Traders work during the IPO of the Chinese ridesharing service Didi Global Inc on the floor of the New York Stock Exchange (NYSE) in New York City, the United States, June 30, 2021.
Brendan McDermid | Reuters
BEIJING – Half a year since the onslaught of Chinese IPOs in the US subsided, many details are still unknown to companies aiming for such international IPOs.
Since the aftermath of the IPO of the Chinese ride-hailing app Didi in late June, the authorities have tightened their control over Chinese companies that raise billions of dollars in US public markets. A 10-year high of 34 China-based companies listed in the US this year, but only three of the IPOs have taken place since July, according to Renaissance Capital.
Regulators in both countries released clarifications this month on what Chinese companies need to go public in the US. While this is a start, many questions remain about implementation.
Over the Christmas holiday weekend on Wall Street, the Chinese Securities Commission released proposed rules for domestic companies wishing to list overseas. The public comment deadline is January 23rd.
The proposed rules of the CSRC said that a foreign listing could be stopped if the authorities see it as a threat to national security. Domestic businesses must comply with relevant foreign investment, cybersecurity, and data security regulations, according to a draft without much elaboration.
"The details of regulatory enforcement require further observation, particularly the scope of oversight of other related departments in addition to the CSRC," said Winston Ma, associate professor of law at New York University and co-author of The Hunt for Unicorns: How State funds reshaping investments in the digital economy. "
No ban on the popular VIE structure
Beijing has stated for years that one of its goals is to improve access to and improve access to its stock market, which is only around 30 years old. Authorities have tried to make it easier for companies to raise funds in the domestic stock market by gradually moving from an admissions system to a registration system.
The new foreign listing rules set specific requirements for filing documents and said the Securities Commission would, according to a draft, respond to filing requests within 20 working days of receiving all materials.
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The Commission has not banned the widespread floating rate structure, as some feared. The structure creates a listing by a shell company, often based in the Cayman Islands, and prevents investors from having majority voting rights in the US-listed stocks.
"If the national laws and regulations are complied with, companies with a VIE structure can be listed abroad after submitting them to the CSRC," said the commission in an English-language statement on its website. What these laws and ordinances were was not stated.
However, the amount of foreign investment allowed in Chinese VIEs will likely be reduced to the amount of A-shares in mainland China, said Bruce Pang, director of macro and strategy research at China Renaissance.
He referred to an online question-and-answer article on new regulations on foreign investment released Monday by China's Ministry of Commerce and the National Development and Reform Commission. The article pointed to existing restrictions restricting foreign ownership to 30% of a company's shares, with any foreign investor limited to a 10% stake.
US holdings in Chinese stocks listed in New York are relatively small, according to Morgan Stanley. Of those eligible for secondary listing in Hong Kong, the average share of US ownership for the top 50 names is 27%, according to data from CNBC.
Foreign financial institutions can also face higher requirements to participate in Chinese IPOs.
“The rule proposed (by the CSRC) also requires that international banks that subscribe to the offshore listing of a Chinese company register with the CSRC, which can pose new compliance challenges for the overseas underwriters as they may be the Chinese regulations must be followed as soon as they join (the) CSRC, "said Ma, former managing director and head of North America of China Investment Corporation, a sovereign wealth fund.
The exam extends to SPACs
Meanwhile, the US has stepped up efforts to alert investors to the uncertainties surrounding investing in New York-listed Chinese companies.
Earlier this month, the US Securities and Exchange Commission finalized the rules it needed to implement a law that could force Chinese companies to move away from US stock exchanges. It's unclear when such delistings would begin – Morgan Stanley analysts don't expect them to happen before at least 2024.
The SEC's corporate finance division also released details last week on 15 areas in which it "encouraged" China-based listings – both existing and future – to increase disclosure. One section read:
Indicate whether you, your subsidiaries or VIEs are subject to the approval requirements of the China Securities Regulatory Commission (CSRC), the Cyberspace Administration of China (CAC), or any other government agency that needs to approve the operation of the VIE and confirm whether you are Have received all required permissions or permits and whether permissions or permits have been denied.
The SEC's statement advised that special-purpose acquisition companies with significant ties to China should also disclose relevant risks. SPACs have grown in popularity over the past two years. They circumvent the traditional IPO process by using shell companies that were formed solely for the purpose of acquiring existing private companies.
The draft rule of the CSRC states that companies that go to other markets via SPACs should meet the same notification requirements as foreign IPOs.