SEC Steps Up Chinese IPO Reporting Rules

The Securities and Exchange Commission appears to be implementing the pause on Chinese company IPOs that its chairman, Gary Gensler, asked for last month.

The commission has begun to issue new reporting requirements for Chinese companies that want to list on U.S. exchanges, according to Reuters.

The agency is asking Chinese companies for details about the offshore vehicles they use to list in the U.S., including disclosure about whether investors in those IPOs will ever directly hold shares in the Chinese operating company.

In Gensler’s “Office Hours” video presentation Aug. 16, the SEC chairman cautioned investors about investing in Chinese companies, noting that they are more likely to be investing in a shell companies in the Cayman Islands or another part of the world than in Chinese companies directly, because China’s government does not allow direct ownership investment from people outside of China in many Chinese companies, especially tech companies.

“Investing in a shell company in the Caymans is different than investing directly in a company in China,” Gensler warned. He said he had asked staff to take a pause on Chinese IPOs on U.S. exchanges.

According to Reuters, SEC staff are now asking Chinese companies that want to list in the U.S. about whether investors will be able to directly hold shares in the Chinese operating company and whether their contractual arrangements with offshore firms are less effective than direct ownership. The SEC is also asking Chinese companies about their accounting disclosures because China does not let its companies share that work with the U.S. Public Company Accounting Oversight Board.

In his video, Gensler noted that Congress passed legislation that will prevent Chinese and other  foreign operating companies from listing in the U.S. if they don’t open their books in the next three years. The legislation also provides a process for delisting noncompliant companies.

The SEC’s latest scrutiny of Chinese companies comes after China announced it would tighten rules for companies listed overseas or seeking to do so and after China began a crackdown on tech companies already listed in the U.S., including Didi Global, Alibaba and Tencent. It also follows President Joe Biden’s renewed a ban on the U.S. listing of Chinese companies involved in defense, intelligence, security research and surveillance technology — what he called “Chinese Military-Industrial Complex Companies.” The original ban, under then-President Donald Trump and renewed under Biden, has resulted in FTSE Russell and S&P Dow Jones Indices removing a number of Chinese stocks from their indexes.