Chinese securities regulator issues draft rule changes that would allow U.S.-listed Chinese firms’ auditors to share information with the SEC

Key Takeaways:

  • China’s securities regulator has published draft rule changes that would allow information sharing between Chinese company auditors and the U.S. securities regulator
  • Chinese securities regulator says it is ‘committed to supporting eligible companies of all types to list or offer securities in overseas markets’

By Doug Young

A few small IPOs are floating up in the headlines as we kick off the new week, signaling spring could finally be near for the stalled train of Chinese companies listing in the U.S. The latest filings are all updates to previously announced pint-sized listing plans by steel products maker Hongli Group Inc., insurance marketer UB-X Technology Ltd. and a special purpose acquisition company (SPAC) called TradeUp Global Corp. (TUGC.US)

But the really big news comes from the Chinese securities regulator, which on Saturday published a document seeking comment on proposed revisions to a rule that would allow Chinese companies’ auditors to share their reports with the U.S. securities regulator. That document’s publication followed numerous reports in both Chinese and non-Chinese media that a deal between the China Securities Regulatory Commission (CSRC) and the U.S. Securities and Exchange Commission (SEC) was getting closer.

Given all the latest developments, we can probably expect to see a rally for U.S.-listed Chinese shares on Monday. Early signs of such a rally were already showing up on Monday morning in Hong Kong, where shares of e-commerce giants Alibaba (BABA.US; 9988.HK) and JD.com (JD.US; 9618.HK) and search giant Baidu (9888.HK) were all up between 2% and 5% in early trade. All three companies originally listed in New York, but later made second listings in Hong Kong as well.

The U.S. and China have been at loggerheads over the last two decades over the information-sharing issue. The U.S. securities regulator says it needs access to audit records for all companies that trade in New York so it can conduct investigations when it suspects financial irregularities. But China bans such access on the grounds that such audit records are “state secrets.”

To resolve the issue once and for all, the U.S. passed the Holding Foreign Companies Accountable Act (HFCAA) in late 2020, giving China three years to set up a mechanism for the information sharing that the SEC was seeking. Without such an agreement, the nearly 300 Chinese companies currently listed in the U.S. would violate the HFCAA and potentially be forced to delist.

The latest CSRC document is quite typical for China, which amends rules from time to time and then seeks public comment before the new rules become official. We would recommend anyone interested in the details to read the actual document. But the introduction nicely summarizes the reason for the changes.

It says the revisions aim “to support domestic companies to offer and list securities in overseas markets pursuant to laws and regulations, to strengthen the confidentiality and archives administration concerning such overseas securities offering and listing by domestic companies, and to enhance cross-border regulatory cooperation.”

“China stays committed to supporting eligible companies of all types to list or offer securities in overseas markets,” the introduction states. “The revised provisions will further strengthen the compliance of such companies and promote healthy and orderly overseas securities offering and listing.” The document is dated April 2, with a deadline of April 17 for the comment period. That means a final revised version of the rules could become official by May or June.

Resuming the flow

New U.S. IPO filings by Chinese companies were happening at a regular clip in the first half of last year, with names like Zhihu (ZH.US), Kanzhun (BZ.US) and Full Truck Alliance (YMM.US) all making relatively large offerings of $100 million or more. But things came to a screeching halt after the listing of the Uber-like DiDi Global (DIDI.US), which was berated by China’s internet regulator for making its IPO before getting a required data security review.

After that happened, a number of other big pending listings went dormant or even withdrew their applications. That list included names like shared bike operator Hello Inc., dating app Soulgate Inc. and a dramatic 11th hour halt to an IPO by medical information provider LinkDoc Technology Ltd.

The listing train never really halted completely, though it did slow very dramatically. What’s more, new listing applications after July were mostly by very small companies seeking to raise small amounts of money, usually less than $50 million. Such companies probably didn’t consider themselves big enough to attract data security concerns, even though they would have faced potential delisting in 2023 under the HFCAA.

Only a handful of such listing applications actually made it to market in that period, including biotech firm LianBio (LIAN.US) and a more recent listing by disposable medical products maker Meihua International (MHUA.US). Now, two companies that made earlier IPO applications have just submitted updated filings, perhaps signaling that companies may start becoming more active again as the CSRC clearly signals such listings can proceed.

One of the new updates came from Hongli, which filed an updated prospectus last week for its plan to raise about $30 million. The company filed its original plan in December, and there don’t appear to be any major new changes to the updated plan. Instead, the bigger significance is that the updated plan shows the listing is still moving forward.

The case is similar for UB-X Technology, whose updated prospectus filed on March 22 also doesn’t contain any major new information different from its original plan filed in late January. UB-X also aims to raise about $30 million by selling 6 million shares for between $4.50 and $5.50 apiece.     

There’s also a new development from a cryptocurrency miner called Saitech, which announced last September it would make a backdoor listing by merging with TradeUp Global, a SPAC launched by UP Fintech Holding Ltd. (TIGR.US), operator of the online Tiger Brokers. That development will see TradeUp’s shareholders vote on the proposed merger on April 22. If they approve the deal, which seems likely, then the SPAC would change its name to Sai.tech Global Corp.

Again, none of these three deals by itself seems particularly significant since all are quite small. But taken collectively, together with the CSRC’s latest announcement, they indicate that major U.S. listings by Chinese companies could resume soon, perhaps as early as June, after China finalizes its rule changes and signs a new information-sharing agreement with the U.S.

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