The U.S. securities regulator in an exclusive report released on July 30 says it will not allow Chinese companies to undertake fundraising in the United States unless they wholly disclose their legal structures and explain the possibility of Beijing interfering in their businesses.
In a related statement, Securities and Exchange Commission Chair Gary Gensler revealed he had also mandated staff to “engage in targeted additional reviews of filings for companies with significant China-based operations.”
The news affirms U.S. policymakers’ concerns that Chinese firms are systematically disobeying U.S. rules that require public companies to reveal to investors a range of possible risks to their financial performance.
Chinese listings in the United States have recorded $12.8 billion so far this year, based on Refinitiv data, as firms rush to capitalize on the U.S. stock market attaining daily record highs.
Deal flows reduced greatly this month on the back of Chinese regulators ban of ride-sharing giant Didi Global Inc (DIDI.N) from signing up new users a few days after its record-breaking IPO. They backed that up with crack-downs on private education and technology firms.
In an interview with Reuters last week, SEC Commissioner Allison Lee noted that Chinese companies listed on U.S. stock exchanges are mandated to disclose to investors the possibility of the Chinese government interfering in their businesses as part of their regular reporting obligations.
On Friday, Reuters confirmed in a report that the agency was not processing registrations for the issuance of Chinese firm securities pending SEC guidance on how to uncover the risks they face in China.
Based on that report, Gensler released Friday’s statement noting that following Beijing’s crackdown, he had mandated staff to request additional disclosures from Chinese firms prior to allowing registrations.
These should include that investors encounter “uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance” and the enforceability of specific contractual arrangements.
Chinese companies are also mandated to reveal if they were denied approval from Chinese regulators to enlist on U.S. exchanges and the possibility that such approval could be rescinded or rejected.
Additionally, Chinese firms should disclose when Chinese law requires them to list in the United States through an offshore shell company, which comes with additional legal complications.
“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,” noted Gensler.
The SEC’s action underlines the latest salvo by U.S. authorities against corporate China, which has frustrated Wall Street for years with its hesitancy to submit to U.S. auditing standards and enhance the governance of firms held closely by founders.
The agency has been under much pressure from U.S. lawmakers to take a tougher stance. A group of Senators including Republicans Bill Hagerty and John Kennedy wrote to Gensler this week encouraging “thorough investigations of U.S. listed Chinese companies’ concerning lack of transparency.”
Last month, the SEC ordered the removal of the chairman of the Public Company Accounting Oversight Board (PCAOB), which has been unsuccessful in an effort to ensure independent auditing of U.S.-listed Chinese firms. The SEC is also being pressured to finalize rules on the delisting of Chinese firms that are not compliant with U.S. auditing requirements.
A total of 418 Chinese firms are listed on U.S. exchanges, according to Refinitiv. The S&P/BNY Mellon China Select ADR Index, which monitors the American depositary receipts of top U.S.-listed Chinese companies, has recorded a loss of 22% of its value year-to-date, compared with an 18% increase in the S&P 500 index.
No major U.S. IPO of a Chinese firm is in the works following Didi, as the business community in China attempts to come to terms with the regulators’ goals.
Chinese officials disclosed last week that they would suspend tutoring for profit in core school subjects to reduce financial pressures on families that have contributed to low birth rates, sending shockwaves through the country’s private education industry. This follows a massive crackdown on China’s huge internet sector amid fears in Beijing over the safety of the personal data of its citizens.
China’s security regulators had a meeting with executives of global investment banks on Wednesday to calm financial nerves, reassuring them that policies will be released more steadily to prevent volatility, people familiar with the development disclosed to Reuters.
State-supported newspaper China Daily also affirmed Beijing remained supportive of local companies aiming to enlist in foreign countries.