US market regulator adds new disclosure requirements for Chinese company IPOs

SEC last month asked for a 'pause' in listings of Chinese companies on US markets as it sought more transparency

The US Securities and Exchange Commission building in Washington. Chinese companies hoping to sell their shares in the US must disclose potential risks before they are allowed to list. AP

The US Securities and Exchange Commission has started issuing new disclosure requirements to Chinese companies seeking to list in New York as part of a push to boost investor awareness of the risks involved, according to officials and a document.

Some Chinese companies have now begun to receive detailed instructions from the SEC about greater disclosure of their use of offshore vehicles – known as variable interest entities, or VIEs – for initial public offerings, the implications for investors and the risk that Chinese authorities will interfere with company operations.

Last month, SEC chairman Gary Gensler asked for a "pause" in US IPOs of Chinese companies and sought more transparency about these issues.

Chinese listings in the US came to a standstill after the SEC freeze. In the first seven months of 2020, such listings reached a record $12.8 billion, as Chinese companies capitalised on the soaring US stock market.

"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.

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. Mr 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 said.

An SEC representative did not immediately respond to a request for comment.

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, a few days after the blockbuster IPO of Didi Global, Chinese regulators banned the ride-sharing company 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 US 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 US 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 US-listed Chinese companies.

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

The SEC is also under pressure to finalise rules on the delisting of Chinese companies that do not comply with US auditing requirements.