Nasdaq to tighten listing rules, restricting Chinese IPOs -sources

Luckin Coffee

19/05/2020 02:48

(Adds background on Trump, SEC moves)
    By Echo Wang
    NEW YORK, May 18 (Reuters) - Nasdaq Inc  NDAQ.O  is set to
unveil new restrictions on initial public offerings (IPOs), a
move that will make it harder for some Chinese companies to
debut on its stock exchange, people familiar with the matter
said on Monday.
    While Nasdaq will not cite Chinese companies specifically in
the changes, the move is being driven largely by concerns about
some of the Chinese IPO hopefuls' lack of accounting
transparency and close ties to powerful insiders, the sources
said.
    At a time of escalating tensions between the United States
and China over trade, technology and the spread of the novel
coronavirus, Nasdaq's new curbs on Chinese IPOs represent the
latest flashpoint in the financial relationship between the
world's two largest economies.
    Nasdaq also unveiled some restrictions on listings last
year, seeking to curb IPOs by small Chinese companies. Their
shares often trade thinly because most 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 to.
    The new tightening of the listing standards reflects the
bourse operator's concerns about some Chinese companies seeking
U.S. IPOs. Last month, Luckin Coffee  LK.O , which had a U.S.
IPO in early 2019, announced that an internal investigation had
shown its chief operating officer and other employees fabricated
sales deals.  urn:newsml:reuters.com:*:nL4N2CU3FK
    The new rules will require companies from some countries,
including China, to raise $25 million in their IPO or,
alternatively, at least a quarter of their post-listing market
capitalization, the sources said. 
    This is the first time Nasdaq has put a minimum value on the
size of IPOs. The change would have prevented several Chinese
companies currently listed on the Nasdaq from going public. Out
of 155 Chinese companies that listed on Nasdaq since 2000, 40
grossed IPO proceeds below $25 million, according to Refinitiv
data.
    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.
 urn:newsml:reuters.com:*:nL2N2511NQ
    The proposed rules will also require auditing firms to
ensure that their international franchises comply with global
standards, the sources said. Nasdaq will also inspect the
auditing of small U.S. firms that audit the accounts of Chinese
IPO hopefuls, the sources added.
    U.S. President Donald Trump told Fox Business in an
interview last week that he was looking "very strongly" at
requiring Chinese companies that list in New York to follow U.S.
accounting standards. But he noted that "the problem with that"
was that Chinese companies could decide to list in London or
Hong Kong instead.
    The U.S. Securities and Exchange Commission (SEC) has been
locked in a decade-long struggle with the Chinese government to
inspect audits of U.S.-listed Chinese companies. The regulator’s
accounting oversight arm, the Public Company Accounting
Oversight Board (PCAOB), is still unable to access those
critical records, it has said.
    The PCAOB, which was set up by the 2002 Sarbanes-Oxley Act
and is overseen by the SEC, is tasked with policing the
accounting firms that sign off on the books of the nation’s
listed companies. Its problems with Chinese audit quality have
been festering since 2011, when scores of Chinese companies
trading on U.S. exchanges were accused of accounting
irregularities.
    The SEC is planning to host a roundtable this summer for
companies, auditors, advisers and other parties to discuss
issues with IPOs of foreign companies and their accounting
disclosures, one of the sources said. 

 (Reporting by Echo Wang in New York; Editing by Cynthia
Osterman and Muralikumar Anantharaman)
 ((E.Wang@thomsonreuters.com;))