US SEC Says Chinese IPO Hopes Must Provide Additional Risk Information

July 30 (Reuters) – The US securities regulator will not allow Chinese companies to raise funds in the United States unless they fully explain their legal structures and disclose the risk of Beijing interfering in their activities, the agency said on Friday, confirming an exclusive report by Reuters.

In a statement, Securities and Exchange Commission Chairman Gary Gensler said he had also asked staff to “engage in additional targeted reviews of cases for companies with large operations based in China.” .

This development underscores the concerns of US policymakers that Chinese companies routinely flout US rules that require state-owned companies to disclose to investors a range of potential risks to their financial performance.

Chinese quotes in the United States have hit a record high of $ 12.8 billion so far this year, according to data from Refinitiv, as companies rushed to capitalize on the U.S. stock market hitting daily highs.

Transaction flows slowed significantly this month after Chinese regulators banned rideshare giant Didi Global Inc (DIDI.N) from signing up new users just days after its successful IPO. They followed up with crackdowns on tech and private education companies.

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

Reuters reported on Friday that the agency is not processing registrations for issuing securities from Chinese companies pending SEC guidelines on how to disclose the risks they face in China.

Following that report, Gensler released a statement on Friday saying that in light of Beijing’s crackdown, it had asked staff to request additional information from Chinese companies before making their registrations effective.

These should include the fact that investors face “uncertainty over future actions of the Chinese government that could significantly affect the financial performance of the operating company” and the enforceability of certain contractual arrangements.

Chinese issuers must also disclose whether they have been denied permission from Chinese authorities to list on U.S. stock exchanges and the risks that such approval could be denied or revoked.

Additionally, Chinese companies should disclose when Chinese law requires them to register in the United States through an offshore shell company, which carries additional legal risks.

“I believe these changes will improve the overall quality of disclosure in the registration statements of offshore issuers that have affiliations with operating companies based in China,” Gensler said.

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LAST EXCEPT

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

The agency has come under intense pressure from US lawmakers to take a tougher line. A group of senators including Republicans John Kennedy and Bill Hagerty wrote to Gensler this week asking for “full investigations into Chinese companies listed in the United States regarding the lack of transparency.”

Last month, the SEC dismissed the chairman of the Public Company Accounting Oversight Board (PCAOB), which failed to provide an independent audit of Chinese companies listed in the United States. The SEC is also under pressure to finalize rules on delisting Chinese companies that do not comply with US audit requirements.

A total of 418 Chinese companies are listed on the US stock exchanges, according to Refinitiv. The S & P / BNY Mellon China Select ADR Index, which tracks US certificates of deposit of major Chinese companies listed in the US, has lost 22% of its value since the start of the year, up from an 18% increase in the S&P 500 index.

No major US IPO of a Chinese company is in the works after Didi, as the business community in China tries to understand regulators’ intentions.

Chinese officials said last week they would ban for-profit private lessons in basic school subjects to ease financial pressures on families that have contributed to low birth rates, sending shock waves through the country. the country’s private education sector. It follows a massive crackdown on China’s huge internet sector, as Beijing worries about the security of the personal data of its citizens. Read more

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

The state-run China Daily also said that Beijing remained favorable to domestic companies seeking to register overseas.

Some Chinese companies proactively canceled their IPOs in the United States this month. LinkDoc Technologies withdrew its offer to raise $ 211 million shortly after Didi’s problems emerged, while Hello Inc announced this week that its U.S. listing plans were on hold. Read more ,

Reporting by Echo Wang in New York, Scott Murdoch and Kane Wu in Hong Kong; additional reporting by Katanga Johnson in Washington, DC; edited by Greg Roumeliotis, Richard Pullin and Dan Grebler

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