SEC gives Chinese companies new requirements for U.S. IPO disclosure

25 Aug, 2021 01:11
source: Singularity Financial

Singularity Financial Hong Kong August 25, 2021 – The U.S. Securities and Exchange Commission (SEC) has started to issue new disclosure requirements to Chinese companies seeking to list in New York as part of a push to boost investor awareness of the risks involved, according to a document reviewed by Reuters and people familiar with the matter.

Securities and Exchange Commission Chairman Gary Gensler outlined the emerging regulatory policy in stark terms last week in a video message, where he said the agency “is taking a pause for now” in approving new initial public offerings of Chinese companies on U.S. stock exchanges.

Gensler argued that American investors may not understand that most Chinese companies that list their shares on U.S. exchanges don’t do so directly. Because the Chinese government blocks foreign direct investment in key industries like technology, these companies form shell entities — called variable interest entities or VIEs — in foreign jurisdictions like the Cayman Islands, which are then listed on exchanges, including the New York Stock Exchange and Nasdaq. These shell companies have a contractual claim on the profits and assets of the parent company, though the enforceability of those claims is questionable.

Some Chinese companies have now started to receive detailed instructions from the SEC about greater disclosure of their use of VIEs for IPOs; implications for investors and the risk that Chinese authorities will interfere with company operations.

“When American investors think we’re investing in a Chinese company, it’s actually more likely we’re investing in a company in the Cayman Islands,” Gensler said. “I’ve asked the SEC staff to ensure that companies provide full and fair disclosure that what we’re actually investing in is actually a shell company in the Caymans.”

“Please describe how this type of corporate structure may affect investors and the value of their investment, including how and why the contractual arrangements may be less effective than direct ownership, and that the company may incur substantial costs to enforce the terms of the arrangements,” said one SEC letter seen by Reuters.

“Refrain from using terms such as ‘we’ or ‘our’ when describing activities or functions of a VIE,” the letter stated.

The SEC has also asked some companies for more details in cases where they do not comply with the U.S. Holding Foreign Companies Accountable Act on accounting disclosures to regulators. China has so far prevented companies from sharing the work of their auditors with the U.S. Public Company Accounting Oversight Board. Last month, the SEC removed the chairman of the board, which has been unsuccessful in its push to ensure independent auditing of U.S.-listed Chinese companies.

The SEC is also under pressure to finalize rules on the delisting of Chinese companies that do not comply with U.S. auditing requirements.