While China is making it increasingly difficult for its companies to IPO in the US, the US has decided to make it that more challenging too.
According to Reuters, the SEC has started to issue new disclosure requirements to Chinese companies seeking to go public in New York as part of a push to boost investor awareness of the risks involved.
"Please describe how this type of corporate structure may affect investors and the value of their investment, including how and why the contractual arrangements may be less effective than direct ownership, and that the company may incur substantial costs to enforce the terms of the arrangements," said one SEC letter seen by Reuters.
While one wonders why it took 10 years for the SEC to wake up to the VIE risks that we warned about over a decade ago, it's better late than never, and according to the report, some Chinese companies have now started to receive detailed instructions from the SEC about greater disclosure of their use of offshore vehicles known as variable interest entities (VIEs) for IPOs; implications for investors and the risk that Chinese authorities will interfere with company operations.
The information crackdown follows after SEC Chair Gary Gensler asked for a "pause" in U.S. initial public offerings of Chinese companies and sought more transparency about these issues. Chinese listings in the United States came to a standstill after the SEC freeze, but not before hitting a record $12.8 billion in the first seven months of 2021, as Chinese companies capitalized on the soaring U.S. stock market.
The SEC has also asked Chinese companies for a disclosure that "investors may never directly hold equity interests in the Chinese operating company," according to the letter. Many Chinese VIEs are incorporated in tax havens such as the Cayman Islands. Gensler has said there are too many questions about how money flows through these entities.
"Refrain from using terms such as 'we' or 'our' when describing activities or functions of a VIE," the letter stated.
The SEC has also provided disclosure requirements pertaining to the risk of Chinese regulators intervening with company data security policies, the sources said. Last month, just days after the blockbuster IPO of Didi Global, Chinese regulators banned the ride-sharing giant from signing up new users. This move was followed by crackdowns on technology and private education companies.
The SEC has also asked some companies for more details in cases where they do not comply with the U.S. Holding Foreign Companies Accountable Act on accounting disclosures to regulators. China has so far prevented companies from sharing the work of their auditors with the U.S. Public Company Accounting Oversight Board. Last month, the SEC removed the chairman of the board, which has been unsuccessful in its push to ensure independent auditing of U.S.-listed Chinese companies.
The SEC's move represents the latest salvo by U.S. regulators against corporate China, which for years has frustrated Wall Street with its reluctance to submit to U.S. auditing standards and improve the governance of companies held closely by founders.
The SEC is also under pressure to finalize rules on the delisting of Chinese companies that do not comply with U.S. auditing requirements.