Senate Bill May Require Chinese Companies Give Up U.S. Listings

Matty-Sways

The Senate has passed a bill that would require Chinese company to pull back the accounting veil or face delisting.

The Senate approved legislation that may require Chinese companies to give up listings on American stock exchanges.

The bill was passed unanimously with senators citing long running concerns over China’s stance towards investor-protection: Alibaba Group Holding Ltd. and Baidu Inc. are among Chinese companies that have raised tens of billions of dollars through U.S. listings. China’s refusal to partake in routine auditing led by firms approved by the Public Company Accounting Oversight Board, an audit watchdog, has “gone on for years and years.”

Negotiations between the audit watchdog, PCAOB, and the Securities and Exchange Commission and China over access to the audit records have been unsuccessful. Regulators have largely opposed barring the companies from the New York Stock Exchange or the Nasdaq Stock Market; however, as Shaswat K. Das, a lawyer at King & Spalding LLP stated, “the ‘nuclear option’ was always on the table in the event a bilateral agreement … could not be reached.”

Luckin Coffee Inc., a Chinese competitor to Starbucks, gained traction among American investors before it was delisted by Nasdaq. Last year, it was publicized that “its employees fabricated as much as $310 million in sales.” It is among more than 200 overseas companies evading the PCAOB, many of which are based in China: without clear U.S. oversight, Chinese companies often carry a “substantially greater risk,” according to the SEC.

Since 1997, Chinese companies have made over $66 billion through U.S. listings, according to the S&P Global Market Intelligence. In 2019 alone, about 18% of all deals were IPOs, according to University of Florida professor Jay Ritter.

The Senate Bill would “require the SEC to prohibit trading in any shares where the company’s auditor hasn’t faced a PCAOB inspection for three consecutive years” and force companies to disclose any governmental ties. It must now be passed by the House where a similar bill has been introduced but hasn’t advanced.

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