Chinese companies listing in the U.S. will face strict scrutiny from U.S. regulators, SEC Chairman Gary Gensler said Friday in a statement underscoring the growing risks faced by investors seeking exposure to the world's second-largest economy.
Gensler highlighted variable interest entities, or VIEs, a legal structure many Chinese companies have used for decades to evade restrictions on overseas listings. He said he had asked the commission's staff to make sure such companies "prominently and clearly disclose" that investors are buying shares in a shell company, not the operating company in China.
Reuters reported Friday that the stricter disclosure standards were coming, shortly before Gensler issued his statement on the SEC website.
Citing the increased scrutiny by Chinese regulators of companies listing abroad, Gensler said the firms must disclose "whether the operating company and the issuer, when applicable, received or were denied permission from Chinese authorities to list on U.S. exchanges; the risks that such approval could be denied or rescinded; and a duty to disclose if approval was rescinded."
He also asked staff to ensure that companies warn that companies which do not allow U.S. regulators to inspect their books could face delisting — a long-running dispute between American and Chinese regulators over access to Chinese firms' audits that escalated after Congress passed the Holding Foreign Companies Accountable Act.
A crackdown by regulators on DiDi shortly after its initial public offering, ostensibly over its cybersecurity risks, spooked investors and sent shares of Chinese tech companies crashing in early July.