SEC Chair Warns of Risk of Investing in US-Listed Chinese Companies

Questionable ownership structures and state secrets of US-listed Chinese companies at center of SEC decision to halt new listings without disclosures

share

key takeaways

  • SEC Chair Gary Gensler wants to make sure investors know that they don’t really own a part of that Chinese company they invested in
  • China prohibits foreigners from owning equity in domestic Chinese companies, so a workaround is created involving an offshore entity which holds a stake in the Chinese parent

SEC Chair Gary Gensler warned investors Friday of the risk of investing in US-listed Chinese companies because of their tenuous capital formation structure, and said that the regulator will require additional disclosures from listed Chinese companies. 

“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,” Gensler said in a statement 

As foreign nationals are prohibited from investing in Chinese firms in a number of key sectors, listed companies set up something called a “variable interest entity” in an offshore jurisdiction. This entity in turn controls a type of domestic company within China called a “wholly foreign-owned enterprise”, which in turn has a management agreement with the domestic Chinese company that’s looking to raise capital on the US market. 

This complicated structure is a concern, according to Gensler. “I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company,” he said in a statement.

Audit reports and ‘protecting user data’

The other reason why the SEC has taken significant interest in this is because of the Public Company Accounting Oversight Board’s (PCAOB) difficulty in obtaining comprehensive audit reports from China listed companies.

Post-Enron, US-listed companies have been required to submit their audits for review under the Sarbanes Oxley Act passed in 2002.

Beijing isn’t a fan of the arrangement and has proposed tightening the rules around “the overseas listing system for domestic enterprises” under the auspices of protecting user data.

Just today, New York-listed Didi, the Chinese equivalent of Uber, was caught in the crosshairs of the US data regulator for storing user data outside the country. Didi’s stock is down approximately 30% since the start of the year on news that regulators are looking into the company.  

“Investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements,” Gensler said in his statement. 

Gensler also said that in the future the PCAOB will be required to inspect the issuer of any US-listed China stocks public accounting firm within three years, at the risk of a possible delisting if the PCAOB is unable to inspect the firm. 

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

MON - WED, MARCH 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience:  Attend expert-led panel discussions and fireside chats  Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts   Grow your network […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Frax report cover.jpg

Research

Frax saw continued development in its frxETH liquid staking derivative and Fraxlend money market throughout 2023. Frax V3 introduces an RWA strategy to drive utility to the protocol's cornerstone product, the FRAX stablecoin.

article-image

Crypto as an “industry” could probably do without quite as many cults of personality

article-image

Bitcoin has rebounded 130% so far this year

article-image

Following layoffs at BAYC parent Yuga Labs and OpenSea, Tiger Global marked down its stakes

article-image

Recent SEC filings suggest the regulator could be lining up the approval of multiple proposals in early January, segment observers argue

article-image

A dinner back in September gave big traders a heads up about the DOJ settlement, Bloomberg reported

article-image

On-chain debt capital markets platform deploys on Coinbase-incubated layer-2 after structured investment products push