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Exclusive: Nasdaq cracks down on IPOs of small Chinese companies

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(Reuters) – Nasdaq Inc (NDAQ.O) is cracking down on preliminary public choices (IPOs) of small Chinese companies by tightening restrictions and slowing down their approval, in response to regulatory filings, company executives and funding bankers.

FILE PHOTO: Two girls maintain umbrellas as they stroll previous the Nasdaq MarketSite in New York’s Times Square, August 22, 2013. REUTERS/Lucas Jackson/File Photo

Nasdaq’s try and restrict these inventory market flotations comes as a rising quantity of them find yourself elevating most of the capital of their IPO from Chinese sources, fairly than from U.S. traders.

The shares of most small Chinese companies commerce thinly following their U.S. itemizing, as a result of most of them keep within the arms of just a few insiders. Their low liquidity makes them unattractive to many massive institutional traders, to whom Nasdaq is in search of to cater.

For instance, when 111 Inc (YI.O), a Chinese on-line pharmacy community, raised $100 million in its IPO on Nasdaq final yr, shares have been primarily bought to connections of the corporate’s executives, 111 CEO Liu Junling advised Reuters in an interview.

Digital influencer incubator Ruhnn Holding Ltd (RUHN.O), after-school training supplier Puxin Ltd (NEW.N), and pet product producer Dogness International Corp (DOGZ.O) are different examples of Chinese companies that listed on Nasdaq within the final two years with extra traders from China snapping up their shares than from the United states, in response to sources near the companies. Ruhnn, Puxin, and Dogness didn’t reply to requests for remark.

“One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies. The statutory obligation of all U.S. equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for U.S. investors,” a Nasdaq spokeswoman stated.

The Nasdaq spokeswoman declined to remark particularly on the influence of the modifications within the itemizing guidelines on the U.S. IPOs of small Chinese companies.

At a time of escalating tensions between the United States and China over commerce and expertise, Nasdaq’s curbs on small Chinese IPOs signify the most recent flashpoint within the monetary relationship between the world’s two largest economies.

U.S.-listed shares of Chinese companies fell sharply on Friday following reviews that the White House was contemplating delisting Chinese companies from U.S. inventory exchanges. A U.S. Treasury official stated on Saturday that U.S. President Donald Trump’s administration was not contemplating blocking Chinese companies from itemizing shares on U.S. inventory exchanges “at this time”.

A supply near Nasdaq stated the modifications to its itemizing guidelines weren’t the consequence of discussions with the White House. A White House spokesman declined to remark on Nasdaq’s itemizing rule modifications.

In June, U.S. lawmakers launched a invoice, which has but to be adopted, that may power Chinese companies listed on American inventory exchanges to undergo regulatory oversight, together with offering entry to audits, or face delisting.

Nasdaq first proposed altering the itemizing guidelines in October 2018, and the modifications took impact final month.

“Nasdaq’s concern about low liquidity and high volatility in the marketplace brought about by such Chinese IPOs has become very obvious since mid-2018,” stated Ralph De Martino, chair of U.S. legislation agency Schiff Hardin LLP’s Asia follow, which advises Chinese companies on their IPOs.

STRICTER RULES

Nasdaq’s new itemizing guidelines have raised the common buying and selling quantity necessities for a inventory, and name for at the least 50% of an organization’s shareholders to speculate a minimal of $2,500 every in an IPO.

Nasdaq additionally stated in June that it might delay the U.S. itemizing of an organization that doesn’t reveal a powerful sufficient nexus to the U.S. capital markets, together with having no shareholders, operations, administration or board members with hyperlinks to the United States.

Small Chinese corporations pursue these IPOs as a result of they permit their founders and backers to money out, rewarding them with U.S. {dollars} they can not simply entry as a result of of China’s capital controls. The companies additionally use their Nasdaq-listed standing to persuade lenders in China to fund them and sometimes get subsidies from Chinese native authorities for changing into publicly traded.

Unlike Nasdaq, the Chinese inventory market has strict itemizing standards that stop some loss-making companies from going public. The geographically adjoining Hong Kong inventory alternate can be seen by IPO hopefuls as extra strict in comparison with Nasdaq.

Chinese companies have raised over 70 billion within the U.S. inventory market since 2000, in response to Refinitiv knowledge. While the largest ones, resembling e-commerce giants Alibaba Group Holding Ltd (BABA.N), Pingduoduo Inc (PDD.O) and JD.com Inc (JD.O), have attracted main U.S. inventory market traders, many small ones have proved unpopular.

This is basically attributable to their poor monitor document. Shares of Chinese IPOs that raised $200 million or much less have traded down 38% on common since their IPO by July 31 within the final 18 months, in comparison with an increase of 13.9% for U.S. companies of the identical measurement, in response to Dealogic knowledge.

Some 19 Chinese companies went public on the Nasdaq in 2018, up from eight in 2017, based mostly on submissions by funding banks underwriting them to Dealogic.

IPOS HELD UP

Following the itemizing rule modifications, small Chinese IPOs have skilled longer ready instances and scrutiny from Nasdaq earlier than they’re allowed to proceed with their IPOs, in response to company and funding banking sources.

For instance, Xuezhu Wang, CEO of Happiness Biotech Group Ltd (HAPP.O), a Chinese firm that manufactures and sells nutraceuticals, advised Reuters he promised Nasdaq to safe at the least 30% of the IPO proceeds from U.S. traders, with a purpose to be allowed to checklist.

As most of the small Chinese companies pursuing U.S. IPOs haven’t any U.S. enterprise presence or model recognition, hiring U.S. residents as board members is now being adopted as a tactic to get listings permitted, Chinese executives and funding bankers say.

China Xiangtai Food Co (PLIN.O), a pork processing firm based mostly in Chongqing City in southwest China, had so as to add two U.S. residents to its board of administrators to be allowed by Nasdaq to finish its IPO in August 2019, in response to two folks aware of the matter.

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Xiangtai didn’t reply to a request for feedback.

The New York Stock Exchange, the opposite main U.S. inventory alternate, operated by Intercontinental Exchange Inc (ICE.N), is trying carefully at Chinese listings, in response to a supply aware of the matter. However, it has but to introduce rule modifications just like Nasdaq.

“The New York Stock Exchange has a longstanding commitment to good governance, rigorously adhering to both the letter and spirit of our listing standards,” a New York Stock Exchange spokesman stated.

Reporting by Echo Wang and Joshua Franklin in New York; Additional reporting by Julie Zhu in Hong Kong and Michelle Price and Alexandra Alper in Washington, D.C; Editing by Greg Roumeliotis and Nick Zieminski


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