Tighter scrutiny dampens Chinese companies' enthusiasm for IPO in the US
Number of mainland Chinese firms heading to market in US down dramatically as a result of greater regulatory oversight by authorities
Toh Han Shih and Ray Chan
Stricter regulatory oversight of Chinese companies listed in the United States has caused the frequency of initial public offerings by mainland firms in the world's biggest economy to fall sharply.
More scrutiny may be on the way. A US advisory body recently urged the government to adopt even tougher measures against Chinese firms listed or seeking to list in the US.
"Judging from the experience of our firm, there has been a significant drop in the number of Chinese listings in the US over the past three years, but there has been a surge in listings for Chinese companies in Europe and elsewhere," said Daniel Roules, a partner at US law firm Squire Sanders.
In 2011, there were 15 Chinese listings in the major US stock markets, namely the New York Stock Exchange, Nasdaq and Nasdaq-related markets, raising US$2.01 billion, according to Mergermarket, an international publisher of information on mergers and acquisitions. That slipped to only two Chinese IPOs in 2012 which raised US$153.43 million. So far this year, there have been six Chinese IPOs raising US$595.18 million, according to Mergermarket.
"The disagreements between the US and China over US regulator review of Chinese audit records are discouraging Chinese companies from listing in the US," said Gene Buttrill, a partner at US law firm Jones Day.
Roules said: "Chinese companies often will not want the trouble and risk of listing in the US, where markets now seem suspicious of companies from China. They are listing in other markets."
Buttrill said the backdoor listings of Chinese firms in the US are "completely dead".
"The US Securities and Exchange Commission (SEC) is subjecting Chinese firms to heightened scrutiny," he said. A Chinese company seeking a US listing can now expect more than 200 comments on its initial draft registration statement, compared to less than 100 five years ago, Buttrill added. "The New York Stock Exchange and Nasdaq will review and ask questions of the Chinese listing candidates, while minimal review was conducted in the past."
The US-China Economic and Security Review Commission (USCC) has called for even tougher standards and inspections of Chinese companies in US markets.
The US Congress should empower the SEC to set minimum standards for companies listing and listed on US exchanges, and enable the watchdog to delist foreign companies not in compliance with these standards, said USCC, a US government body that advises the US Congress on Sino-US relations. Currently it is the US exchanges, not the SEC, that set listing standards and delist companies.
The USCC also called for the Obama administration to encourage the Chinese government to develop better regulatory enforcement and more transparent markets within the mainland. The USCC insists there are too many restrictions by the Chinese government on US authorities' and auditors' inspection of Chinese companies listed in the US, despite recent concessions by Beijing.
In May, the US and China announced a deal for limited information-sharing between their regulatory agencies on US-listed Chinese companies. In July, Chinese regulators agreed to turn over certain documents of some listed Chinese companies to assist the SEC in its investigations.
"China has agreed to greater access for auditors, though not as much as the US authorities would like," said Roules.
USCC said no agreement has yet been reached between China and the US that would grant more general direct access to documents for US regulators.
Buttrill agreed China has not yet made any meaningful concessions in allowing more inspections of Chinese companies listed in the US.
"China and the US are engaged in a particularly heated political confrontation on this issue, and we are not seeing any near-term solutions, Buttrill said. "This is reflected by the strong pressure placed on auditors by the Chinese government, which has made clear they face criminal sanction if they co-operate with US authorities."
During recent investigations, the SEC sought audit papers from Chinese branches of multinational accounting firms that serviced US-listed Chinese companies, USCC pointed out: "To date, the [accounting] firms have refused to produce these documents, arguing that doing so would put them in violation of Chinese state secrets laws and subject them to criminal liability in China."
On November 7, the SEC announced sanctions against a New York-based audit firm, Sherb & Co, its founder, two other partners, and an audit manager for their roles in the failed audits of three China-based companies listed in the US - China Sky One Medical, China Education Alliance and Wowjoint Holdings.
An SEC investigation found Sherb and its auditors falsely represented that they had conducted audits in compliance with US standards "when they were riddled with failures and improper professional conduct", said the SEC.
In December 2012, the SEC charged five firms with breaking US securities laws by refusing to turn over audit papers.
In the past two years, US regulators have deregistered about 50 Chinese companies following fraud probes, said the USCC. In 2011, Longtop Financial Technologies, a Xiamen-based maker of financial software, was delisted from the New York Stock Exchange over fraud allegations.
US listing requirements should be applied evenly and fairly to all firms regardless of nationality, said Roules. "I see no basis for tougher standards for Chinese companies. I would, however, like to see better collaboration between the US and Chinese authorities when investigating potential fraud problems."
The USCC's recommendation that the SEC gets directly involved in listing standards and delisting companies are unnecessary, because US stock exchanges are already stepping up their scrutiny of Chinese companies, argued Buttrill.
"Where SEC and the exchanges need to improve is screening companies before allowing them to list."