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Chinese companies seeking IPO in New York receive new disclosure requirements from US securities watchdog

  • Some Chinese firms are receiving detailed instructions from the SEC about greater disclosure of their use of variable interest entities (VIEs) for IPOs
  • The new requirements also cover implications for investors and the risk that Chinese authorities will interfere with company operations

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The US Securities and Exchange Commission has started to issue new disclosure requirements to Chinese companies seeking to list in New York. Photo: AP
Reuters
The US Securities and Exchange Commission (SEC) has started to issue 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 a document reviewed by Reuters and people familiar with the matter.
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Some Chinese companies have now started to receive detailed instructions from the SEC about greater disclosure of their use of offshore vehicles known as variable interest entities (VIEs) for IPOs, as well as implications for investors and the risk that Chinese authorities will interfere with company operations.
Last month, SEC chair Gary Gensler asked for a “pause” in US initial public offerings (IPOs) of Chinese companies and sought more transparency about these issues. Chinese listings in the United States came to a standstill after the SEC freeze. In the first seven months of 2020, such listings reached a record US$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 seen by Reuters.

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. 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 stated.

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The SEC did not immediately respond to a request for comment.

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