SEC ups disclosure requirements for Chinese companies seeking US IPOs: report

SEC ups disclosure requirements for Chinese companies seeking US IPOs: report
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The Securities and Exchange Commission (SEC) has reportedly started releasing new disclosure requirements for Chinese companies that want to list in New York, part of an effort to increase awareness among investors of risks that exist.

Reuters that some Chinese companies have received detailed instructions from the SEC regarding increased disclosure of their vehicles overseas, which are referred to as variable interest entities (VIEs), for initial public offerings (IPOs), according to a document reviewed by the news wire and people familiar with the matter.

The SEC is also reportedly asking for more information regarding implications for investors and risks that Chinese authorities will get in the way of company operations.

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Additionally, the agency has requested that some companies provide more information pertaining to situations when they do not act in accordance with the U.S. Holding Foreign Companies Accountable Act on accounting disclosures to regulators, according to Reuters.

“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,” the SEC wrote in one letter seen by Reuters. 

The agency has also reportedly asked Chinese companies to disclose that “investors may never directly hold equity interests in the Chinese operating company,” according to the letter.

A number of Chinese VIEs have set up corporations in tax havens, like the Cayman Islands, according to Reuters. SEC Chair Gary GenslerGary GenslerRegulators must act to protect financial system from climate risk: report SEC probing Wall Street banks' documentation of digital employee communication: report Protecting consumers requires protecting and incentivizing whistleblowers, too MORE, however, has reportedly said too many questions exist regarding how money moves through those entities.

“Refrain from using terms such as 'we' or 'our' when describing activities or functions of a VIE,” the letter says.

The reported notices of new disclosure requirements for Chinese companies come after Gensler last month requested a “pause” in IPOs for Chinese companies, and requested more transparency about those issues, the news wire noted.

After the pause, Chinese listings in the U.S. reportedly hit a standstill.

The SEC in March adopted a measure that was meant to establish stricter regulation of Chinese firms from U.S. stock exchanges.

It implemented disclosure requirements under the Holding Foreign Companies Accountable Act that mandated firms to establish that they are not owned or controlled by a foreign governmental entity.

The SEC also said it was requiring that companies disclose any foreign arrangements and influence in their annual reports.