“In light of the recent developments in China and the overall risks, I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” said SEC Chairman Gary Gensler.

The Chinese government said this month that it was planning rule changes to allow regulators to block companies from listing overseas even if the entity selling the shares is based outside China, a loophole used for years by the country’s large tech firms.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” Gensler said.

The SEC‘s move comes amid increasing pressure from US lawmakers, who have passed legislation such as the Holding Foreign Companies Accountable Act as a way to force Chinese companies to improve disclosure standards.

It also comes a day after a group of Republican lawmakers sent a letter urging Gensler to act to prevent further losses like those suffered by shareholders of Didi Global, whose shares went into a tailspin after Beijing started an investigation into the company soon after it went public in the US.

Chinese regulators suspect Didi of deceit in US listing, sources say

“The SEC’s move is perhaps the most market-positive way this could have played out,” said Andrew Bishop, global head of policy research at Signum Global Advisors. “Had the SEC not acted quickly, Congress would very likely have moved forward with legislation, which would have created far more long-lasting and hard-to-overcome barriers to future Chinese IPOs in the US.”

Senators Marco Rubio, Republican from Florida, and Bob Casey, Democrat of Pennsylvania, have introduced a bill that would bar Chinese companies from listing on US exchanges because, under Chinese law, they are prohibited from providing audits to US regulators.

The legislation, called the No IPOs for Unaccountable Actors Act, would require the SEC to stop any company headquartered in China from listing in the US.

Friday’s new disclosure requirement means Chinese firms must state clearly that their stocks will be sold through a shell company. The listing firms will describe the shell company differently from the China-based operating company and make their financial connections clear to investors.

The US will also require that the listing firms state the risks investors may face in the event of regulatory pressure from the Chinese government.

In addition, Chinese companies need to disclose whether Chinese authorities have approved or denied their applications to list on US exchanges, as well as the risks associated with potential denials.

For US investors, regulations are primary risk for Chinese shares

The listing companies will also have to state that in the event of a violation of the US audit rules where the Chinese firms fail to hand over their audits to US regulators to inspect, their shares can be delisted from the exchanges as the result.

Gensler said the commission would also begin additional reviews of filings of companies with significant operations in China.

US securities and trade associations applauded the move and urged regulators to go further.

“It is long overdue for the SEC to address the Chinese Communist Party’s fraud on US capital markets,” said Michael Stumo, chief executive of the Coalition for a Prosperous America, an advocacy group on trade policy.

Chris Iacovella, chief executive at the American Securities Association, which represents regional financial services companies and American retirees, said, “The CCP’s access to the US capital markets must end.”

Both associations said the SEC needed to act to force the exchanges to delist all Chinese companies that are not compliant with US rules.

They also urged the House of Representatives to pass a bill – the Accelerating Holding Foreign Companies Accountable Act – that would allow regulators to delist Chinese companies from US capital markets more quickly. The current legislation signed into law in December allows foreign companies three years to become compliant with the US audit rules before they can be delisted. The new bill cut the time to two years.

Since the law was signed, the SEC has been under congressional pressure to tighten disclosure requirements on foreign companies. While China wasn’t specifically mentioned, the law was clearly targeting the country as total market capitalisation of Chinese firms on US exchanges has ballooned to US$2 trillion.

Earlier this week, SEC Commissioner Allison Lee said listed Chinese companies must disclose the risks of the Chinese government interfering in their businesses as part of their regular reporting obligations.

It was the first comment made by a US securities official since Chinese regulators began a crackdown on the country’s tech and education sectors this month because of concerns about cybersecurity, personal data management and monopolistic practices.

Beijing also said it has been working to close the loophole Chinese companies use by setting up offshore VIEs to list abroad.