SEC rules to slow China's IPOs on US market

Updated: 2011-11-19 13:06


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BEIJING - It will not be as easy as it once was for Chinese companies to list on the major US exchanges, as the US has set new rules to tighten standards for firms going public by reverse mergers.

The US Securities and Exchange Commission (SEC) last week approved new rules for initial public offerings (IPOs) of reverse merger firms on its three listing markets -- Nasdaq, NYSE, and NYSE Amex.

The impact of the new rules remains to be seen, but the move will further slow the pace of Chinese companies going public in the United States, analysts said.

"The move largely aims to get candidates tested on the market before IPO approval, so it is hard to quantify how many Chinese firms will fail to meet the requirements," said Zhong Rixin, an analyst with, a Beijing-based information provider on US stock markets.

Currently, stocks of more than 240 Chinese firms are traded on the three exchanges, and less than half were listed through reverse mergers, or mergers in which private firms buy large sums of shares of public firms, according to Zhong.

Under the new rules, a reverse merger company applying to list is required to complete a one-year "seasoning period" by trading in the US over-the-counter market or on another regulated US or foreign exchange following the reverse merger, and to file all required reports with the SEC, including audited financial information.

The company also has to maintain the requisite minimum share price for at least 30 of the 60 trading days immediately prior to its listing application and the exchange's decision to list.

"The US listing policies had always been easier to access and had rigid oversight. The new rules will make IPOs on the US market a lot more difficult for Chinese firms," said Li Hao, an analyst at the consulting agency Anbound.

According to Li, many Chinese firms seeking a US listing are Internet concept companies, whose early-stage earning power is frequently questioned.

"Under the new rules, these companies may encounter more troubles, as their performances are volatile and it usually takes years for them to gain profits," he said.

Many Chinese firms enter the US stock market through reverse mergers. This option allows them to get around the strict financial scrutiny that is usually applied to IPOs, but also leads to auditing loopholes due to different auditing systems being used for reversed-merged companies.

In recent months the SEC has suspended trading of more than 35 companies based overseas, including some companies formed by reverse mergers, as they lacked required financial information. It also issued a bulletin in June warning investors about firms that engage in reverse mergers.

To close regulatory gaps, the SEC in June started discussing with relevant Chinese authorities revising the cross-border auditing oversight system for US-listed Chinese companies, but little progress has been made, Li said.

"Some small and middle-sized Chinese firms are attracted by the high efficiency of IPOs in the US, as China's listing scrutiny is relatively more stringent," said Wu Xiaoqiu, director of the Finance and Securities Institute of the Beijing-based Renmin University of China.

"There are chances that some of them rushed to boost their status by listing on the US market, but failed to adapt to regulatory requirements," Wu said.

China's concept stocks have experienced a drastic downturn recently amid a sharp retreat on the US stock market and uncertainties in global economic prospects.

Meanwhile, the number of Chinese firms going public on the US market dropped sharply following a string of accounting scandals that sparked trading halts and investigations on US-listed Chinese firms.

From March to June, more than 20 US-listed Chinese firms suspended trading or delisted on US exchanges for alleged financial fraud.

Meanwhile, data with Beijing-based Zero2IPO Research Center showed that only one Chinese company went public on the US market in the third quarter of the year.

Despite a grim outlook, Loletta Chow, leader of Ernst & Young's Global and Asia-Pac China Overseas Investment network, said the market always has its ups and downs, and her team remains optimistic about the long-term development of China's IPO market.

Nasdaq OMX Group Chief Executive Robert Greifeld in June also made positive comments about China's concept stocks. He told Xinhua that Nasdaq still welcomes Chinese firms to the US market and sees China as its greatest opportunities outside of the US market.

While expecting the market to further cool next year, Li said the prospects for Chinese firms going public in the United States still depend on the progress made on the cross-boarder auditing oversight system and the cooperative joint inspections between China and the Unite States.