate
structure, identifying the person or entity that owns the equity in
each depicted entity.
Describe all contracts and arrangements through which you claim to
have economic rights
and exercise control that results in consolidation of the VIE s
operations and financial
results into your financial statements. Identify clearly the entity in
which investors are
purchasing their interest and the entity(ies) in which the company s
operations are
conducted. Describe the relevant contractual agreements between the
entities and how this
type of corporate structure may affect investors and the value of
their investment,
including how and why the contractual arrangements may be less
effective than direct
ownership and that the company may incur substantial costs to enforce
the terms of the
arrangements. Disclose the uncertainties regarding the status of the
rights of the Cayman
Islands holding company with respect to its contractual arrangements
with the VIE, its
founders and owners, and the challenges the company may face enforcing
these
contractual agreements due to legal uncertainties and jurisdictional
limits.
Feng Zhou
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Youdao, Inc.
Comapany
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8. Please move your summary of risk factors to this section and revise
your disclosure to
individually and specifically identify risks arising from the legal
system in China in
separate and specific risk factors, including all of the risks
identified in comment 1. Also
discuss the risks and uncertainties regarding the enforcement of laws
and that rules and
regulations in China can change quickly with little advance notice and
the risk that the
Chinese government may intervene or influence your operations at any
time, or may exert
more control over offerings conducted overseas and/or foreign
investment in China-based
issuers, which could result in a material change in your operations
and/or the value of the
securities you are registering for sale. Acknowledge any risks that
any actions by the
Chinese government to exert more oversight and control over offerings
that are conducted
overseas and/or foreign investment in China-based issuers could
significantly limit or
completely hinder your ability to offer or continue to offer
securities to investors and
cause the value of such securities to significantly decline or be
worthless. Provide cross-
references to the more detailed discussion of these risks in the
prospectus and include the
header and page number of the risk factor to which you are
referencing.
9. Disclose each permission or approval that you, your subsidiaries, or
the VIEs are required
to obtain from Chinese authorities to operate your business and to
offer the securities
being registered to foreign investors. State whether you, your
subsidiaries, or VIEs are
covered by permissions requirements from the China Securities
Regulatory Commission
(CSRC), Cyberspace Administration of China (CAC) or any other
governmental agency
that is required to approve the VIE s operations, and state
affirmatively whether you have
received all requisite permissions or approvals and whether any
permissions or approvals
have been denied. Please also describe the consequences to you and
your investors if you,
your subsidiaries, or the VIEs: (i) do not receive or maintain such
permissions or
approvals, (ii) inadvertently conclude that such permissions or
approvals are not required,
or (iii) applicable laws, regulations, or interpretations change and
you are required to
obtain such permissions or approvals in the future. Explain the basis
for your conclusions.
10. We note that the consolidated VIEs constitute a material part of your
consolidated
financial statements. Please provide in tabular form a condensed
consolidating schedule
that disaggregates the operations and depicts the financial position,
cash flows, and results
of operations as of the same dates and for the same periods for which
audited consolidated
financial statements are required. The schedule should present major
line items, such as
revenue and cost of goods/services, and subtotals and disaggregated
intercompany
amounts, such as separate line items for intercompany receivables and
investment in
subsidiary. The schedule should also disaggregate the parent company,
the VIEs and its
consolidated subsidiaries, the WFOEs that are the primary beneficiary
of the VIEs, and an
aggregation of other entities that are consolidated. The objective of
this disclosure is to
allow an investor to evaluate the nature of assets held by, and the
operations of, entities
apart from the VIE, as well as the nature and amounts associated with
intercompany
transactions. Any intercompany amounts should be presented on a gross
basis and when
necessary, additional disclosure about such amounts should be included
in order to make
the information presented not misleading.
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Youdao, Inc.
Comapany
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11. Provide a clear description of how cash is transferred through your
organization. Disclose
your intentions to distribute earnings or settle amounts owed under
the VIE agreements.
Quantify any cash flows and transfers of other assets by type that
have occurred between
the holding company, its subsidiaries, and the consolidated VIEs, and
direction of transfer.
Quantify any dividends or distributions that a subsidiary or
consolidated VIE have made
to the holding company and which entity made such transfer, and their
tax consequences.
Similarly quantify dividends or distributions made to U.S. investors,
the source, and their
tax consequences. Your disclosure should make clear if no transfers,
dividends, or
distributions have been made to date. Describe any restrictions on
foreign exchange and
your ability to transfer cash between entities, across borders, and to
U.S. investors.
Describe any restrictions and limitations on your ability to
distribute earnings from the
company, including your subsidiaries and/or the consolidated VIEs, to
the parent company
and U.S. investors as well as the ability to settle amounts owed under
the VIE
agreements. Provide cross-references to the condensed consolidating
schedule and the
consolidated financial statements.
12. Disclose that trading in your securities may be prohibited under the
Holding Foreign
Companies Accountable Act if the PCAOB determines that it cannot
inspect or investigate
completely your auditor, and that as a result an exchange may
determine to delist your
securities. Disclose whether your auditor is subject to the
determinations announced by
the PCAOB on December 16, 2021.
Risk Factors, page 5
13. Include a risk factor to specifically acknowledge that if the PRC
government determines
that the contractual arrangements constituting part of the VIE
structure do not comply
with PRC regulations, or if these regulations change or are
interpreted differently in the
future, the securities you are registering may decline in value or
become worthless if the
determinations, changes, or interpretations result in your inability
to assert contractual
control over the assets of your PRC subsidiaries or the VIEs that
conduct all or
substantially all of your operations.
14. Include a risk factor that discusses the implications to you under the
Holding Foreign
Companies Accountable Act. Ensure that it discloses that the United
States Senate has
passed the Accelerating Holding Foreign Companies Accountable Act
which, if enacted,
would decrease the number of non-inspection years from three
years to two years, and
thus, would reduce the time before your securities may be prohibited
from trading or
delisted.. Acknowledge that the Commission adopted rules to implement
the HFCAA and
that, pursuant to the HFCAA, the PCAOB has issued its report notifying
the Commission
of its determination that it is unable to inspect or investigate
completely accounting firms
headquartered in mainland China or Hong Kong.
15. Given the Chinese government s significant oversight and discretion
over the conduct of
your business, please revise to highlight separately the risk that the
Chinese government
may intervene or influence your operations at any time, which could
result in a material
Feng Zhou
Youdao, Inc.
May 27, 2022
Page 6
change in your operations and/or the value of the securities you are
registering. Also,
given recent statements by the Chinese government indicating an intent
to exert more
oversight and control over offerings that are conducted overseas
and/or foreign investment
in China-based issuers, acknowledge the risk that any such action
could significantly limit
or completely hinder your ability to offer or continue to offer
securities to investors and
cause the value of such securities to significantly decline or be
worthless.
16. In light of recent events indicating greater oversight by the
Cyberspace Administration of
China (CAC) over data security, particularly for companies seeking to
list on a foreign
exchange, please revise your disclosure to explain how this oversight
impacts your
business and your offering and to what extent you believe that you are
compliant with the
regulations or policies that have been issued by the CAC to date,
including the regulations
that went into effect on February 15.
We remind you that the company and its management are responsible for
the accuracy
and adequacy of their disclosures, notwithstanding any review, comments, action
or absence of
action by the staff.
Refer to Rules 460 and 461 regarding requests for acceleration. Please
allow adequate
time for us to review any amendment prior to the requested effective date of
the registration
statement.
Please contact Stacey K. Peikin at 202-551-6223 or Mara Ransom at
202-551-3264 with
any other questions.
FirstName LastNameFeng Zhou Sincerely,
Comapany NameYoudao, Inc.
Division of
Corporation Finance
May 27, 2022 Page 6 Office of Trade &
Services
FirstName LastName