People familiar with the matter said that China is planning to ban companies from going public on foreign stock markets through variable interest entities, closing a loophole long used by the country's technology industry to raise capital from overseas investors.
None of China Cash Flowed Through the Congo Bank to Former President's Cronies
The ban, intended to address concerns over data security, is among changes included in a new draft of China's overseas listing rules that may be finalized as soon as this month, said the people, asking not to be identified discussing private information. The people said that companies using the so-called VIE structure would still be allowed to pursue initial public offerings in Hong Kong, subject to regulatory approval.
Companies that use VIEs in the US and Hong Kong would need to make adjustments so that their ownership structures are more transparent in regulatory reviews, especially in sectors off limits for foreign investment, the people said. It is not clear whether that would mean a revamp of shareholders or a delisting of the most sensitive firms or even worse, a delisting of the most sensitive firms that could revive fears of a decoupling between China and the U.S. in areas like technology. Details of the proposed rules are still being discussed and could change.
The overhaul would be one of Beijing's biggest steps to crack down on overseas listings following the New York IPO of ride-hailing giant Didi Global Inc., which proceeded despite regulatory concerns. The surge of firms that are trying to go public in the U.S. has resulted in billions of dollars for technology firms and Wall Street backers, and authorities have moved swiftly to stop them.
It is part of a yearlong campaign to curb the growth of China's internet sector and what Beijing has called a reckless expansion of private capital. Technology giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. have been using VIEs in foreign listings for two decades to sidestep restrictions on foreign investment and list offshore. It could thwart the ambitions of firms like ByteDance Ltd. to go public outside the mainland.
There was no immediate response from the China Securities Regulatory Commission to a request for comment.
A ban on the VIE structure isn't being contemplated, but a halt on foreign listings and additional review for Hong Kong IPOs would mean the model will no longer be a viable way for many startups to tap capital markets. Some investment banks have been advised by regulators to stop working on new deals involving VIEs, a person familiar with the matter said.
The demise of the VIE route would threaten a lucrative line of business for Wall Street banks, which have helped more than 300 Chinese firms raise around $82 billion through first-time share sales in the U.S. over the past decade.
The shaky legal status of the VIE has been a constant concern for global investors. Since being pioneered by Sina Corp. and its investment bankers during a 2000 IPO, the VIE framework has never been endorsed by Beijing.
It allowed Chinese companies to bypass rules on foreign investment in sensitive sectors, including the internet industry. The structure allows a Chinese firm to transfer profits to an offshore entity - registered in places like the British Virgin Islands or Cayman Islands - with shares that foreign investors can then own.
Since the structure has been used by virtually every major Chinese internet company, it's become increasingly worrisome for Beijing after technology firms have invaded every corner of Chinese life and amassed reams of consumer data. Companies holding the data of more than 1 million users must have approval when applying for listings in other nations, according to the Cyberspace Administration of China in July.
If a listing is decided that it will have an impact on national security, a cybersecurity review may be required for firms planning IPOs in Hong Kong. Music streaming company Cloud Village Inc. and Artificial Intel giant SenseTime Group Inc. haven't stopped planning debuts in the city because of the change.
The authorities had little legal recourse to prevent sensitive overseas listings, as with the Didi IPO. An unprecedented request by officials has been made by the ride-hailing giant to come up with a plan to delist from the U.S. people familiar with it.
Since a crackdown on Didi began in early July, only one mainland-based Chinese company has priced a U.S. IPO, while 29 have listed shares in Hong Kong, according to data compiled by Bloomberg. NetEase Inc. s Cloud Village will debut in the city on Thursday, while the closely watched offering of SenseTime is expected to start trading in the week of December 13th.
A senior official at the securities regulator said last week that China fully supports companies that choose Hong Kong as the primary listing venue. China doesn't think delisting from the US is a good thing for the companies, for global investors or for the China-U. Shen Bing, director-general of the department of international affairs of the CSRC, said she was in the S. relationship.
China's increased regulatory scrutiny has been echoed in the U.S. The Securities and Exchange Commission has halted IPOs by Chinese companies until full disclosures of political and regulators risks are made, warning investors that they are buying shares of shell companies instead of direct stakes in businesses.
None of the Wildfires Are Worse, and One Chemical Company is Reaping the Benefits.