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U.S. SEC says Chinese IPO hopefuls must provide additional risk disclosures

·4-min read
FILE PHOTO: The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, D.C.

By Echo Wang, Scott Murdoch and Kane Wu

(Reuters) -The U.S. securities regulator 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 in their businesses, the agency said on Friday, confirming an exclusive report by Reuters.

In a statement, Securities and Exchange Commission Chair Gary Gensler said he had also asked staff to "engage in targeted additional reviews of filings for companies with significant China-based operations."

The development underscores U.S. policymakers' concerns that Chinese companies are systematically flouting U.S. rules that require public companies to disclose to investors a range of potential risks to their financial performance.

Chinese listings in the United States have reached a record $12.8 billion so far this year, according to Refinitiv data, as companies swooped in to capitalize on the U.S. stock market reaching daily record highs.

Deal flows slowed substantially this month after Chinese regulators banned ride-sharing giant Didi Global Inc from signing up new users just days after its blockbuster IPO. They followed up with crack-downs on technology and private education companies.

In an interview with Reuters earlier this week, SEC Commissioner Allison Lee said that Chinese companies listed on U.S. stock exchanges must disclose to investors the risks of the Chinese government interfering in their businesses as part of their regular reporting obligations.

On Friday, Reuters reported that the agency was not processing registrations for the issuance of Chinese company securities pending SEC guidance on how to disclose the risks they face in China.

Following that report, Gensler issued Friday's statement saying that in light of Beijing's crackdown, he had asked staff to seek additional disclosures from Chinese companies before making their registrations effective.

These should include that investors face "uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance" and the enforceability of certain contractual arrangements.

Chinese issuers must also disclose if they were denied permission from Chinese authorities to list on U.S. exchanges and the risks that such approval could be denied or rescinded.

In addition, Chinese companies should disclose when Chinese law requires them to list in the United States via an offshore shell company, which carries additional legal risks.

"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," said Gensler.

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The SEC's move represents the latest salvo by 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 held closely by founders.

The agency has been under intense pressure from U.S. lawmakers to take a tougher line. A group of senators including Republicans John Kennedy and Bill Hagerty wrote to Gensler this week urging "thorough investigations of U.S. listed Chinese companies' concerning lack of transparency."

Last month, the SEC removed the chairman of the Public Company Accounting Oversight Board (PCAOB), which has been unsuccessful in a 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.

A total of 418 Chinese companies are listed on U.S. exchanges, according to Refinitiv. The S&P/BNY Mellon China Select ADR Index, which tracks the American depositary receipts of major U.S.-listed Chinese companies, has lost 22% of its value year-to-date, compared with an 18% rise in the S&P 500 index.

No major U.S. IPO of a Chinese company is in the works following Didi, as the business community in China tries to come to grips with the regulators' intentions.

Chinese officials said last week they would bar tutoring for profit in core school subjects to ease financial pressures on families that have contributed to low birth rates, sending shockwaves through the country's private education sector. This came on the heels of a broad crackdown on China's massive internet sector amid concern in Beijing over the safety of the personal data of its citizens.

China's securities regulator met with executives of global investment banks on Wednesday to calm financial market nerves, reassuring them that policies will be rolled out more steadily to avoid volatility, people familiar with the matter told Reuters.

State-backed newspaper China Daily also said Beijing remained supportive of domestic companies seeking to list overseas.

Some Chinese companies canceled their U.S. IPOs this month proactively. LinkDoc Technologies pulled its offering to raise $211 million soon after Didi's troubles emerged, while Hello Inc this week announced its U.S. listing plans were on hold.,

(Reporting by Echo Wang in New York, Scott Murdoch and Kane Wu in Hong Kong; additional reporting by Katanga Johnson in Washington, D.C.; editing by Greg Roumeliotis, Richard Pullin and Dan Grebler)

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