SEC points new disclosure necessities for Chinese language IPOs amid Beijing proceedings
People leave the SEC headquarters in Washington, DC, May 12, 2021.
Andrew Kelly | Reuters
The Securities and Exchange Commission said Friday it would require additional disclosures from Chinese companies seeking listing on US stock exchanges after Beijing cracked down on the issuance of foreign stocks.
“Given the recent developments in China and the overall risks with the China-based company [variable interest entities] Structure, I have asked employees to obtain certain disclosures from offshore issuers associated with China-based operating companies before their registration statements are validated, “SEC chairman Gary Gensler said in a statement.
The so-called Variable Interest Entities are a structure used by large Chinese companies from Alibaba to JD.com to go public in the US while bypassing Beijing’s oversight, as the country is not a direct one in most cases foreign ownership permits. These variable ownership companies allow China-based operating companies to set up offshore shell companies in a different jurisdiction and issue shares to public shareholders.
Gensler said he feared that “the average investor may not realize they are holding shares in a shell company rather than a China-based operating company.”
The SEC will ask Chinese companies to clearly distinguish the management services of the shell company from the operating company, while pointing out any risks posed by future actions by the Chinese government.
The move came when Beijing stepped up its oversight of the spate of Chinese entries on U.S. ridehailing app Didi, which became the latest victim of the crackdown. The stock plunged nearly 30% this month after Beijing announced a cybersecurity investigation that suspended new user registrations.
Tensions between the two countries could be a severe blow to Chinese companies that have been loudly listing in New York in recent years. In 2020, 30 China-based US public offerings raised the most capital since 2014, data from Renaissance Capital shows.
According to the U.S. China Economic and Security Review Commission, at least 248 Chinese companies were listed on three major U.S. stock exchanges with total market capitalizations of $ 2.1 trillion. In the USA, eight Chinese state-owned companies are listed at the national level
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