China’s securities regulator said domestic companies seeking to sell shares abroad would have to follow domestic rules and file for local registration, in a draft framework meant to clarify proceedings in a market rocked by the state’s crackdown on overseas listings.
The draft rules, released on Friday, follow a nearly six-month pause in Chinese listings in the U.S., since the ill-fated New York initial public offering for ride-hailing giant Didi Global Inc. DIDI -0.53% In July, the Chinese government punished Didi for front-running domestic regulations and subsequently said it would install guidelines for Chinese companies selling shares overseas. Companies have put on hold their listing plans pending more regulatory clarity from Beijing.
The China Securities Regulatory Commission said the draft rules aren’t meant to tighten policies for overseas listings, though it also stressed that companies listed overseas can’t leak state secrets and that they must follow domestic regulations such as foreign-investment, cybersecurity and data-security laws. It is seeking public consultation until Jan. 23.
The rules also blessed the structure known as variable-interest entity, or VIE, which has been used since the early 2000s by virtually every Chinese internet company to get around China’s restrictions on foreign investments in domestic businesses. The regulator said on Friday that companies can sell shares abroad using the VIE structure provided they abide by domestic laws and register with the CSRC first.
The regulator seems to be trying to create a more efficient domestic system for Chinese companies that are trying to raise capital overseas, said Jason Elder, a capital-markets lawyer at Mayer Brown LLP who has worked on deals involving Chinese companies. He added that the framework will ultimately depend on the CSRC’s final guidance.
“What they’re not pushing toward is a further delinking or decoupling with the global financial system, but they’re rather recognizing that their regulatory environment could be improved to provide more certainty that companies listing overseas are complying with domestic laws,” Mr. Elder said.
The rules will first apply to those companies that are seeking to sell shares abroad and will be also applied to those seeking secondary listings, backdoor listings or listings via special-purpose acquisition companies. For those that are already listed overseas, there will be a grace period of unspecified duration, the CSRC said.
A company would need to file for a registration with the CSRC within three working days after filing for an overseas IPO. International banks that act as sponsors or lead underwriters of Chinese companies’ overseas listings are also required to register with the CSRC.
The development of the draft rules aims to provide a clearer framework for overseas listing and promote a stable and predictable policy environment, the CSRC said. It added that it has always supported Chinese companies choosing listing destinations of their own.
The language used to describe the process of getting the nod from the CSRC for overseas listing is “registration,” which in the domestic market hints at a friendly tone and typically indicates that the regulator will check only the completeness of the companies’ disclosure and if there are major compliance or legal issues.
In the U.S., securities regulators have started a countdown that will force many Chinese companies to leave American stock exchanges. In late 2020, then-President Donald Trump signed a law that bans the trading of securities in foreign companies whose audit working papers can’t be inspected by U.S. regulators for three years in a row. That year, Luckin Coffee Inc., an upstart rival to Starbucks Corp. in China, admitted to fabricating revenue and expenses.
“In recent years, some overseas listed companies have committed serious violations of laws and regulations such as financial fraud, which has damaged the overall international image of Chinese companies and has adversely affected the overseas financing of Chinese companies,” the CSRC said.
In light of heightened scrutiny from Washington, some Chinese companies have rerouted to Hong Kong for IPOs.
Companies would need to get the CSRC’s approval before cooperating with investigations by overseas regulators, the CSRC said. The regulator reiterated that it would keep collaborating with overseas peers on cross-border securities regulations, including strengthening information-sharing and audit-inspections cooperation.
Under the draft rules, Chinese authorities would be able to require companies seeking to list outside the country to dispose of domestic assets or operations as a way to mitigate national-security concerns, the CSRC said.
Write to Dave Sebastian at [email protected] and Jing Yang at [email protected]
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