US SEC says Chinese IPO hopefuls must provide additional risk disclosures

NEW YORK: The US Securities and Exchange Commission will not process registrations of securities by Chinese companies unless they provide disclosures on the implications of a new regulatory crackdown by Beijing and other risks, the agency said on Friday, confirming a report by Reuters.

In a statement, SEC Chair Gary Gensler said he had also asked staff to “engage in targeted additional reviews of filings for companies with significant China-based operations.”

The development underscores US policymakers’ concerns that Chinese companies are systematically flouting US rules that require public companies to disclose to investors a range of potential risks to their financial performance.

Chinese listings in the United States have reached a record $12.8 billion so far this year, according to Refinitiv data, as companies swooped in to capitalize on the US stock market reaching daily record highs.

Deal flows slowed substantially this month after Chinese regulators banned ride-sharing giant Didi Global Inc from signing up new users just days after its blockbuster IPO. They followed up with crack-downs on technology and private education companies.

In an interview with Reuters earlier this week, SEC Commissioner Allison Lee said that Chinese companies listed on US stock exchanges must disclose to investors the risks of the Chinese government interfering in their businesses as part of their regular reporting obligations.

On Friday, Reuters reported that the agency was not processing registrations for the issuance of Chinese company securities pending SEC guidance on how to disclose the risks they face in China.

Following that report, Gensler issued Friday’s statement saying that in light of Beijing’s crackdown, he had asked staff to seek additional disclosures from Chinese companies before making their registrations effective.

These should include that investors face “uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance” and the enforceability of certain contractual arrangements.

Chinese issuers must also disclose if they were denied permission from Chinese authorities to list on US exchanges and the risks that such approval could be denied or rescinded.

In addition, Chinese companies should disclose when Chinese law requires them to list in the United States via an offshore shell company, which carries additional legal risks.

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

The SEC’s move represents the latest salvo by US regulators against corporate China, which has frustrated Wall Street for years with its reluctance to submit to US auditing standards and improve the governance of companies held closely by founders.

The agency has been 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 urging “thorough investigations of US listed Chinese companies’ concerning lack of transparency.” Last month, the SEC removed the chairman of the Public Company Accounting Oversight Board (PCAOB), which has been unsuccessful in a push to ensure independent auditing of US-listed Chinese companies.