Chinese issuers are finding it harder to move ahead with US listings, as banks and US regulators become more cautious about pushing such transactions amid lingering Chinese regulatory risks.
US stock listings by Chinese companies have come to a grinding halt after China's cyberspace regulator launched a data security probe into Didi Global on July 2, just two days after the Chinese ride-hailing giant raised US$4.4bn from a NYSE IPO.
Soon after the Didi debacle, China proposed rules that require companies holding data on more than one million users to apply for cybersecurity approval when seeking listings in other countries. It is also drafting rules that will govern Chinese companies listing overseas including those structured as variable interest entities, a commonly used structure whereby ownership of assets in China is held indirectly through shell companies incorporated in jurisdictions such as the Cayman Islands.
As regulatory uncertainty makes China-to-US IPOs more risky, some banks are simply skipping such transactions while others are seeking greater assurance.
Goldman Sachs, one of the bookrunners on the planned US$500m US IPO of SoftBank-backed XtalPi, has asked the artificial intelligence drug researcher to provide “regulatory assurance” beyond verbal guarantees that the IPO complies with all relevant Chinese regulations and has the green light from regulators, said three sources with direct knowledge of the matter.
“The IPO is now stalled as it’s hard for the issuer to provide such assurance as no regulators can hand out approvals when rules governing overseas listings are not even ready,” said one of the sources.
Goldman declined to comment on XtalPi but said while it recognised the regulatory situation was going to evolve, it had not changed due diligence processes in how it handled US IPOs.
“It’s understandable for banks to seek extra assurance after the Didi fiasco. We have basically strongly advised Chinese issuers against a US IPO or simply given the deal a pass,” said a banker away from the XtalPi deal.
More aggressive
The US Securities and Exchange Commission is also getting more aggressive in requesting that companies with links to China, even if not formally Chinese, extensively disclose risks in listing documents.
On Monday, in response to a request by the SEC, FWD Group, a Hong Kong-headquartered Asian insurer controlled by Hong Kong billionaire Richard Li with no substantive operations in mainland China, added a disclosure in its filing that “it cannot guarantee that the PRC government will not seek to intervene or influence its operations at any time”.
The company finished pre-marketing in October for an IPO that could raise up to US$3bn. Tighter scrutiny from the US regulator is likely to drag the deal into next year.
Also on Monday, Chinese-American biotech LianBio saw its shares plunge 14.4% to US$13.70 on their Nasdaq debut after the company delayed its IPO for a few days following last-minute enquiries from the SEC.
The biotech, which partners with global pharmaceutical companies to test and sell drugs in China, completed the first US listing by a company with an extensive Chinese business since Didi.
LianBio, which is not structured as a VIE but is incorporated in the Cayman Islands, was asked to amend some formulations in the filing to fully reflect China-related risks. Several sources said the SEC was looking more closely at businesses with operations in China.
Against this backdrop, Hong Kong-based artificial intelligence biotech company Insilico Medicine, which recently filed confidentially for a US IPO, is expecting its US$300m float to be highly scrutinised.
“The company thinks it’s a Hong Kong company so should face less scrutiny than a [mainland] Chinese company. But given how aggressive the SEC is these days, it could face much more enquiries than it thought,” said a person familiar with the situation.
With US listings looking less likely, some Chinese companies have shifted or are considering shifting their IPOs to Hong Kong. Podcast and online radio start-up Ximalaya withdrew a US IPO in September and subsequently filed for a US$500m–$1bn Hong Kong listing. Online truck logistics services provider ForU Worldwide, which pre-marketed a US$300m–$500m Nasdaq IPO, is now considering doing a private round before turning to a Hong Kong listing.
Others, however, are simply hoping their US IPOs can go ahead despite all the regulatory noise.
“Some companies just can’t list in Hong Kong as their financial numbers or company structure can’t fulfil the listing requirements there. They can only wait,” said an ECM banker.
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