SEC demands new disclosure requirements on Chinese company seeking to go public in the US

  • Posted on August 02, 2021
  • IPO
  • By Glory

Amid Beijing's crackdown on oversea share issuance, the US Securities and Exchange Commission said on Friday that it will require new disclosure requirements from Chinese companies seeking to list in the US.

"In light of the recent developments in China and the overall risks with the China-based [variable interest entities] structure, Inhave asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective," said Gary Gensler SEC Chairman, in a statement.

Chinese companies previously opted to go public on US stock exchanges via the so-called variable interest entities, which allows these companies to skirt oversight from Beijing while they IPO overseas, since the country doesn't allow direct foreign ownership, mostly. Through the variable interest entities, China-based operating companies can establish offshore shell companies overseas and issue stocks to public shareholders.

In an interview with Reuters last week, SEC Commissioner Allison Lee said that all Chinese companies listed on US stock exchanges must disclose Beijing interference risks to investors as part of their regular reporting obligations. As of Friday, the SEC was not processing registrations for the issuance of Chinese companies' Securities due to pending SEC guidance on how they're expected to disclose their risks. For instance, Chinese companies must disclose if they were denied permission from Chinese authorities to list on any US stock exchange and risks associated with an approval denial or rescind. These companies must also disclose when Chinese authorities allows them to list in the United States via an offshore Shell company that may have additional risks.

The SEC chairman expressed his concern over the fact that new investors may not realize that they have invested in a shell company and not the actual China-based operating company. The commission will now require Chinese companies to clearly distinguish management services of the shell company from the operating company, as well as state any interference risk from the Chinese government.

The US regulator said it will no longer Chinese companies to raise money in the United States unless the companies fully explain their legal structures, as well as disclose any risk of Chinese government interfering with their businesses, according to Reuters on Friday. In a statement, Gensler said he also asked staff to "engage in targeted additional reviews of filings for companies with significant China-based operations."

The SEC move follows Beijing's increasing crackdown on US-listed Chinese companies, with ride hailing company Didi as the latest case. The company's stock fell by nearly 30% after Chinese regulators announced a cybersecurity investigation on the company and stopped it from signing new members. US policy makers are also concerned that Chinese companies listed in the US are flouting rules that require public companies to full disclose to investors all possible risks to their businesses.

"I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies,"Gensler said.

The growing tensions between the United States and China could be a huge problem for US-listed China-based come use, which may affect the Chinese economy in turn, In 2020, thirty China-based US-listed companies on the New York Stock Exchange raised the most capital since 2014, according to data from Renaissance Capital.

According to the US-China Economic and Security Review Commission, there were about 248 China-based companies listed on three major US stock exchanges with a $2.1 trillion total market capitalization. While there are eight national-level Chinese-state companies listed in the US. In this year alone, Chinese listings in the US have hit a record $12.8 billion, so far, according to Refinitiv data. 

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