Picture: REUTERS/SHANNON STAPLETON
Picture: REUTERS/SHANNON STAPLETON

New York/Hong Kong — Nasdaq is planning new rules that would make initial public offerings (IPOs) more difficult for some Chinese companies, thrusting the US exchange into the middle of an increasingly contentious debate over financial links between the world’s largest economies.

The proposed regulations include minimum fundraising thresholds and stricter requirements for auditors, according to Nasdaq filings with the US Securities and Exchange Commission (SEC) seen by Bloomberg News. While the rules wouldn’t only apply to China, companies from there would be among the most affected.

Nasdaq’s proposal follows a string of accounting scandals at Chinese firms that have burnt some of the biggest names on Wall Street and drawn the attention of President Donald Trump, who  said last week that he’s “looking at” Chinese companies that don’t follow American accounting rules, while his administration moved to stop a federal retirement savings fund from investing in the Asian nation’s stocks.

Relations between the super-powers have deteriorated in recent months across multiple fronts, from trade to the coronavirus.

“The latest news will likely be seen as a bit more pointed, showing a bit more teeth in terms of the US-China trade tensions,” said Jingyi Pan, market strategist at IG Asia.

Nasdaq’s proposals include requiring companies from certain countries to raise at least $25m in their IPO or, alternatively, an amount equal to at least a quarter of their post-listing market capitalisation. Of the 29 Chinese companies that went public on the Nasdaq last year, 10 raised less than $25m, data compiled by Bloomberg shows.

Restrictive markets

Many Chinese IPOs that fall below Nasdaq’s proposed threshold are thinly traded, due in part to shares being held by a small group of insiders. A minimum size would provide greater price support, Nasdaq said in its filings.

The proposals, which require approval from the SEC, apply to companies from restrictive markets that have national security or other laws restricting US regulators’ access to information.

China is one of four locations that Nasdaq names in the filings as having refused to share company financial records and details of audits with the US Public Company Accounting Oversight Board (PCAOB), along with Belgium, France and Hong Kong, where it concerns mainland Chinese companies. The SEC and PCAOB warned in a strongly worded statement last month that investors should beware the lack of visibility into the books of companies from emerging markets, including China.

The current regulations allow Nasdaq to deny the listing of firms from restrictive market countries whose auditors have not been or are not permitted to be inspected by the PCAOB. Nasdaq is now proposing a more stringent set of criteria, including requiring auditors to show that they have sufficient expertise with international accounting standards in the offices doing the audit.

The new rules would also require that companies have a member of either senior management or a director with relevant experience at a US-listed public company, or that they have hired advisers with similar experience.

A representative for Nasdaq declined to comment on the filings, which were first reported by Reuters. Chinese firms currently in the pipeline for US IPOs include Dada Nexus, an operator of crowd-sourced delivery platforms in China backed by JD.com. It plans to raise $500m.

Some investors played down the potential effect of Nasdaq’s proposals, saying that underwriters have already been tightening standards. Several international banks have recently curbed work on some US listings by Chinese firms, concerned about rising reputational risks after a string of disappointing deals.

Meanwhile, exchanges in China and Hong Kong have relaxed listing standards to entice more companies to go public closer to home.

“It is China that has a surplus of capital due to a high savings rate,” said Gary Dugan, CEO at the Global Chief Investment Officer (CIO) Office in Singapore. “Many of these younger companies can get funded from within.”

Bloomberg