US SEC tells Chinese companies to disclose regulatory risk
03:43, 24 August 2021
Chinese companies looking to list in the US are being asked by the country's securities watchdog to adhere to new disclosure requirements, in a bid to spread investor awareness of risks involved with China’s highly volatile regulatory environment, Reuters reported on Monday.
The US Securities and Exchange Commission (SEC) has reached out to a number of Chinese companies with detailed instructions about greater disclosure on the possibilities of Chinese authorities interfering with company operations, Reuters reported.
Capital.com reached out to the SEC for a comment but was unable to get an immediate reply.
US IPO increasingly difficult
The initial public offering (IPO) environment for Chinese companies looking to go public in the US has become increasingly difficult with companies sandwiched between new regulations issued by authorities in the US, as well as China.
The US is a lucrative market for growing Chinese companies looking to tap into Western capital investments. In the first seven months of 2020, Chinese IPOs raised a record USD12.8bn from a booming US stock market, according to Reuters.
However, the recent Didi Global IPO fiasco has dented investor sentiment and alerted market authorities after the shares of the ride-hailer tanked less than a week into its New-York IPO following regulatory crackdown from Beijing.
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Didi Global fiasco
Didi Global shares slumped nearly 20% in a single session in early July after Chinese regulators removed the ride-hailer’s apps from smartphone app stores in China and disallowed it from signing up new users in the country.
In late July, SEC Chairman Gary Gensler expressed his concerns about Chinese companies using shell companies to issues shares on foreign stock exchanges, as some Chinese “companies are not allowed to have foreign ownership and cannot directly list on exchanges outside of China.”
“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” Gensler added.
Disclosing risks involved
“In light of the recent developments in China and the overall risks with the China-based VIE (variable interest entity) structure (shell companies), I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a 30 July statement.
Gensler also stated that China-based companies seeking to list in the US will have to disclose whether it received or was denied permission from Chinese authorities to list on US exchanges.
A failure to allow the inspection of the issuing company’s public accounting firm within three years may result in the delisting of the operating company in the future, Gensler added.
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