China clarifies rules for overseas IPOs in US What we don’t know.

Traders work during the IPO of Chinese rideshare company Didi Global Inc on the New York Stock Exchange (NYSE) floor in New York, United States on June 30, 2021.

Brendan McDermid | Reuters

BEIJING – Six months after the Chinese IPO rush in the United States has dried up, many details remain unknown to companies wishing to pursue such international listings.

Since the fallout from the IPO of the Chinese rideshare app Didi in late June, authorities have stepped up their surveillance of Chinese companies raising billions of dollars in U.S. public markets. A 10-year high of 34 China-based companies listed in the United States this year, but only three of the IPOs have occurred since July, according to Renaissance Capital.

Regulators in both countries this month released clarifications on what Chinese companies need to go public in the United States. While this is a start, many implementation questions remain.

Over the Christmas weekend on Wall Street, the China Securities Regulatory Commission released proposed rules for domestic companies if they wish to list overseas. The public comment period ends on January 23.

The rules proposed by the CSRC provided that registration abroad could be suspended if the authorities considered it a threat to national security. Domestic companies must comply with relevant provisions in the areas of foreign investment, cybersecurity and data security, according to a draft, without too much detail.

“The details of the application of the rules still require further observation, especially the scope of oversight of other related departmental regulators, in addition to the CSRC,” said Winston Ma, assistant professor of law at the University. from New York and co-authored “The Hunt for Unicorns: How Sovereign Wealth Funds are Reshaping Investing in the Digital Economy.”

No ban on the popular VIE structure

Beijing has said for years that one of its goals is to increase access and improve its stock market, which is only around 30 years old. Authorities have attempted to make it easier for companies to raise funds on the national stock market by gradually moving from a registration system to an approval system.

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The new rules for foreign listings set out specific requirements for filing documents and say the securities commission will respond to filing requests within 20 business days of receiving all documents, according to one draft.

The commission also did not ban the widely used variable interest entity structure, as some had feared. The structure creates a listing through a shell company, often based in the Cayman Islands, preventing investors in US-listed stocks from having majority voting rights.

“If they comply with national laws and regulations, companies with a VIE structure are eligible to register abroad after filing a case with the CSRC,” the commission said in an English statement on its website. Internet. He did not specify what these laws and regulations were.

However, the amount of foreign investment allowed in Chinese VIEs will likely be reduced to match that of mainland China A-shares, said Bruce Pang, head of macro and strategic research at China Renaissance.

He pointed to an online question-and-answer article on new foreign investment regulations released Monday by China’s Ministry of Commerce and the National Development and Reform Commission. The article noted existing restrictions that limit foreign ownership to 30% of a company’s shares, with each foreign investor capped at 10% of the capital.

US ownership of Chinese stocks listed in New York is relatively low, according to data from Morgan Stanley. Among those eligible for secondary listing in Hong Kong, the median share of US ownership for the top 50 names is 27%, according to CNBC’s calculations of the data.

Foreign financial institutions may also face more stringent requirements to participate in Chinese IPOs.

“The [CSRC’s] The proposed rule will also require international banks that subscribe to a Chinese company’s overseas listing to register with the CSRC, which may create new compliance issues for foreign underwriters as they may have to follow. Chinese rules once they are registered with [the] CSRC, ”said Ma, former managing director and head of North America of China Investment Corporation, a sovereign wealth fund.

Control extends to PSPCs

Meanwhile, the United States has stepped up efforts to alert investors to the uncertainties surrounding investing in Chinese companies listed in New York.

Earlier this month, the U.S. Securities and Exchange Commission finalized the rules it needs to implement a law that could force Chinese companies to withdraw from U.S. stock exchanges. It’s unclear when such write-offs would begin – Morgan Stanley analysts don’t expect them to happen until at least 2024.

The SEC’s corporate finance division also released details last week on 15 areas in which it “encouraged” China-based listings – existing and future – to increase disclosures. One section read:

Indicate whether you, your subsidiaries, or VIEs are covered by the licensing requirements of the China Securities Regulatory Commission (CSRC), the Cyberspace Administration of China (CAC), or any other government agency that is required to approve the operations of the VIE, and indicate in the affirmative whether you have received all the required authorizations or approvals and if any authorizations or approvals have been denied.

The SEC statement noted that special purpose acquisition companies with significant ties to China should also disclose relevant risks. PSPCs have exploded in popularity over the past two years. They bypass the traditional IPO process by using shell companies created for the sole purpose of acquiring existing private companies.

The CSRC draft rules stipulated that companies going to other markets via SPACs had to follow the same filing requirements as overseas IPOs.

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