According to sources familiar with the matter at hand, Nasdaq Inc is set to unveil stricter regulations on initial public offerings (IPOs). The move is aimed at bringing increased transparency, especially for some Chinese companies, who want to debut on its stock exchange.
Although Nasdaq is unlikely to specifically cite any Chinese companies by name, the move comes midst concerns that Chinese IPO hopefuls’ lack of accounting transparency, said sources.
In 2019, Nasdaq had also unveiled some restrictions on listings in an aim to curb IPOs of small Chinese companies. Most such IPOs saw thin trading on account of the bulk of the shares being with few insiders. Further their low liquidity have also made them unattractive to many large institutional investors to whom Nasdaq seeks to cater to.
The increase in the transparency in listing standards reflects Nasdaq’s concerns about the inflated valuation of some Chinese companies with the latest case in point being Luckin Coffee. Last month, the Chinese company which had a U.S. IPO in early last year, announced that following the results of an internal investigation, it was found that its chief operating officer and other employees had fabricated sales deals.
According to sources, the new rules will require companies from select countries, to raise $25 million in their IPO or at least a quarter of their post-listing market capitalization.
Once the new rules come into effect, it will be the first time that Nasdaq has put a minimum value on the size of IPOs. If the rule was applied to previous years, it would have prevented many Chinese companies from being listed on the bourse. Of the 155 Chinese companies listed on Nasdaq since 2000, 40 have grossed IPO proceeds below $25 million, going by Refinitiv data.
Small Chinese companies persue U.S. IPOS since it allows their founders and backers to cash out and thus reward themselves with easy U.S. dollars which they cannot easily access because of China’s capital controls. These companies also use the Nasdaq-listed status to convince lenders in China to fund them and often get subsidies from Chinese local authorities for becoming publicly traded.
Further, once the proposed rules comes into effect, it will also require auditing firms to ensure that their international franchises comply with global accounting standards, said sources while adding, Nasdaq will also inspect the auditing of small U.S. firms that audit the accounts of Chinese IPO hopefuls.
Since a decade the U.S. Securities and Exchange Commission (SEC) has been struggling with the Chinese government to inspect audits of U.S.-listed Chinese companies. The SEC’s accounting oversight arm, the Public Company Accounting Oversight Board (PCAOB), is still unable to access those critical records, said the SEC.
The SEC plans on hosting a roundtable conference this summer, which will include companies, auditors, advisers and other parties to discuss issues with IPOs of foreign companies and their accounting disclosures, said a source.