SEC Adds to Chinese Company Investment Prohibitions
Under the “Holding Foreign Companies Accountable Act” passed in December of 2020, the SEC is required to identify public companies that are located in a foreign country by requesting an audit report issued by a registered public accounting company to allow the US Public Company Accounting Oversight Board to inspect or investigate companies despite ‘a position taken by an authority in the foreign jurisdiction’. In other words, if foreign US listed companies do not fully disclose all information, in particular ownership structure, they are notified by the SEC of such a request and have roughly three weeks to provide complete information. If they don’t, they are subject to delisting in the US. The SEC has added an additional 80 names to its list of provisional delisting, including some of the most prominent Chinese technology companies, and including those already delisted, the list now represents roughly half of all Chinese companies listed on US stock markets. Here are some of the ‘new’ names added this week:
Bilibili (BILI)
Pinduoduo (PDD)
Tencent Music (TME)
JD.com (JD)
Netease (NTES)
We expect that anyone at the institutional level that has or is investing in Chinese companies listed on US exchanges has done considerable due diligence before making such investments. Understanding Chinese company ownership takes an inordinate amount of time as layers upon layers of organizations are deciphered, only to find that behind the organization names lies a state or city controlled agency. We do this regularly for what are smaller companies compared to those on the list above and many times we hit a wall where there is no public information to define ownership further. The companies on the list should at the very least be able to quantify ownership publicly and if they cannot do so, for any reason, they should not be able to trade on US exchanges. We are usually less favorable toward government regulations toward Chinese companies, but ownership is definable and should be presented in a way that is relatively easy to understand and allows the investor to understand who benefits from the success of such companies.
Bilibili (BILI)
Pinduoduo (PDD)
Tencent Music (TME)
JD.com (JD)
Netease (NTES)
We expect that anyone at the institutional level that has or is investing in Chinese companies listed on US exchanges has done considerable due diligence before making such investments. Understanding Chinese company ownership takes an inordinate amount of time as layers upon layers of organizations are deciphered, only to find that behind the organization names lies a state or city controlled agency. We do this regularly for what are smaller companies compared to those on the list above and many times we hit a wall where there is no public information to define ownership further. The companies on the list should at the very least be able to quantify ownership publicly and if they cannot do so, for any reason, they should not be able to trade on US exchanges. We are usually less favorable toward government regulations toward Chinese companies, but ownership is definable and should be presented in a way that is relatively easy to understand and allows the investor to understand who benefits from the success of such companies.
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