The Chinese regulatory crackdown on companies planning an IPO in the U.S. has already steered several businesses to reconsider plans. Chinese companies can expect additional scrutiny and disclosure requirements in the U.S. as well.
The Securities Exchange Commission, the financial regulator that oversees U.S. public offerings, said it would conduct “targeted additional reviews” of IPO filings for any company with significant operations based in China, according to a statement SEC Chairman Gary Gensler published Friday morning.
The SEC has its focus on both China-based companies as well as those that operate in China but are effectively controlled by shell companies held elsewhere — called Variable Interest Entities, or VIEs. Companies based in China will be required to make additional disclosures, including citing whether the company has received or has been denied permission from Chinese authorities to list on a U.S. exchange, as well as the risk the approval may be denied or rescinded. VIEs will need to clearly disclose they are shell companies, and express how uncertainty stemming from government action in China could impact the financial performance and contracts of China-based operating companies they hold.
The new SEC requirements are meant to protect investors amid the recent guidance and restrictions in China, Gensler said. Earlier this morning, Reuters reported that the SEC had frozen the registration process for Chinese companies while it drafted new disclosure requirements over risks they face in China.
China has administered a slew of actions since last November, cracking down on companies looking to raise international capital. Most notably was its recent data privacy investigation against car-hailing app, Didi Chuxing. The Cyberspace Administration of China (CAC) ordered the company to stop registering new customers, mere days after it was listed on the New York Stock Exchange, and subsequently removed the app from app stores. Since then, China has implemented new rules across several sectors, although a Chinese financial regulator recently assured several major investment banks that the country wouldn’t ban companies from going public in the U.S., as long as they meet certain requirements.
China’s new mandates come alongside a booming international IPO market. Many of America’s inbound IPOs have come from China this year — exactly half of the 68 international companies listed on U.S. exchanges in the first six months of 2021, according to EY’s second quarter IPO report. These numbers will likely shrink in the second half of this year, as Chinese companies have already been pulling IPO registrations.
Meanwhile, Mainland China had a higher number of IPOs in the first half of this year than it has in more than two decades — 247 companies went public, an 109% increase from the year prior, raising $32.9 billion in funding.