U.S. Nasdaq steps up scrutiny of Chinese company listings

Originally published on Nikkei Asia (August 14, 2024)

NEW YORK -- The Nasdaq Stock Market has increased its scrutiny of small to midsize Chinese companies looking to list on the bourse, causing uncertainty and delays, according to people familiar with the matter.

Several investment bankers, lawyers and professional services companies have told Nikkei Asia the tech-focused Nasdaq has questioned the identity and background of investors before the companies' planned initial public offerings, a move that has extended the listing process by weeks or months.

The stricter screening is aimed at protecting investors from potentially excessive volatility caused by the listings, according to sources. The bourse has asked the Chinese companies for documentation on buyers of IPO shares to ensure that the majority are U.S. citizens, one lawyer said. Additional due diligence includes requiring the principal underwriter to be a member of the Nasdaq, which has its own set of regulations.

Another lawyer, who spoke on condition of anonymity, pointed out that 80% of IPO buyers for Chinese companies allowed to list at Nasdaq were U.S. citizens. The recent concerns stem from so-called pump and dump transactions by foreign investors in small to midsize Chinese listings that have brought volatility to the market, industry players say.

Such volatility could stem from small to midsize companies of any origin. However, industry sources cited several notable Chinese deals that raised regulators' eyebrows.

In July 2022, AMTD Digital, a Hong Kong financial services company, listed its shares on the New York Stock Exchange and saw its stock price skyrocket from an IPO price of $7.80 to $2,555 at its peak in a matter of weeks, giving it a larger market valuation than Chinese e-commerce giant Alibaba at one point. The stock crashed in subsequent weeks.

Nasdaq declined to comment on the added scrutiny of Chinese companies.

"They've been asking in some deals for China issuers, for additional diligence around things like [the identities of the] selling stockholders," said John Owen, a New York-based capital markets partner at Morrison Foerster. "And again, I think that has been unique. But it's because of, you know, a particular set of deals where the price behaved kind of unusually after pricing."

Owen added that many companies, including Chinese ones, looking to list in the U.S. have pushed back listing dates to 2025 amid interest rate uncertainties.

But others are more wary of the political landscape. One investment banker said U.S.-China geopolitical tensions have also heightened scrutiny from Nasdaq.

"Many Chinese companies are looking to get listed before the [U.S. presidential] election, because who knows how regulations could change with a new president," he said.

U.S. voters will cast their ballots in November for Vice President Kamala Harris or former President Donald Trump as the country's next leader.

Chinese listings in the U.S. slowed during the coronavirus pandemic. This was followed by an overhaul by the China Securities Regulatory Commission of its listing regulations on March 31, 2023, requiring domestic companies to get approval for overseas share offerings. Chinese companies must also obtain approvals from government departments overseeing cross-border data security.

This year, as of Aug. 14, 13 Chinese companies valued at a combined $642 million have listed on the Nasdaq and the New York Stock Exchange, according to financial analytics firm Dealogic. A total of 44 Chinese companies have filed to list on the Nasdaq this year, according to a Nikkei Asia tally. None have been rejected by the exchange so far.

Nasdaq proposed last Thursday automatic suspension for companies whose share price stays below $1 for a year or falls below $1 after completing a reverse stock split. The changes are subject to approval by the U.S. Securities and Exchange Commission.