US SEC Reportedly Rolls Out New IPO Disclosure Requirements For Chinese Firms

In July, the US Securities and Exchange Commission (SEC) said that it would not allow Chinese companies to make money in America unless the firms fully disclose their structure to note the risks of Beijing potentially interfering in their business matters.

The US Securities and Exchange Commission has started to roll out new disclosure requirements for the Chinese companies that seek to be listed on Wall Street exchanges under a move to "boost investor awareness of the risks involved", Reuters reported Tuesday, citing a document it obtained and people said to be familiar with the matter.

The fresh instructions from the SEC, which have reportedly already been delivered to some Chinese companies, include demands to disclose their use of offshore financial vehicles known as 'variable interest entities' (VIEs) for IPOs and risks that the administration of Chinese President Xi Jinping's government might be meddling with company operations.

"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," one SEC letter reads, according to Reuters.

The new SEC instructions also ask that firms "refrain from using terms such as 'we' or 'our' when describing activities or functions of a VIE". They also now require disclosure that "investors may never directly hold equity interests in the Chinese operating company", while also asking to explain the risks of Chinese regulators interfering with company data security policies.

The new requirements emerged after the chair of the SEC, Gary Gensler, stated that the Chinese companies would not be allowed to raise investment money in the United States unless they fully explain their structure and disclose all possible risks of interference from the Chinese government in Beijing. Gensler also announced "targeted additional reviews of filings for companies with significant China-based operations" amid beliefs that Chinese firms were failing to comply with the US auditing standards.

"I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies," Gensler said.

According to Reuters, the SEC is also expected to finalize new rules on delisting Chinese companies found to be in breach of US auditing requirements.

The Jinping administration does not allow the US Public Company Accounting Oversight Board (PCAOB) to inspect the audits of Chinese firms listed on New York stock exchanges, citing national security concerns.

As new requirements come from the SEC, the China Securities Regulatory Commission reportedly is mulling regulations to close the VIE loophole - a structure used by Chinese companies to be listed on Wall Street exchanges by getting around Beijing's strict laws in regard to foreign ownership of strategic companies. Through VIEs, Chinese firms are de facto posed as foreign entities outside of Beijing's restrictions on foreign investments.