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Recap: Chinese IPOs in the Current Environment, 2.23.21
New U.S. laws and regulations are tightening requirements for listing on U.S. exchanges. How will they impact Chinese listings? Do they aim to protect U.S. investors? How do they affect the valuation and underwriting of Chinese listings? The new rules are hitting some of China’s biggest players—including Alibaba and Baidu—and more than 200 other Chinese firms, valued at US$2.2 trillion. Will tighter U.S. rules be a boon for Hong Kong and Shanghai? And how can companies navigate the new rules to pursue their IPO dreams? Three top experts discuss the behind-the-scenes workings of IPOs for the answers to these questions and more.
Melanie Chen has more than 20 years of experience in tax, accounting and legal services on cross-border acquisitions and public offerings between the United States and China. She established the China Group at UHY in 2005 and has grown it into a leading professional services platform with close to 30 employees located in New York City, Irvine California and Beijing China, providing integrated accounting, tax and business solutions to Chinese companies going public and making investments in the United States. She is a licensed attorney in both New York and China, as well as a licensed CPA. Melanie specializes in providing integrated tax, accounting and consulting to multinational companies doing cross-border investments in China and the U.S.
Ruth Jin is an attorney specializing in corporate and securities law. Ms. Jin’s clients range from entrepreneurs to Fortune 500 companies, and she regularly advises businesses through all stages of growth from start-up/capital financing to IPO. She has extensive experience in mergers and acquisitions, joint ventures and alternative public offerings, and very familiar with legal issues related to cross-border transactions. Prior to founding Jin & Koppell, she was an attorney at Orrick Herrington & Sutcliffe LLP. She has her law degrees from Georgetown University, University of Tokyo and Peking University.
Anthony LeCour is a Managing Director of Wedbush Securities, with extensive experience advising domestic and international clients in the consumer goods sector (food, beverage, emerging brands, beauty and personal care products, ingredients, luxury goods, and consumer health) on M & A assignments, strategic advisory and capital financing initiatives. He has advised on over $130 billion of transactions involving cross-border stock/cash mergers and acquisitions, spin offs, minority stock purchases/strategic investments, joint ventures, and capital raising engagements.
Full Video of Chinese IPOs in the Current Environment:
Selected quotes from the program:
Dinda Elliott (DE): Why do Chinese companies want to list in the states in the first place – particularly given the fact that the environment is not exactly welcoming these days?
Anthony LeCour (AL): First and foremost, you have to consider that despite some of the political upheaval and what not, particularly over the last two years there have been a tremendous amount of Chinese companies accessing the US capital markets. For example, back in 2019 you had probably about 28 IPOs in the market for about close to four billion. Despite all the political issues […] you had a 240% increase in Chinese IPOs in the US. Despite all these headwinds, there has still been tremendous interest and the average size of these IPOs has really jumped as well.
This gives you a perspective that [the US market] is still a very lucrative and attractive market for Chinese companies. This is probably for three reasons: higher valuations, investor access, and increased credibility. […] Investors in the US have a very strong appetite for Chinese offerings. It gives them access to companies with strong growth and particularly in a rapidly growing Chinese economy. When you look at the top ten IPOs in the US in 2020, three of those were Chinese companies.
Another key aspect is that the market here is more transparent than the Chinese market. From an investor standpoint, it gives them a degree of more comfort. You have an issue sometimes particularly in the Chinese markets where there’s more state-controlled currency and other regulatory issues which can affect valuation.
DE: Why is everybody talking about the future of Chinese IPOs? What’s the problem? What are the Chinese companies up against now?
Ruth Jin (RJ): There about four new rules and guidelines issued in 2020 that are aimed at Chinese companies specifically. The first I want to address is the Holding Foreign Countries Accountable Act. This was in response to the lack of compliance among Chinese companies listed on US exchanges […] The second one is in November 2020, the SEC issued new disclosure guidelines on China based issuers, which required China based issuers to have a more detailed description of the risks involving China. The Third one which is significant is the Trump administration’s executive order banning securities of Chinese military companies. This executive order bans any transaction involving the securities of any communist military company.
DE: Why were Chinese companies able to get away with not complying with the regulations in the first place? Are these tightened regulations politically driven or is it really an effort to protect US investors?
RJ: I think it’s both – the executive order made by President Trump is politically driven because as we speak, you know, China was an emerging market, and from an investor standpoint it is still an emerging market, but it is still the second largest economy. And as we speak, a Chinese spaceship is orbiting Mars. The Chinese Military – not only is the technology catching up with America but the spending is catching up as well, and arms control treaties are not possible with China as it consistently rejected that proposal. So, the executive order to limit Chinese military influenced companies to have access to have access to the global capital market is politically driven to deter the expansion and enhancement of US to Chinese military. The SEC’s new guidelines are more about fair game and leveling the playing field.
DE: If Chinese companies do want to go public in the US, what is your advice for them? How can they overcome the challenges they are facing now in terms of these increased restrictions? What are the best ways to complete a successful IPO?
Melanie Chen (MC): My first advice is to engage a US CPA firm as your auditor to avoid uncertainties – that will solve a lot of your headaches and uncertainties. My second advice is to carefully receive investment before you go IPO. Since there is a blacklist from the US government, you want to carefully select your investors and try not to associate with the companies on the blacklist.
RJ: Companies like TikTok – they didn’t become TikTok without America. And that is the key, and Chinese entrepreneurs know that. So, try to stay private and then have a good relationship with the Chinese government because ultimately you need to achieve their approval.
Have more dialogue and make sure American investors understand China better because for example the judgements are not enforced mutually between the US and China but the arbitration is.