The butterfly cannot fly over the Pacific: Uncovering the legal details of the Manus case, the era of offshore arbitrage has completely come to an end

Author: Amelia I Biteye Content Team

On April 27, 2026, the Office of Foreign Investment Security Review (National Development and Reform Commission) made a decision to prohibit the investment in the acquisition of the Manus project by foreign capital, requiring the parties to withdraw from the acquisition transaction.

In just a few dozen words, this decision directly pressed the termination button on a transaction valued at over $2 billion. The years of product refinement, legal framework adjustments, financing, and exit strategies by Manus all collapsed in an instant, wasted.

This is the first publicly halted foreign investment acquisition case in the AI field since the implementation of the "Foreign Investment Security Review Measures" in January 2021.

What is special about this transaction is that both parties have legally moved offshore: Meta is a U.S. company, and Manus has completed its relocation to Singapore and established a holding structure in the Cayman Islands. However, Chinese regulatory authorities ultimately still made a decision to prohibit the investment.

The spillover effects of this case also extend to AI companies like Moonlight Dark Side, ByteDance, and Leap Star, which are facing clearer compliance guidance.

Behind this lies a deeper issue: the traditional offshore structure approach is becoming completely ineffective. Entrepreneurs must clarify their compliance path from Day 0.

This article does not tell a story but focuses on the essentials - what laws and regulations are being followed; where the red lines for "bath-style going abroad" are drawn; and how companies should choose from today onwards.

I. What laws and regulations are being followed?

Looking back at the Manus case, the initial discussions in the industry mostly focused on "what happened" - relocation, restructuring, prohibition. However, as the details of the case gradually emerged, the legal community's attention returned to a more fundamental question: on what basis can the regulators halt this transaction? What laws are being followed? What regulations are being followed?

The answer is not found in a single law but in a three-tiered regulatory logic. The synergy between the three layers ultimately forms an unavoidable review logic.

First Layer: Identifying "Chinese Entities" - The Underlying Basis for Penetrative Review

This is the legal starting point of the entire case: where is Manus actually incorporated?

From a legal perspective, the answer seems clear - Manus has completed its relocation to Singapore, the holding structure is set up in the Cayman Islands, and the parent company Butterfly Effect Pte is a genuine Singapore entity. This was also the core legal argument made by the Manus team throughout the transaction process:

"Our entity structure has transitioned to an offshore structure."

But the regulatory response is:

Form does not count; substance counts.

Jingtiancheng Law Firm systematically analyzed from a legal perspective why "legal shell offshore" failed in the Manus case. The root cause lies in the fact that the core AI assets have an inseparable substantive connection with the legal jurisdiction within China across four dimensions:

• Team Dimension: The engineering team that grasps the underlying core logic has long accumulated R&D experience within China, and their technical capabilities were developed and trained within China;

• Computing Power Dimension: Domestic R&D has formed a path dependency for technical interfaces and computing power scheduling, and the core system's architectural genes are stamped with a Chinese label;

• Algorithm Dimension: The development and training of core model weights were completed domestically, which is the most legally significant "source of technology";

• Data Dimension: The training data accumulated from human feedback reinforcement learning (RLHF) based on massive user interactions is highly concentrated within China.

These four dimensions point to the same conclusion: the legal form of Manus is Singaporean, but the "technical substance" of Manus as a company has its source, core, and foundation all within China. According to the principle of "substance over form," this type of substantive connection is sufficient to constitute the basis for penetrative review from a regulatory perspective - this is the first cornerstone of all subsequent legal actions.

So, although in 2022, Xiao Hong founded Butterfly Effect Technology in Beijing, established a "Cayman-Hong Kong-Beijing" red-chip structure in 2023, and relocated to Singapore in 2025 while completing team restructuring and business isolation, the legal determination does not look at "when it was relocated," but rather "where it came from." Any technology asset originating within China does not change nationality due to a mere registration change.

Second Layer: Export Restrictions and Regulatory Evasion - Legal Qualification of Bath-Style Going Abroad

Once the first layer is established: Manus is identified as a "domestic enterprise," the second layer of legal logic follows: transferring core assets offshore is itself an export action. Export actions are subject to export control regulations.

Manus's three-step actions constitute a complete puzzle of "avoiding export controls" in the eyes of regulators:

Step one, entity transfer. The company entity was moved from China to Singapore, establishing the offshore entity Butterfly Effect Pte and building a holding structure in the Cayman Islands. Legally, this completed the first step of "de-Chinafication."

Step two, team and asset transfer. The company rapidly laid off nearly two-thirds of its employees in China (80 out of 120), retaining over 40 core technical personnel to move to Singapore.

Step three, data and business separation. Domestic social media accounts were cleared, access from Chinese IPs was blocked, and collaborations with local companies like Alibaba Tongyi Qianwen were terminated.

Legally, the technical knowledge, R&D capabilities, and algorithm experience carried out of the country by core technical personnel constitute "technology export" behavior that may fall under the "Prohibited and Restricted Export Technology Catalog." Additionally, according to the "Data Security Law" and "Data Exit Security Assessment Measures," a large amount of user interaction data training completed before the separation is highly concentrated in China - the data genes have already been written into the model, and the separation action cannot be traced back or deleted.

Thus, the penetrative logic of regulation can be summarized in a cold statement:

Code written on Chinese soil, data grown among Chinese users - this is "Chinese assets," and transferring them is exporting, which must be regulated.

The essence of "bath-style going abroad" is to cover substantive violations with formal compliance, which is a systematic evasion of the export control system.

Third Layer: Proactive Declaration Mechanism - You Can't Say "I Didn't Know"

If the first two layers are "substantive violations," the third layer is "procedural violations" - and it is the easiest to be convicted.

Article 4 of the "Foreign Investment Security Review Measures" clearly states that foreign investments involving important information technology and key technologies must be "proactively declared to the working mechanism office before implementing the investment." This is a mandatory pre-investment declaration obligation, not a "suggested report," nor is it "to be reported after something goes wrong."

Throughout the transaction process, Manus and Meta never made any form of proactive declaration to Chinese regulatory authorities until the completion of the transaction. During the lengthy transaction period, Manus and its investors seemed to have reached a dangerous tacit agreement: as long as regulators did not knock on the door, they would not proactively open the window.

In legal practice, "failure to report" is itself an independent serious violation. It conveys the signal that: either knowingly committing an offense or deliberately evading. In either case, regulators cannot let it go lightly.

A compliance lawyer summarized after the incident:

"The biggest compliance flaw exposed by the Manus case is not that the applicability of a specific regulation is controversial, but that the company fundamentally abandoned its obligation to declare to Chinese regulators. In the legal system, evading procedures is more intolerable to regulators than substantive violations."

Looking back, Manus's outcome was actually written in the first layer: once penetrative review determines you are a "substantially Chinese entity," the second layer's export control logic and the third layer's declaration obligation are automatically unlocked. The three layers of legal principles are interlinked and form a logical closed loop. In this closed loop, there is no room for "luck."

II. Why the National Development and Reform Commission?

The Ministry of Commerce was the first to take action. On January 8, 2026, a spokesperson for the Ministry of Commerce publicly stated that it would assess the acquisition's consistency with export controls, technology import and export, and foreign investment-related laws and regulations. However, on April 27, the hammer fell from the National Development and Reform Commission.

There is a story behind this departmental switch. Some experts believe: the Ministry of Commerce is relying on the "Prohibited and Restricted Export Technology Catalog," which describes controlled technologies very specifically: artificial intelligence interactive interface technology specifically used for Chinese and minority languages. After "washing," all services of Manus have been converted to English, excluding Chinese users. This means that if one simply follows the export control line, there may be some controversy.

This is the space for controversy regarding the applicability of regulations. However, we lean towards a deeper implication, as the applicability of laws is ranked lower than political considerations.

The National Development and Reform Commission oversees "security reviews," while the Ministry of Commerce manages "technology import and export." The involvement of the National Development and Reform Commission means that this matter has shifted from "business" to "sovereignty."

In other words, the National Development and Reform Commission, as a macro department with more comprehensive economic management authority than the Ministry of Commerce, also sends a clear signal - this is not a random enforcement against a specific company, but a systematic deterrent of "striking a blow to prevent a hundred blows."

Killing one is to warn a hundred.

All practitioners still on the sidelines can now see where the red line is drawn - not in some vague area of specific provisions, but in the undeniable final measure of safeguarding national security.

III. Four High-Risk Trigger Points

Based on the Manus case and the "penetrative review" principle established by the "Foreign Investment Security Review Measures," the following four red lines have become clear. Crossing any of these lines means that the "bath-style going abroad" route should no longer be considered.

Red Line 1: Founders Hold Chinese Passports and Have Not Renounced Chinese Nationality

The founder of Manus, Xiao Hong, is a Chinese national. The jurisdiction of China's export control law covers individuals. This means that the founder himself may also become a focus of regulatory attention, and relevant arrangements cannot be understood solely at the company level.

The harsher reality lies across the Pacific: in the geopolitical risk assessments of North American VCs, the financing environment for Chinese founders is tightening. Leading Silicon Valley venture capital firms like a16z are sharply reducing their investment willingness in founders holding Chinese passports under geopolitical pressure.

Manus's Series B financing was led by Benchmark, but afterward, Benchmark faced strong backlash from U.S. politicians, with several Republican senators claiming the deal was "aiding the Chinese government."

Investors from Silicon Valley's Founders Fund bluntly stated:

The founder is Chinese, the company is in Beijing, and the core technology is a general AI agent - this is the "original sin."

Both sides are closing their doors. If you have a Chinese passport, U.S. capital is uneasy; if you have Chinese technology, Chinese regulators won’t let go. This gap is much narrower than most people imagine.

Red Line 2: Received State Capital

It is not only "sovereign wealth fund direct investment" that counts as state capital. Various levels of government guidance funds, state-owned components in RMB fund LPs, and policy bank loans - all fall within the definition of "state capital infusion." Even those office, computing power, and talent subsidies that seem trivial during the application process will be noted down when it comes time to settle accounts.

Red Line 3: The First Line of Code Was Written in China

The initial coding location of core code, the completion location of algorithm model training, and the storage location of technical documents - these seemingly "purely technical" facts legally constitute proof of "source of technology." Manus's early development was completed within China, and when the team moved to Singapore, the code they carried constituted technology export. Manus never made any technology export declaration regarding this transfer.

Red Line 4: Used Chinese Data

This is the illusion that many AI entrepreneurs easily fall into: thinking that as long as they later clear out domestic users and block Chinese IPs, the company will be clean.

But in the eyes of regulators, 'technical substance' looks not only at code but also at data genes.

The "Data Security Law" and "Data Exit Security Assessment Measures" have clear review requirements for cross-border transmission involving "important data." Although Manus closed its Chinese services and blocked Chinese IPs, the user interaction data accumulated in the early stages has already completed core model training - the data genes are embedded in the model's weights and cannot be deleted through "post-cleaning." Data grown among Chinese users means the model carries a Chinese label.

IV. Specific Industry Entrepreneurs: Aligning from Now On

The "Security Review Measures" set up a security review mechanism for foreign investments that may affect national security, focusing on areas such as military and defense security, as well as important fields where foreign capital obtains actual control, such as important information technology, key technologies, major infrastructure, and important resources.

In the current regulatory environment following the Manus case, the following points deserve special attention:

First, the judgment of "actual control" in practice does not only look at shareholding ratios; if foreign investors can significantly influence the company's operational decisions, personnel, finances, technologies, etc. (such as having a veto right or knowledge of key technologies), they fall within this scope. Such definitions are very broad. For example, if you only hold 5% of the equity corresponding to a dollar fund, but this 5% equity comes with a veto right, it may be deemed to "significantly influence the company's operational decisions," thus being recognized as "actual control" and triggering a review.

Second, the National Development and Reform Commission, as the leading department of the working mechanism, has the authority to provide compliance window guidance based on national security judgments. For instance, on April 24, 2026, the National Development and Reform Commission required some AI companies to refuse U.S. capital guidance. Although not explicitly listed in the provisions, it falls within the scope of "daily security review work and preventive management" authorized by Articles 3 and 7 of the "Security Review Measures."

Third, it is not advisable to evade reviews through VIEs, holding, trusts, etc. In practice, once arrangements are identified as evading review, companies may face risks of rectification, suspension, withdrawal, or other compliance handling.

Conclusion: The Past "Sitting on the Fence" Gray Path Has Been Blocked 360 Degrees

From now on, companies must clarify their compliance stance from Day 0.

Especially in the AI sector, there are only two routes to choose from.

Route A: Go the U.S. Capital Route - Completely Clean Out

If you decide to take dollar funds, follow the Silicon Valley route, and your ultimate goal is to be acquired or listed on the U.S. stock market, what you need to do is not "wash," but to change blood.

A hard standard: you cannot cross any of the four aforementioned red lines.

This specifically means four things:

First, the founder must resolve nationality. A Chinese passport itself is a compliance risk label in the eyes of U.S. VCs. If you are determined to take this route, renouncing Chinese nationality is not an option; it is a prerequisite.

Second, do not take state capital. Any funds involving government guidance funds, state-owned LPs, or policy loans should undergo thorough compliance penetration at the early stage of financing, and if necessary, be returned or repurchased.

Third, the source code must be written offshore. This is the most brutal and core requirement. The first line of core algorithm code must be completed offshore. The domestic team can only work on non-core modules or peripheral businesses. You need to establish a truly capable offshore technology center from the very beginning - not a shell, but an entity.

Fourth, data and users must be isolated from day one. From the very beginning, do not touch Chinese user data. It is not "post-cleaning," but "never owned."

The premise of taking this route is: you can bear the cost of being completely severed from the domestic market. You must give up all income, users, and brand synergy from the Chinese market. You are betting that global returns will be