Just how receptive are US capital markets to Chinese issuers? And what major legal and compliance issues do Chinese companies need to consider before exposing themselves to the scrutiny of US regulators?
Vanessa Ip reports
In 2014, Alibaba made headlines for being the largest US-listed initial public offering (IPO), but earlier this year, the world’s largest e-commerce company caught the media’s attention for an entirely different reason – the US Securities and Exchange Commission (SEC) launched an investigation into Alibaba’s accounting practices following speculation about the company’s growth rate and its relationship with affiliated companies.
It’s certainly not the first time that the credibility of US-listed Chinese companies has come under scrutiny. A few years ago, a rash of repeated accounting fraud scandals involving the use of shell businesses to create reverse mergers rattled markets, leaving investor confidence and appetite for Chinese listings at an all-time low.
As a direct consequence, valuations have plummeted and the flood of Chinese listings has ended. Influenced by the central government’s reform plans aimed at reducing domestic listing standards, the prevailing trend is that more and more Chinese companies are now choosing to de-list from US stock exchanges in order to go private, then re-list and trade at home. (At the moment, however, the reforms and the trend of returning have stalled temporarily because regulators have kept a tighter grip on capital-market activities since the start of 2016.)
Although the market for US listings of Chinese companies has cooled from its peak in 2010 and 2011, it “remains open”, says Du Yilong, a partner in the Hong Kong office of Latham and Watkins. Du, who advises regularly on US securities regulation, adds: “[In] each of the past few years, there were about a dozen US listings from China. The market is attractive for companies in the IT sector, particularly, that have a US angle.” But just how “open” are the US markets to Chinese companies following earlier scandals?
Virginia Tam, a partner in the Hong Kong office of K&L Gates who advises Chinese companies on US securities issues, agrees that US capital markets remain receptive to securities offerings of Chinese companies. “The situation, however, is very different from the markets we saw 10 years ago,” she says. “First, partly as a result of the financial scandals in the early 2010s, smaller companies are finding it much more difficult to raise funds and ‘up-list’ themselves in the US.