ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter
Markets

US regulators step up scrutiny of IPO hopefuls from China

SEC chair sounds warning on shell-company-linked VIEs

Traders work during the IPO for Didi Global on the New York Stock Exchange floor on June 30: Didi had already started trading when the regulator blew the whistle.   © Reuters

NEW YORK (AP) -- Chinese companies hoping to sell their shares in the United States must start making more disclosures about their potential risks before U.S. regulators will allow them to list their stock.

The Securities and Exchange Commission announced the move Friday after Beijing said it would step up its supervision of Chinese companies listed overseas, including reviews of their cybersecurity.

SEC Chair Gary Gensler pointed in particular to Chinese businesses that use shell companies to get around Chinese rules blocking foreign ownership for their industries.

Under these deals, the Chinese business forms a shell company in the Cayman Islands or somewhere else. The shell company then sells its stock to investors after listing in New York.

The shell company has no ownership of the Chinese company. Instead, it has service contracts with it. These arrangements are called variable interest entities, or "VIEs."

"I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company," Gensler said.

Gensler said he asked the SEC's staff to make sure such companies make several disclosures before an initial public offering of stock. Among them: They must make clear investors are buying shares of the shell company, not the China-based operating company, and that future actions by the Chinese government could significantly affect financial performance.

Gensler also said that all Chinese companies trying for a U.S. IPO must disclose risks that approvals from Chinese authorities to list on a U.S. exchange could be rescinded, among other things.

Several big-name Chinese companies have seen their stocks tumble recently as Beijing has stepped up regulation of their data protection and security.

U.S.-listed shares of ride-hailing company Didi Global, for example, have been falling since they began trading at the end of June. They dropped nearly 20% in their fourth day of trading after the company was ordered to stop signing up new users and remove its app from online stores while it increases security for customer information.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends July 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more