Nasdaq cracks down on IPOs of small Chinese companies
30/09/2019 12:00
(Repeats story first published on Sunday)
By Echo Wang and Joshua Franklin
Sept 29 (Reuters) - Nasdaq Inc NDAQ.O is cracking down on
initial public offerings (IPOs) of small Chinese companies by
tightening restrictions and slowing down their approval,
according to regulatory filings, corporate executives and
investment bankers.
Nasdaq's attempt to limit these stock market flotations
comes as a growing number of them end up raising most of the
capital in their IPO from Chinese sources, rather than from U.S.
investors.
The shares of most small Chinese companies trade thinly
following their U.S. listing, because most of them stay in the
hands of a few insiders. Their low liquidity makes them
unattractive to many large institutional investors, to whom
Nasdaq is seeking to cater.
For example, when 111 Inc YI.O , a Chinese online pharmacy
network, raised $100 million in its IPO on Nasdaq last year,
shares were mainly sold to connections of the company's
executives, 111 CEO Liu Junling told Reuters in an interview.
Digital influencer incubator Ruhnn Holding Ltd RUHN.O ,
after-school education provider Puxin Ltd NEW.N , and pet
product manufacturer Dogness International Corp DOGZ.O are
other examples of Chinese companies that listed on Nasdaq in the
last two years with more investors from China snapping up their
shares than from the United states, according to sources close
to the companies. Ruhnn, Puxin, and Dogness did not respond to
requests for comment.
"One critical quality of our capital markets is that we
provide non-discriminatory and fair access to all eligible
companies. The statutory obligation of all U.S. equity exchanges
to do so creates a vibrant market that provides diverse
investment opportunities for U.S. investors," a Nasdaq
spokeswoman said.
The Nasdaq spokeswoman declined to comment specifically on
the impact of the changes in the listing rules on the U.S. IPOs
of small Chinese companies.
At a time of escalating tensions between the United States
and China over trade and technology, Nasdaq's curbs on small
Chinese IPOs represent the latest flashpoint in the financial
relationship between the world's two largest economies.
U.S.-listed shares of Chinese companies fell sharply on
Friday following reports that the White House was considering
delisting Chinese companies from U.S. stock exchanges. A U.S.
Treasury official said on Saturday that U.S. President Donald
Trump's administration was not considering blocking Chinese
companies from listing shares on U.S. stock exchanges "at this
time". urn:newsml:reuters.com:*:nL2N26I0X6
A source close to Nasdaq said the changes to its listing
rules were not the result of discussions with the White House. A
White House spokesman declined to comment on Nasdaq's listing
rule changes.
In June, U.S. lawmakers introduced a bill, which has yet to
be adopted, that would force Chinese companies listed on
American stock exchanges to submit to regulatory oversight,
including providing access to audits, or face delisting.
Nasdaq first proposed changing the listing rules in October
2018, and the changes took effect last month.
"Nasdaq's concern about low liquidity and high volatility in
the marketplace brought about by such Chinese IPOs has become
very obvious since mid-2018," said Ralph De Martino, chair of
U.S. law firm Schiff Hardin LLP's Asia practice, which advises
Chinese companies on their IPOs.
STRICTER RULES
Nasdaq's new listing rules have raised the average trading
volume requirements for a stock, and call for at least 50% of a
company's shareholders to invest a minimum of $2,500 each in an
IPO.
Nasdaq also said in June that it may delay the U.S. listing
of a company that does not demonstrate a strong enough nexus to
the U.S. capital markets, including having no shareholders,
operations, management or board members with links to the United
States.
Small Chinese firms pursue these IPOs because they allow
their founders and backers to cash out, rewarding them with U.S.
dollars they cannot easily access because of China's capital
controls. The companies also use their Nasdaq-listed status to
convince lenders in China to fund them and often get subsidies
from Chinese local authorities for becoming publicly traded.
Unlike Nasdaq, the Chinese stock market has strict listing
criteria that prevent some loss-making companies from going
public. The geographically adjacent Hong Kong stock exchange is
also viewed by IPO hopefuls as more strict compared to Nasdaq.
Chinese companies have raised over 70 billion in the U.S.
stock market since 2000, according to Refinitiv data. While the
biggest ones, such as e-commerce giants Alibaba Group Holding
Ltd BABA.N , Pingduoduo Inc PDD.O and JD.com Inc JD.O , have
attracted major U.S. stock market investors, many small ones
have proved unpopular.
This is largely due to their poor track record. Shares of
Chinese IPOs that raised $200 million or less have traded down
38% on average since their IPO through July 31 in the last 18
months, compared to a rise of 13.9% for U.S. companies of the
same size, according to Dealogic data.
Some 19 Chinese companies went public on the Nasdaq in 2018,
up from 8 in 2017, based on submissions by investment banks
underwriting them to Dealogic.
IPOS HELD UP
Following the listing rule changes, small Chinese IPOs have
experienced longer waiting times and scrutiny from Nasdaq before
they are allowed to proceed with their IPOs, according to
corporate and investment banking sources.
For example, Xuezhu Wang, CEO of Happiness Biotech Group Ltd
HAPP.O , a Chinese company that manufactures and sells
nutraceuticals, told Reuters he promised Nasdaq to secure at
least 30% of the IPO proceeds from U.S. investors, in order to
be allowed to list.
As most of the small Chinese companies pursuing U.S. IPOs
have no U.S. business presence or brand recognition, hiring U.S.
citizens as board members is now being adopted as a tactic to
get listings approved, Chinese executives and investment bankers
say.
China Xiangtai Food Co PLIN.O , a pork processing company
based in Chongqing City in southwest China, had to add two U.S.
citizens to its board of directors to be allowed by Nasdaq to
complete its IPO in August 2019, according to two people
familiar with the matter.
Xiangtai did not respond to a request for comments.
The New York Stock Exchange, the other major U.S. stock
exchange, operated by Intercontinental Exchange Inc ICE.N , is
looking closely at Chinese listings, according to a source
familiar with the matter. However, it has yet to introduce rule
changes similar to Nasdaq.
"The New York Stock Exchange has a longstanding commitment
to good governance, rigorously adhering to both the letter and
spirit of our listing standards," a New York Stock Exchange
spokesman said.
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Trump considers delisting Chinese firms from U.S. markets
-sources urn:newsml:reuters.com:*:nL2N26I0X6
U.S. must have access to U.S.-listed Chinese firms' audit
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Alibaba plans bumper $20 bln HK listing to boost investment war
chest -sources urn:newsml:reuters.com:*:nL2N2330HB
Trump says trade deal with China could happen sooner than people
think urn:newsml:reuters.com:*:nL2N26G0VJ
Trump's China trade rhetoric turns harsh at U.N., says won't
take 'bad deal' urn:newsml:reuters.com:*:nL2N26F0WB
Hopes for trade breakthrough fade as China cancels U.S. farm
visits urn:newsml:reuters.com:*:nL2N26B0ZA
China's slowdown deepens; industrial output growth falls to
17-1/2 year low urn:newsml:reuters.com:*:nL3N2670MR
EXPLAINER-U.S., China more divided than ever as new trade talks
loom urn:newsml:reuters.com:*:nL2N25W18V
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(Reporting by Echo Wang and Joshua Franklin in New York
Additional reporting by Julie Zhu in Hong Kong and Michelle
Price and Alexandra Alper in Washington, D.C
Editing by Greg Roumeliotis and Nick Zieminski)