July 30 (Reuters) – The U.S. Securities and Exchange Commission will not allow Chinese companies to raise money in the United States unless they fully explain their legal structures and disclose the risk of Beijing interfering with their businesses, the said Agency on Friday and confirmed an exclusive report from Reuters.
In a statement, Securities and Exchange Commission chairman Gary Gensler said he also asked staff to “conduct targeted additional filing reviews for companies with significant business operations in China.”
The development underscores the concern of US politicians that Chinese companies are systematically violating US rules that require listed companies to disclose a number of potential risks to their financial performance to investors.
According to Refinitiv data, Chinese prices in the United States have hit a record $ 12.8 billion so far this year as companies entered the US stock market to hit all-day highs.
Deal flow slowed significantly this month after Chinese regulators banned ride-sharing giant Didi Global Inc (DIDI.N) from signing up new users just days after its blockbuster IPO. Raids against technology companies and private education companies followed.
In an interview with Reuters earlier this week, SEC Commissioner Allison Lee said that as part of their regular reporting obligations, Chinese companies listed on US stock exchanges must disclose to investors the risks of Chinese government interference in their businesses. Continue reading
On Friday, Reuters reported that the agency will not process registrations for issuing securities of Chinese companies pending SEC guidelines on disclosing the risks they face in China.
Following the report, Gensler issued a statement on Friday saying that in view of the Beijing crackdown, he had asked employees to seek additional disclosures from Chinese companies before their registrations take effect.
These should include that investors face “uncertainty about future measures by the Chinese government that could significantly affect the financial performance of the operating company” and the enforceability of certain contractual agreements.
Chinese issuers must also disclose whether they have been denied permission to list on US stock exchanges by the Chinese authorities and the risks that such admission could be denied or revoked.
Additionally, Chinese companies should disclose when Chinese law requires them to be listed through an offshore shell company in the United States, which creates additional legal risks.
“I believe these changes will improve the overall quality of disclosure in registration statements from offshore issuers that have ties to China-based operating companies,” said Gensler.
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The SEC move marks the latest salvo from U.S. regulators against corporate China, which has frustrated Wall Street for years with its reluctance to submit to U.S. auditing standards and improve the governance of companies closely held by founders.
US lawmakers have come under heavy pressure to take a tougher stance. A group of senators, including Republicans John Kennedy and Bill Hagerty, wrote to Gensler this week urging “thorough investigations into US publicly traded Chinese companies for lack of transparency.”
Last month, the SEC ousted the chairman of the Public Company Accounting Oversight Board (PCAOB), which was unsuccessful in ensuring independent scrutiny of US-listed Chinese companies. The SEC is also under pressure to finalize rules for delisting Chinese companies that do not meet US audit requirements.
According to Refinitiv, a total of 418 Chinese companies are listed on US stock exchanges. The S & P / BNY Mellon China Select ADR Index, which tracks the American depository receipts of large US-listed Chinese companies, has lost 22% of its value over the year to date, compared with an 18% increase in the S&P 500 Index.
No major US IPO of a Chinese company is in the works after Didi as the business community in China tries to get a grip on regulators’ intentions.
Chinese officials said last week they would ban tuition in core school subjects to ease financial pressures on families who have contributed to low birth rates, which sent shock waves through the country’s private education sector. It came after broad crackdown on China’s massive internet sector amid concerns in Beijing over the security of its citizens’ personal information. Continue reading
China’s securities regulator met with executives from global investment banks on Wednesday to calm the nerves of financial markets and reassure them that the guidelines will be implemented more consistently to avoid volatility, people familiar with the matter told Reuters. Continue reading
The state-backed China Daily newspaper also said Beijing continues to support domestic companies seeking overseas listing.
Some Chinese companies proactively canceled their US exchanges this month. LinkDoc Technologies withdrew its $ 211 million raise shortly after Didi’s problems surfaced, while Hello Inc announced this week that its US listing plans have been put on hold. Continue reading ,
Reporting by Echo Wang in New York, Scott Murdoch and Kane Wu in Hong Kong; additional coverage from Katanga Johnson in Washington, DC; Editing by Greg Roumeliotis, Richard Pullin and Dan Grebler
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