Traders work during the IPO of Chinese ride-hailing company Didi Global Inc. on the floor of the New York Stock Exchange (NYSE) on June 30, 2021 in New York City, US.
Brendan McDermid | Reuters
BEIJING — Half a year after the Chinese IPO rush in the US, many details remain unknown to companies looking to pursue such international listings.
Since the fallout on Chinese ride-hailing app Didi’s IPO in late June, officials have increased their investigation into Chinese companies raising billions of dollars in US public markets. Of the 34 China-based companies listed in the US this year, a 10-year high, according to Renaissance Capital, but only three IPOs have taken place since July.
Regulators in both countries this month issued clarifications on what is required for Chinese companies to go public in the US and, while it is a start, many questions remain about implementation.
Over the Christmas holiday weekend on Wall Street, the China Securities Regulatory Commission issued proposed rules for domestic companies if they wish to list overseas. The public comment period ends on January 23.
CSRC’s proposed rules state that a foreign listing can be stopped if the authorities consider it a threat to national security. A draft said that domestic companies need to comply with relevant provisions in the areas of foreign investment, cyber security and data protection.
“The details of rule enforcement still require further observation,” said Winston Ma, an assistant professor of law at New York University and co-author of the book “The Hunt”, particularly with regard to the supervisory scope of relevant ministry regulators other than the CSRC. ” For Unicorns: How Sovereign Funds Are Reshaping Investing in the Digital Economy.”
No restriction on popular VIE structure
Beijing has said for years that one of its goals is to increase access and improve its stock market, which is only about 30 years old. The authorities have tried to make it easier for companies to raise funds from the domestic stock market by gradually shifting from the approval system to the registration system.
The new rules for foreign listings laid out specific requirements for filing documents, and said the Securities Commission would respond to filing requests within 20 business days of receiving all materials, according to a draft.
The commission also did not ban the widely used variable interest unit structure, as some feared. The structure creates a listing through a shell company, often based in the Cayman Islands, which prevents investors from having majority voting rights in US-listed stocks.
“Companies with a VIE structure are eligible to be listed overseas after filing with the CSRC if they comply with domestic laws and regulations,” the commission said in an English-language statement on its website. It did not specify what those laws and regulations were.
However, the amount of foreign investment allowed in Chinese VIEs will be reduced to match mainland China’s A shares, said Bruce Pang, head of macro and strategy research at China Renaissance.
He pointed to an online question-and-answer article on Monday from China’s commerce ministry and the National Development and Reform Commission on new rules on foreign investment. The article referred to existing restrictions that limit foreign ownership to 30% of the company’s shares, with each foreign investor capped at a 10% stake.
According to Morgan Stanley data, US ownership of Chinese stocks listed in New York is relatively small. Of those eligible for secondary listings in Hong Kong, US ownership accounts for an average of 27% for the top 50 names, according to CNBC calculations of the data.
Foreign financial institutions may also face greater requirements to participate in Chinese IPOs.
“The [CSRC’s] The proposed rule would also require international banks that underwrite a Chinese firm’s offshore listing to register with the CSRC, which could create new compliance challenges for foreign underwriters, as they need to be registered with Chinese regulations once they are registered. may need to be followed. [the] CSRC,” said Ma, former managing director and head of North America for China Investment Corporation, a sovereign wealth fund.
Investigation extends to SPACs
Meanwhile, the US is increasing its efforts to alert investors to the uncertainties of investing in Chinese companies listed in New York.
Earlier this month, the US Securities and Exchange Commission finalized rules needed to enforce a law that could force Chinese companies to delist from US stock exchanges. It’s unclear when such delisting will begin — Morgan Stanley analysts don’t expect it to happen until at least 2024.
The SEC’s Corporate Finance Department also released details last week on 15 areas in which it “encouraged” China-based listings — existing and future — to increase disclosure. One section read:
state whether you, your subsidiaries, or VIE are covered by permission requirements from the China Securities Regulatory Commission (CSRC), the Cyberspace Administration of China (CAC) or any other government agency required to approve the operation of VIE, and affirmatively whether you have obtained all required permissions or approvals and whether any permissions or approvals have been denied.
The SEC statement said special purpose acquisition companies with significant ties to China must also disclose relevant risks. SPACs have exploded in popularity over the past two years. They bypass the traditional IPO process by using shell companies created for the sole purpose of taking over existing private companies.
The CSRC’s draft rules state that companies moving to other markets through SPACs must comply with the same filing requirements as for foreign IPOs.
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