SEC slaps new disclosure requirements on Chinese IPOs amid Beijing’s crackdown

The Securities and Exchange Commission said Friday it will require additional disclosures from Chinese companies seeking a listing on U.S. stock exchanges, following Beijing’s intensified crackdown on oversea share issuance. “In light of the recent developments in China and the overall risks with the China-based [variable interest entities] structure, I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” SEC Chairman Gary Gensler said in a statement.

The so-called variable interest entities are a structure used by major Chinese companies from Alibaba to JD.com to go public in the U.S. while skirting oversight from Beijing as the country doesn’t allow direct foreign ownership in most cases. These variable interest entities allow China-based operating companies to establish offshore shell companies in another jurisdiction and issue stocks to public shareholders. Gensler said he worries that “average investors may not realize that they hold stock in a shell company rather than a China-based operating company.”

The SEC will ask Chinese companies to clearly distinguish the shell company’s management services from the operating company, while stating any risk from future actions from the Chinese government. The move came as Beijing stepped up its oversight on the flood of Chinese listings in the U.S. Ride-hailing app Didi became the latest victim of the clampdown. The stock tumbled nearly 30% this month after Beijing announced a cybersecurity investigation, suspending new user registrations.

SEC slaps new disclosure requirements on Chinese IPOs amid Beijing’s crackdown, CNBC, Aug 2