Hundreds of Chinese companies step towards US listing

The China Securities Regulatory Commission’s Trial Administrative Measures for Overseas Securities Offering and Listing by Domestic Companies came into force on 31 March 2023, together with the supporting guidelines.

According to the 27 November 2023 Notice on Strengthening Financial Support to Boost Growth of Private Economy, “eligible private companies are supported in going public on overseas stock exchanges, so as to make the most of the markets and resources at home and abroad”. This notice was jointly issued by China’s eight regulatory agencies, including the People’s Bank of China (PBOC), the National Administration of Financial Regulation (NAFR) and the China Securities Regulatory Commission (CSRC).

By 6 December 2023, nearly 200 Chinese companies had filed with the CSRC, and 52 had completed their registration of overseas listing and received their notice of registration. Of them, 21 companies chose to go public on US stock exchanges, four on the New York Stock Exchange (NYSE) and 17 on the Nasdaq.

The US capital markets are multi-layered. The NYSE and Nasdaq are becoming increasingly mature through continuing layering and evolution. The Nasdaq has three distinct tiers: the Global Select Market, the Global Market and Capital Market. The Nasdaq Global Select Market has the highest listing standards, and the Nasdaq Capital Market has the lowest. Of the Chinese enterprises that completed filing with the CSRC and planned to list on the Nasdaq, 12 companies disclosed their choices of market layer: one company chose the Nasdaq Global Market and the remaining 11 enterprises chose the Nasdaq Capital Market. The table below are the listing standards for the Nasdaq Capital Market:

Listing standards. The lower listing standards are most attractive to Chinese companies. Among the Chinese enterprises listed on the Nasdaq, the “net income standard” is usually adopted for their initial listing. This standard imposes much lower net profit requirements than the financial requirements imposed on companies seeking to list in the Chinese mainland.

Listed companies. Listings on the Nasdaq Capital Market are mainly for smaller tech firms and high-growth emerging companies. The Nasdaq Capital Market has shaped an investor base interested in high-growth, high-tech and innovative businesses, and which is highly willing to invest in tech innovators and high-growth enterprises. Therefore, if China-based tech firms and high-growth emerging companies go public on the Nasdaq Capital Market, they are more likely to win over investors and gain higher valuations.

Listing modes. The listing modes available on the Nasdaq Capital Market include IPO, ADR, reverse merger and special-purpose acquisition company (SPAC). Enterprises may choose the listing mode most suitable for their own conditions. If the SPAC mode is used, regardless of whether the listing is successful or not, the shares will become tradable immediately on completion of the allotment, effectively shortening the time required for listing. This mode is very attractive to China’s small and medium enterprises seeking to list in the US.

In addition, the high liquidity level of the Nasdaq Capital Market means easier and greater financing opportunities for enterprises. Frequent trading will also give a boost to the price discovery mechanism.

According to public disclosures, the compliance of the variable interest entity (VIE) structure is on the CSRC’s priority list for compliance review of companies filing for registration of overseas listing. The common feedback is to ask the issuer to provide additional information on foreign exchange management, overseas investment and other regulatory procedures involved in the VIE setup and reverse merger, and the payment of taxes and fees in accordance with the law. Due to the complexity of the VIE structure, the CSRC may solicit the opinions of authorities such as the National Development and Reform Commission, the Ministry of Industry and Information Technology and the Ministry of Commerce when examining the issuer with a VIE structure, which will result in an extended period of registration.

In August 2023, the CSRC made it clear that it would continue to unblock overseas listing channels for Chinese companies. To date, companies with successful VIE registration include J&T Express (Hong Kong red-chip listing) and Cheche Technology (US SPAC listing). This success brings confidence to companies intending to go public overseas via the VIE.

In addition to the VIE structure, the CSRC also pays extra attention to the compliance of employee equity incentive plans (including whether each plan has gone through the decision-making procedure and domestic regulatory procedures for foreign exchange), personal information protection and data security (including whether information is provided to third parties and whether necessary information protections are in place).

In the US, the US Securities and Exchange Commission’s (SEC) Statement on Investor Protection Related to Recent Developments in China and the Disclosure Considerations for China-Based Issuers, makes it clear the SEC is concerned about the accuracy of the following information on Chinese companies that seek to list in the US:

• Authenticity of financial statements;
• Information acquisition and supervision;
• The issuer’s organisational structure;
• Regulatory environment;
• Shareholders’ rights;
• Corporate governance; and
• Differences in reports submitted by intermediaries.

The description of relevant facts must be more rigorous, detailed and comprehensive, and must be disclosed in a targeted manner:

• Description of the issuer’s business, which shall distinguish shell companies from actual business operators;
• The uncertainty in the issuer’s financial position and performance of major contracts due to China’s policy changes;
• Detailed financial information;
• Whether the operating entity and, if applicable, the issuer have completed their CSRC filing; and
• A review of the accounting firm engaged by the issuer, as required by the Holding Foreign Companies Accountable Act.

Opportunities usually coexist with challenges. Listing on a stellar capital market like those in the US will create positive signal effects for issuers. Also, the stringent regulatory systems of domestic and foreign capital markets will translate into broader recognition among investors.

It is suggested that issuers accurately position themselves and select the appropriate market for listing. Qualified intermediaries should be engaged as early as possible to provide guidance on compliance, gain a full understanding of the equity or VIE structure and domestic and foreign shareholders, conduct a prudent assessment of business activities involving sensitive industries such as information security, and complete the pre-listing procedures for overseas listing in a timely manner to ensure compliance with domestic and foreign laws and regulations.