EXCLUSIVE SEC Gives Chinese Companies New Requirements for US IPO Disclosures

Aug.23 (Reuters) – The U.S. Securities and Exchange Commission (SEC) has started issuing new disclosure requirements for Chinese companies wishing to register in New York as part of a campaign to educate investors about risks, according to a document reviewed by Reuters and people familiar with the matter.

Some Chinese companies have now started to receive detailed instructions from the SEC regarding greater disclosure of their use of offshore vehicles known as Variable Interest Entities (VIEs) for IPOs; implications for investors and the risk of Chinese authorities interfering with the company’s operations.

SEC Chairman Gary Gensler last month called for a “pause” in US initial public offerings (IPOs) of Chinese companies and called for more transparency on the issues. Chinese listings in the US came to a halt after the SEC freeze. In the first seven months of 2020, those quotes hit a record high of $ 12.8 billion, as Chinese companies capitalized on the soaring U.S. stock market.

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

The SEC also asked Chinese companies to disclose that “investors can never directly own stakes in the Chinese operating company,” according to the letter. Many Chinese VIEs are incorporated in tax havens such as the Cayman Islands. Gensler said there were too many questions about how money flows through these entities.

“Refrain from using terms such as ‘we’ or ‘our’ to describe the activities or functions of a VIE,” the letter said.

An SEC spokesperson did not immediately respond to a request for comment.

The SEC also provided disclosure requirements regarding the risk of Chinese regulators interfering with companies’ data security policies, the sources said. Last month, just days after the successful IPO of Didi Global Inc (DIDI.N), Chinese regulators banned the ridesharing giant from signing up new users. The move was followed by crackdowns on tech and private education companies.

The SEC has also asked some companies for more details in cases where they fail to comply with the U.S. Holding Foreign Companies Accountable Act on accounting disclosures to regulators. China has so far prevented companies from sharing their auditors ‘work with the United States’ Public Company Accounting Oversight Board. Last month, the SEC removed the chairman of the board, who failed to provide an independent audit of Chinese companies listed in the United States.

The SEC decision represents the latest salvo by U.S. regulators against Chinese companies, which for years have frustrated Wall Street with its reluctance to submit to U.S. auditing standards and improve the governance of companies tightly owned by the founders.

The SEC is also under pressure to finalize rules on delisting Chinese companies that do not comply with US audit requirements.

Echo Wang report in New York Editing by Greg Roumeliotis and David Gregorio

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