WASHINGTON—U.S. regulators will require additional disclosures from Chinese companies before allowing them to sell shares in the U.S., following new restrictions from China’s government on companies that raise capital offshore.
The new disclosure requirements from the Securities and Exchange Commission will mostly focus on so-called Variable Interest Entities, or VIEs, a form of a shell company used to skirt Chinese-government restrictions on foreign ownership and listing on overseas exchanges. The entities, which are often based in offshore jurisdictions such as the Cayman Islands, allow U.S. investors to gain exposure to Chinese companies through service agreements and other contracts with the operating company.
SEC Chairman Gary Gensler said U.S. investors may not realize that they are purchasing stock in shell companies rather than an operating company in China.
“In light of the recent developments in China and the overall risks…I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Mr. Gensler said Friday.
Large Chinese tech companies, including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. , lost hundreds of billions of dollars in combined market value in July as concerns mounted about how the sector would fare under a barrage of regulatory pressure from Beijing.
A company seeking to list shares in the U.S. must first file a registration statement with the SEC. The process involves a back-and-forth between the company and SEC lawyers over the disclosures contained in the statement before it is eventually declared effective, allowing the company to proceed with an initial public offering.
For Chinese-company VIEs, the SEC will require the registration statements to clearly distinguish the shell company’s management services from the China-based operating company, and to provide detailed information about the relationship between the two entities.
The statements will also have to disclose uncertainty “about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements,” Mr. Gensler said.
For all China-based operating companies seeking to register securities in the U.S., the SEC will begin requiring them to disclose whether they received permission from Chinese authorities to list on U.S. exchanges, as well as the risk that that permission might be rescinded. They will also have to disclose that they could be delisted if U.S. auditors aren’t allowed to review their papers within three years.
The SEC’s plans come as China tightens restrictions on its firms as they seek to raise money abroad.
Earlier this month, Chinese regulators launched a cybersecurity probe into ride-hailing company Didi Global Inc. shortly after it went public in the U.S. Soon after, China said it would tighten scrutiny of overseas-listed companies and those seeking to sell shares abroad.
Write to Paul Kiernan at paul.kiernan@wsj.com
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