EXCLUSIVE SEC offers Chinese companies new requirements for the disclosure of US IPOs

August 23 (Reuters) – The U.S. Securities and Exchange Commission (SEC) has begun issuing new disclosure requirements to Chinese companies that want to trade in New York as part of a push to raise investor awareness about the risks involved, according to a document reviewed by Reuters and people familiar with the matter.

Some Chinese companies have now begun receiving detailed instructions from the SEC on further disclosure of their use of offshore vehicles known as variable interest entities (VIEs) for IPOs; implications for investors and the risk that the Chinese authorities will interfere with the company’s operations.

Last month, SEC President Gary Gensler called for a “pause” in the initial public offerings (OPOs) of U.S. companies in China and sought more transparency on these issues. Chinese ads in the United States came to a halt after the SEC froze. During the first seven months of 2020, these quotes reached a record $ 12.8 billion, as Chinese companies capitalized on the growing U.S. stock market.

“Describe how this type of corporate structure can affect investors and the value of their investment, including how and why contractual agreements may be less effective than direct ownership and that the company may incur substantial costs for enforce the terms of the agreements, “a SEC letter read from Reuters.

The SEC has also asked Chinese companies to disclose that “investors will never be able to have direct stakes in the Chinese operating company,” according to the letter. Many Chinese VIEs are incorporated into tax havens such as the Cayman Islands. Gensler has said there are too many questions about how money flows through these entities.

“Refrain from using terms like‘ we ’or‘ our ’when describing activities or functions of a VIE,” the letter said.

An SEC spokesman did not immediately respond to a request for comment.

The SEC has also provided disclosure requirements related to the risk of Chinese regulators intervening in the company’s data security policies, sources said. Last month, just days after Didi Global Inc (DIDI.N) went public, Chinese regulators banned the travel-sharing giant from registering new users. This move was followed by crackdowns on technology and private education companies.

The SEC has also asked some companies for more details in cases where they do not comply with the U.S. Foreign Companies Accountability Act on accounting disclosures to regulators. To date, China has prevented companies from sharing the work of its auditors with the U.S. Public Company Accounting Oversight Committee. Last month, the SEC fired the chairman of the board, who was unsuccessful in his push to secure an independent audit of Chinese companies listed in the United States.

The SEC measure represents the last salvation of U.S. regulators against corporate China, which has for years frustrated Wall Street with its reluctance to submit to U.S. audit standards and improve corporate governance. which are closely held by the founders.

The SEC is also under pressure to finalize rules on the withdrawal of Chinese companies that do not meet U.S. audit requirements.

Report by Echo Wang in New York Edition by Greg Roumeliotis and David Gregorio

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