China is reportedly planning to ban internet companies whose data poses potential security risks from listing outside the country, including in the US.
According to a person familiar with the matter, the country is also expected to impose a ban on companies involved in ideology issues. Last month, Beijing said it planned to strengthen supervision of all firms listed offshore, a sweeping regulatory shift that came after a cybersecurity investigation into ride-hailing giant Didi Global just days after its US listing.
As part of the planned rules, the Chinese securities regulator would strictly scrutinize overseas initial public offer (IPO), bound firms and ban those that collect vast amounts of users’ data or create content that could pose possible security risks.
According to the sources, all internet firms would be asked to voluntarily apply for reviews with the powerful Cybersecurity Administration of China (CAC) if they aim to list their shares outside China. CAC would review the firms, if necessary, with other relevant ministries and regulators, after the cybersecurity watchdog’s approval companies would be allowed to submit an application to the securities regulator.
The plan is one of several proposals under consideration by Chinese regulators as Beijing has tightened its grip on the country’s internet platforms in recent months.
The rules being drafted would also emphasize the legal responsibility of underwriters in overseas listings and require a more thorough disclosure of shareholding for those with so-called variable interest entities (VIE) structures.
The VIE structure was created to circumvent rules restricting foreign investment in sensitive industries like media and telecommunications, enabling Chinese companies to raise funds overseas via offshore listings.
It has been widely adopted by China’s new economy companies, mainly internet firms, that are generally incorporated in the Cayman Islands and the British Virgin Islands and therefore falls outside Beijing’s legal jurisdiction. It gives firms more flexibility to raise capital offshore while bypassing the scrutiny and lengthy IPO vetting process that locally incorporated companies have to go through.