Last month, the SEC announced a number of new directives for staff regarding Chinese companies that register securities directly in the U.S. and those that use so-called variable interest entities (VIEs). VIEs are a form of shell company, one that typically establishes an offshore entity in another jurisdiction to issue stock to public shareholders.
Gary Gensler, chairman of the SEC, said in a statement that he will direct staff to seek certain disclosures of offshore issuers associated with China-based operating companies before their registration statements can be declared effective.
These directives include:
- All companies’ VIE registration statements must distinguish the difference between the Chinese based operating company and the shell company
- The China-based operating company, the shell company issuer, and investors must disclose if they face uncertainty about future actions by the government of China that could harm the operating company’s financial performance and the enforceability of the contractual arrangements
- Companies must disclose detailed financial information so that investors can best understand the financial relationship between the VIE and the issuer
Any China-based operating company looking to register securities with the SEC must also disclose whether the company was granted permission from Chinese authorities to list on U.S. exchanges.
“I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies,” Gensler said in the statement.
The SEC’s move comes just a month after a crackdown in data security by Chinese officials, one that threatened to tighten oversight of overseas listings. 