US regulator leans hard on China IPOs to explain offshore structures

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NEW YORK – Chinese companies applying to go public in the United States are facing increasingly detailed questions from the US Securities and Exchange Commission (SEC) about their offshore corporate structures, according to people familiar with the matter.

Many of the SEC’s queries have focused on the nature and direction of cash flows through so-called variable interest entities, which allow Chinese companies to circumvent Beijing’s restrictions on foreign ownership, the people said, asking not to be identified because the discussions are private.

SEC officials have asked the firms to quantify transfers and dividends between the parent company and other entities, as well as their respective balances and any tax implications, the people said. The regulator has also asked for additional disclosures on political and regulatory risks in China, one of the people said, adding that new applicants may face as many as 20 more questions than was typical before this month.

The questions offer an early look at how SEC chair Gary Gensler is following through on a pledge in late July to push for more disclosures on Chinese IPOs in New York. While some listing hopefuls may take comfort in the fact that the SEC is still engaging with them, it remains unclear whether regulators will ultimately sign off on new Chinese offerings. Mr Gensler said on Monday (Aug 16) that he’s asked SEC staff to “take a pause for now” in green-lighting IPOs that use the VIE structure.

In response to questions about the additional scrutiny, an SEC spokesperson referred to Gensler’s comments, declining to comment further.

The Nasdaq Golden Dragon China index, which tracks US-listed Chinese firms, snapped a six day losing streak, rising 1.4 per cent on Wednesday.

The Commission is turning more cautious after Chinese regulators announced scores of actions in recent weeks directed at companies in the country’s technology and education sectors, sending their share prices plunging and prompting some investors to ask whether American depositary receipts representing stakes in Chinese companies have become uninvestable.

Mr Gensler has faced pressure to increase scrutiny of Chinese companies after shares in Didi Global plunged in the wake of its US IPO in June. Right after the listing, China announced it was conducting a security review and restricting the ride-sharing company from adding new customers.

China later mandated cybersecurity reviews of companies listing abroad with data on more than one million users. Regulators also ordered some tutoring companies to become non-profits, wiping billions off their market value and sending investors scurrying to examine the country’s media for signs of where the next crackdown would strike.

Chinese companies from on-demand logistics firm Lalamove to home-services outfit Daojia have put their US IPO plans on hold or weighed going public in Hong Kong instead. Others, such as -sharing giant Hello, scrapped their registrations entirely.

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