Nasdaq’s Proposed New Listing Rules May Block Some Chinese Firms From Exchange

Nasdaq is preparing to introduce some new rules that will likely make it more difficult from some Chinese and other foreign companies to get listed on the stock exchange.

The rules are targeted at companies that lack accounting transparency and have excessive control by insiders.

Among other things, companies would now be required to raise a minimum of $25 million or one-fourth of their post-IPO market capitalization in order to get on the exchange. Nasdaq will also apply more stringent accounting standards of new listings. Nasdaq said it will also examine the auditing of small U.S. companies that audit the accounts of prospective Chinese listings.

“The risks to U.S. investors are heightened when a company’s business is principally administered in a jurisdiction that has secrecy laws, blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S.-listed companies in such jurisdiction,” Nasdaq said.

The new rules also require that companies seeking to be listed on Nasdaq have a member of either senior management or a board director (or an adviser) with relevant experience at a U.S.- listed public company.

Reuters reported that Nasdaq’s proposed new rules would have blocked several Chinese companies currently listed on Nasdaq from ever going public on the exchange. Out of 155 Chinese companies that have listed on Nasdaq since 2000, 40 generated IPO proceeds below the $25 million threshold.

Bloomberg noted that of the 29 Chinese companies that listed on Nasdaq last year, 10 raised less than $25 million.

Small Chinese companies would especially be hurt by the new rules – these firms typically use the prestige of a Nasdaq listing to attract money from lenders or subsidies from the Chinese government, while allowing their founders and key insiders to cash out.

These small Chinese stocks are also thinly traded on Nasdaq (due to the control of a few insiders), thereby making them unattractive to institutional investors.

Nasdaq’s plans remain subject to approval by the Securities and Exchange Commission.

While Nasdaq is not specifically targeting Chinese firms, the new rules appear to have emerged as a response to the debacle surrounding Luckin Coffee (LK), the Chinese coffee chain engulfed in a massive accounting fraud scandal.

An executive at the company and other employees had grossly inflated quarterly sales figures to the tune of about $310 million in fabricated sales. Nasdaq suspended trading in Luckin shares in early April and has now moved to delist the company.

Nasdaq’s new measures come as tensions between the U.S. and China have worsened partly as a result of the coronavirus pandemic, which President Donald Trump, among others, have blamed on the Chinese.

Last week, Trump sought to prohibit a federal retirement savings fund from investing in Chinese companies. The president also said he would look at U.S.-listed Chinese companies that do not follow U.S. accounting rules.

“The latest news will likely be seen as a bit more pointed, showing a bit more teeth in terms of the U.S.-China trade tensions,” said Jingyi Pan, market strategist at IG Asia Pte.

Meanwhile, the SEC has long attempted and failed to examine the audits of U.S.-listed Chinese companies – many of which have been accused of accounting irregularities.

However, Chinese companies may not need to list on U.S. exchanges to generate attention and cash.

“It is China that has a surplus of capital due to a high savings rate,” said Gary Dugan, chief executive officer at the Global CIO Office in Singapore. “Many of these younger companies can get funded from within.”

Ironically, exchanges in China and Hong Kong have loosened their own listing standards in order to attract more companies to go public in local bourses.

China is also reportedly urging its companies to find listings on the London Stock Exchange under terms of “the Shanghai-London Stock Connect scheme” that began last year.

Chinese authorities have specifically pushed two companies -- China Pacific Insurance and SDIC Power – to seek a London listing after failed attempts last year. They have also urged China Yangtze Power to seek a secondary listing on the London Stock Exchange.

The Shanghai Stock Exchange stated that U.K. listings under the connect scheme were the "companies' own decisions based on their development needs and market conditions.”

However, such listings require the approval of U.K. regulatory authorities, which will not be easy. Nor will new Chinese listings attract a lot of interest from foreign investors. Moreover, the pandemic has harmed the climate for IPOs.

"The IPO market is likely to remain shaky for a good while yet, and these are not 'need to own' assets. Investors will already be busy supporting the companies in their portfolio and are likely to be selective," said a London-based banker.