US and China tighten IPO activities together


Half a year after the IPO fever of Chinese enterprises in the US gradually subsided, the detailed regulations on listing in foreign countries such as the US market have not been clarified yet.

Ride-hailing “super app” Didi raised $4.4 billion from an initial public offering (IPO) on the New York Stock Exchange at the end of June 2021. Photo: Reuters

Few IPOs in the second half of the year

Since the incident scandal Following the listing of the ride-hailing “super app” Didi in New York at the end of June 2021, Chinese authorities have stepped up scrutiny of Chinese businesses that raise billions of dollars in the US public markets. According to investment bank Renaissance Capital (Russia), there have been 34 China-based companies conducting initial public offerings (IPOs) in the US in 2021, the highest level in 10 years. . But, in the last 5 months of the year (from July) only 3 deals were done.

This month, the US and Chinese authorities have further explained about the necessary regulations that Chinese companies must comply with when listing in the US. However, the actual implementation of listing is still a question mark.

The China Securities Regulatory Commission (CSRC) has published proposed regulations for companies in China to list abroad. The public comment period on these regulatory proposals will end on January 23, 2022.

Under the proposal of the China Securities Regulatory Commission, Chinese companies could be stopped from listing overseas if authorities determine it is a threat to national security. In addition, Chinese companies need to comply with relevant regulations in the fields of foreign investment, cyber security, and data privacy when conducting listings abroad, suggested the Securities Regulatory Commission. China Securities stated and did not explain anything further.

“The details of the implementation of the regulations still need to be observed further, especially the scope of supervision by other relevant ministerial authorities, besides the CSRC,” he said. Winston Ma, a law professor concurrently at New York University commented.

Businesses in China are overseen by a number of ministries, ranging from specialized ministries to others that focus on specific areas of activity such as foreign exchange.

According to CNBC, it is worth mentioning that it was not the China Securities Regulatory Commission, but the Cyberspace Administration of China, that asked Didi and two other companies newly listed in the US to stop accepting registrations of investors. new users while authorities conduct a security investigation. This request was made just a few days after Didi successfully listed and raised $ 4.4 billion in the US market.

The influence of the Cyberspace Administration of China has increased significantly this year. Over the summer, the agency proposed that companies with data on more than 1 million users be subject to security review before undertaking an overseas listing.

In August 2021, Mr. Sheng Ronghua, head of the Cyberspace Administration of China told reporters that Chinese companies that want to list shares at home and abroad need to comply with national laws and regulations. , while ensuring the security of the national network, “critical information infrastructure”, and personal data.

No ban structural barrier ENGLISH

For years, Beijing has insisted that one of its goals is to increase access to and improve the stock market. Chinese authorities have made it easier for businesses to raise money from the domestic stock market by gradually transitioning from a licensing system to a listing registration system.

The China Securities Regulatory Commission’s new regulatory proposals for overseas listings do not lay out specific requirements for listing filings, but the commission made clear it would respond to business listing requests within 20 business days of receipt of all documents.

In addition, the China Securities Regulatory Commission affirmed that it does not prohibit the use of special ownership structures in international capital raising (VIE). However, there have been concerns that the VIE model allows a business to list through a shell company (usually based in the Cayman Islands) but prevents equity investors from going public. listed in the US have majority voting rights.

“If complying with domestic laws and regulations, companies with VIE structure are eligible to list overseas after submitting an application to CSRC,” the China Securities Regulatory Commission said in English on its website. its website. However, the agency did not specify what those laws and regulations were.

According to Bruce Pang, Head of Macro and Strategy Research at China Renaissance Financial Institution, the foreign investment allowed to pour into companies under China’s VIE structure may be reduced to be compatible with the number of class A shares of the mainland China market.

According to data from investment bank Morgan Stanley, US ownership of Chinese stocks listed in New York is relatively low. Among businesses that qualify for a secondary listing in Hong Kong, the average ownership rate of US investors in China’s top 50 companies is 27%, according to aggregate data. by CNBC.

Foreign financial institutions may have to meet many other requirements if they want to participate in the IPO of a Chinese company.

“Regulatory Proposal [của Ủy ban Điều tiết chứng khoán Trung Quốc] would also require international banks underwriting a Chinese company’s overseas listing to register with the commission, which could be challenging for foreign underwriters, as they need to comply with Chinese regulations once they register with the CSRC,” said Winston Ma, North American market manager at China Investment Corporation.

Check carefully paradigm SPAC

The US side also recently increased warnings to investors about the uncertainties when investing in Chinese companies listed in New York. Earlier this month, the US Securities and Exchange Commission finalized regulations aimed at realizing a law that is believed to force Chinese companies to delist from US stock exchanges.

Last week, the US Securities and Exchange Commission’s Corporate Finance Department released details on 15 areas in which it “encourages” Chinese companies to list and to list in the future. The future must be more transparent.

Accordingly, Chinese enterprises must clearly disclose whether they, a subsidiary or a company under the VIE structure, meet the licensing requirements from the China Securities Regulatory Commission, the Cyberspace Administration of China or not. any other Chinese government agency tasked with approving VIE’s operations. In addition, businesses wishing to list must confirm that they have received all necessary permits or approvals and clarify whether any permits or approvals have been denied.

The US Securities and Exchange Commission further noted that special purpose acquisitions (SPACs) with close ties to China should also be alert to the risks involved. In fact, the SPAC model has blossomed in the past two years, especially it has become the preferred form of Asian businesses looking to raise capital in the US market. By using the SPAC model, businesses bypass the traditional IPO process by using shell companies created with the sole purpose of acquiring existing private companies.

However, the Beijing side is still quite strict towards the SPAC model. Under the regulatory proposal of the China Securities Regulatory Commission, companies accessing other markets through the SPAC model must comply with the same filing requirements as conducting an overseas IPO.