Exclusive: Nasdaq to tighten listing rules, restricting
Chinese IPOs - sources
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[May 19, 2020] By
Echo Wang
NEW YORK (Reuters) - Nasdaq Inc <NDAQ.O> is
set to unveil new restrictions on initial public offerings (IPOs), a
move that will make it harder for some Chinese companies to debut on its
stock exchange, people familiar with the matter said on Monday.
While Nasdaq will not cite Chinese companies specifically in the
changes, the move is being driven largely by concerns about some of the
Chinese IPO hopefuls' lack of accounting transparency and close ties to
powerful insiders, the sources said.
At a time of escalating tensions between the United States and China
over trade, technology and the spread of the novel coronavirus, Nasdaq's
new curbs on Chinese IPOs represent the latest flashpoint in the
financial relationship between the world's two largest economies.
Nasdaq also unveiled some restrictions on listings last year, seeking to
curb IPOs by small Chinese companies. Their shares often trade thinly
because most stay in the hands of a few insiders. Their low liquidity
makes them unattractive to many large institutional investors, to whom
Nasdaq is seeking to cater to.
The new tightening of the listing standards reflects the bourse
operator's concerns about some Chinese companies seeking U.S. IPOs. Last
month, Luckin Coffee <LK.O>, which had a U.S. IPO in early 2019,
announced that an internal investigation had shown its chief operating
officer and other employees fabricated sales deals.
The new rules will require companies from some countries, including
China, to raise $25 million in their IPO or, alternatively, at least a
quarter of their post-listing market capitalization, the sources said.
This is the first time Nasdaq has put a minimum value on the size of
IPOs. The change would have prevented several Chinese companies
currently listed on the Nasdaq from going public. Out of 155 Chinese
companies that listed on Nasdaq since 2000, 40 grossed IPO proceeds
below $25 million, according to Refinitiv data.
Small Chinese firms pursue these IPOs because they allow their founders
and backers to cash out, rewarding them with U.S. dollars they cannot
easily access because of China’s capital controls. The companies also
use their Nasdaq-listed status to convince lenders in China to fund them
and often get subsidies from Chinese local authorities for becoming
publicly traded.
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A man walks near Nasdaq MarketSite in an empty Times Square as the
coronavirus disease (COVID-19) outbreak continues in New York City,
U.S., March 29, 2020. REUTERS/Eduardo Munoz
The proposed rules will also require auditing firms to ensure that their
international franchises comply with global standards, the sources said. Nasdaq
will also inspect the auditing of small U.S. firms that audit the accounts of
Chinese IPO hopefuls, the sources added.
U.S. President Donald Trump told Fox Business in an interview last week that he
was looking "very strongly" at requiring Chinese companies that list in New York
to follow U.S. accounting standards. But he noted that "the problem with that"
was that Chinese companies could decide to list in London or Hong Kong instead.
The U.S. Securities and Exchange Commission (SEC) has been locked in a
decade-long struggle with the Chinese government to inspect audits of
U.S.-listed Chinese companies. The regulator’s accounting oversight arm, the
Public Company Accounting Oversight Board (PCAOB), is still unable to access
those critical records, it has said.
The PCAOB, which was set up by the 2002 Sarbanes-Oxley Act and is overseen by
the SEC, is tasked with policing the accounting firms that sign off on the books
of the nation’s listed companies. Its problems with Chinese audit quality have
been festering since 2011, when scores of Chinese companies trading on U.S.
exchanges were accused of accounting irregularities.
The SEC is planning to host a roundtable this summer for companies, auditors,
advisers and other parties to discuss issues with IPOs of foreign companies and
their accounting disclosures, one of the sources said.
(Reporting by Echo Wang in New York; Editing by Cynthia Osterman and Muralikumar
Anantharaman)
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