SEC gives Chinese companies new requirements for US IPO disclosures

The US Securities and Exchange Commission 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.

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; implications for investors and the risk of Chinese government regulation.

Last month, SEC Chair Gary Gensler asked for a "pause" in US initial public offerings 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 capitalized 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.

The SEC has also asked Chinese companies for a disclosure that "investors may never directly hold equity interests in the Chinese operating company." 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.

The SEC has provided disclosure requirements pertaining to the risk of Chinese regulation of company data security, the sources said. It has also asked some companies for more details in cases where they do not comply with the US Holding Foreign Companies Accountable Act.

China has so far prevented companies from sharing the work of their auditors with the US Public Company Accounting Oversight Board.