- Though progress has been made in resolving the long-standing difficulty of PCAOB entry to audit inspections of China-based issuers, regulatory initiatives in the US are introducing new complexities.
- Chinese language authorities lately launched a brand new regulatory framework for abroad listings of China-based issuers.
- HKEX has taken various initiatives to modernize the Hong Kong market, enhance its alignment with international requirements, present further channels for elevating capital and enhance liquidity.
The previous yr has offered a posh panorama for China-based firms in search of to entry international capital markets. Amid difficult macroeconomic circumstances and escalating geopolitical tensions, regulators in the US, mainland China and Hong Kong have launched initiatives for China-based issuers that present alternatives for individuals who are in a position to efficiently navigate the regulatory course of.
Regulatory developments in the US
Considerations about auditor inspections ease. The Holding Overseas Firms Accountable Act (HFCAA), together with the Consolidated Appropriations Act of 2023, requires the US Securities and Alternate Fee (SEC) to ban securities of issuers based mostly in China from being traded on a inventory trade. American securities or on the over-the-counter market. within the U.S. securities buying and selling market if the Public Firm Accounting Oversight Board (PCAOB) is unable to examine or examine issuers’ China-based auditors for 2 consecutive years.
In December 2022, the PCAOB issued a report eradicating mainland China and Hong Kong from the checklist of jurisdictions that aren’t topic to full inspection. In consequence, many China-based issuers that had been designated by the SEC, pursuant to the HFCAA, as “commission-identified issuers” in 2022 as a result of their auditors have been situated in mainland China or Hong Kong have been not designated. recognized as such in 2023. The PCAOB’s inspection of the work of auditors in mainland China and Hong Kong is ongoing.
The SEC’s initiatives give attention to data associated to China. Following a July 2021 assertion from SEC Chairman Gary Gensler requesting higher disclosures from Chinese language firms, the SEC issued a pattern remark letter to those firms. The letter requires sure disclosures in firms’ registration statements and periodic or routine studies, specializing in vital areas together with dangers related to using variable curiosity entity (VIE) constructions , dangers related to doing enterprise in China, authorizations and approvals from Chinese language authorities and disclosures relating to the HFCAA.
In July 2023, the SEC printed one other instance of a remark letter for China-specific disclosures targeted on three areas:
- Issuers recognized by the Fee below the HFCAA.
- Threat of Chinese language authorities intervention or management.
- Impression of the U.S. Uyghur Pressured Labor Prevention Act.
Each remark letters underscore the SEC’s continued give attention to extra seen and strong disclosure relating to China-related issues. Most China-based issuers obtain, or are anticipated to obtain, these feedback from the SEC throughout their IPO course of or of their periodic studies.
Assessment of outbound know-how investments is coming. The Biden administration issued a decree on August 9, 2023, directing U.S. companies to determine laws that can prohibit or require notification of sure kinds of abroad investments by U.S. individuals in entities in China (together with Hong Kong and Macau) concerned in three particular classes of superior applied sciences and merchandise: semiconductors and microelectronics, quantum data applied sciences and synthetic intelligence.
The ultimate guidelines will possible take impact in 2024, and the scope of the evaluation program shall be narrowly targeted, at the least initially, with the best impression most definitely on U.S. personal fairness and enterprise capital investments in China . Sure actions are expressly exempt from evaluation, equivalent to investments in public firms, financial institution loans and underwriting actions.
Regulators in the US, mainland China and Hong Kong have launched initiatives aimed toward China-based issuers, which give alternatives for individuals who are in a position to efficiently navigate the regulatory course of.
Some biotech segments are additionally reportedly below evaluation for potential funding restrictions in China, and self-driving applied sciences seem to face various ranges of regulatory scrutiny. In October 2023, the U.S. Division of Commerce unveiled new laws that additional strengthen a broad set of export controls on superior chips and chipmaking gear first launched in October 2022.
Political pressure between the US and China is rising. In July 2023, the US Home of Representatives Choose Committee on the Chinese language Communist Get together despatched letters to 4 American enterprise capital corporations expressing “critical issues” about investments in Chinese language know-how startups. Some observers have interpreted the letters as a method to stress the chief department, given the restricted outcomes of legislative efforts to regulate abroad funding in some Chinese language industries. President Joe Biden’s August 9, 2023 government order seems to align with the intentions of this Home committee.
Impression of New Chinese language Submitting Requirement on Offshore Listings
In February 2023, the China Securities Regulatory Fee (CSRC) issued new laws requiring that China-based firms (even when integrated abroad) that provide or checklist their securities on a international market should file a request to the CSRC inside three working days following their declaration. utility for registration overseas. This requirement extends to IPOs and subsequent choices in the US, Hong Kong and different international capital markets.
Thus far, greater than 100 firms have utilized to the CSRC. The evaluation course of skilled some preliminary delays, however has accelerated since August 2023. The CSRC has cleared greater than 50 purposes encompassing a variety of IPO candidates in the US and Hong Kong, firms with and with out offshore holding constructions and, particularly, firms that use a VIE construction. — suggesting a tacit recognition by Chinese language regulators of this construction.
New initiatives in Hong Kong
Hong Kong’s SPAC market is maturing and seeing its first de-SPAC transaction. In early 2022, the Hong Kong Inventory Alternate Restricted (HKEX) launched a regime permitting the itemizing of particular objective acquisition firms (SPACs). The market has welcomed the initiative, with 5 SPAC listings on HKEX up to now and various further SPAC itemizing purposes filed however not but finalized.
Beneath HKEX guidelines, a SPAC should announce an acquisition or enterprise mixture (a de-SPAC transaction) inside 24 months of itemizing and full a de-SPAC transaction inside 36 months of itemizing. The primary de-SPAC transaction in Hong Kong was introduced in August 2023 by Aquila Acquisition Company, the primary listed SPAC.
Aquila introduced that it’ll accomplice with on-line metal market operator ZG Group. Though this transaction is just not but finalized, this “proof of idea” has prompted different firms to actively take into account de-SPAC transactions as an possibility.
There are a selection of complexities in structuring SPAC transactions below Hong Kong guidelines, together with the requirement for concurrent funding from institutional traders within the type of a “share” placement. personal funding in public shares” (PIPE).
HKEX treats de-SPAC transactions as re-listing purposes and, due to this fact, the time and course of required for a goal to go public by way of a de-SPAC transaction is similar to that of a conventional IPO. Nevertheless, in a difficult market setting, the provision of this various channel for firms in search of fundraising and itemizing alternatives in Hong Kong is a welcome growth.
IPO settlement time is bettering. After a number of years of planning, Hong Kong’s “Sooner Interface for New Issuance” (FINI) plan lastly got here into impact in November 2023. FINI is a brand new digital IPO settlement platform, which has considerably decreased the time between pricing an IPO and shutting. and begin of negotiations, from 5 to 2 working days. Firms enterprise an IPO in Hong Kong will now have their IPO funds obtained and their shares listed and traded on the Hong Kong Inventory Alternate on the second enterprise day after pricing. Market contributors, together with underwriters and traders, will profit from decreased publicity to market threat because of the shorter settlement interval.
The brand new system has additionally digitized many facets of the IPO utility, underwriting and settlement course of, with many paperwork now accepted on the trade’s on-line system.
Personal shares are approved. In its newest transfer to enhance capital administration choices and tackle liquidity points, HKEX has introduced plans to permit listed firms to carry their very own shares as treasury shares. Traditionally, HKEX has not permitted treasury shares, however with Hong Kong’s rising success in attracting “return” listings from Higher China firms with twin itemizing in the US, the place treasury shares are widespread, there was stress for Hong Kong to align with the worldwide market. observe on this space.
Permitting treasury shares permits Hong Kong to proceed to stay a gorgeous itemizing vacation spot for the area’s main new firms. HKEX plans to introduce guidelines governing the resale of treasury shares, which is able to permit firms to maintain repurchased shares in money and resell them available on the market. It will make it simpler to promote shares in small portions at market costs (versus promoting giant blocks of latest shares, that are often at a reduction).
Resales of personal shares shall be topic to the identical guidelines as these relevant to points of latest shares. HKEX makes an attempt to discourage firms from buying and selling in treasury shares with the goal of manipulating their inventory worth or making a buying and selling revenue. As such, sure limitations shall be utilized to transactions on personal shares, together with a 30-day moratorium on resales after any repurchase and on repurchases after any resale, in addition to a one-month ban interval on resales. of personal shares earlier than any announcement of outcomes.
(See additionally “How Companies Adapt to Capital Market Volatility and Plan Forward. “)