NASDAQ to unveil new restrictions on IPOs to deter deceptive listings

By Rahul Vaimal, Associate Editor
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Nasdaq is set to unveil new restrictions on initial public offerings (IPOs), a move that will make it harder for some Chinese companies to debut on its stock exchange.

While Nasdaq is not expected to summon Chinese companies specifically in the changes but the move is motivated largely by anxieties about some of the Chinese IPO seekers’ lack of accounting transparency and close ties to powerful insiders.

Nasdaq also revealed some restrictions on listings last year, attempting to curb IPOs by small Chinese companies. Their shares frequently trade thinly because most stay in the hands of a few insiders. Their low liquidity makes them unattractive to many large institutional investors, to whom Nasdaq caters to.

The new tightening of the listing standards reflects the bourse operator’s concerns about some Chinese companies seeking U.S. IPOs. Last month, Luckin Coffee LK.O, which had a U.S. IPO in early 2019, announced that an internal investigation had shown its chief operating officer and other employees fabricated sales deals.

The new rules will compel companies from some countries, including China, to raise $25 million in their IPO or, alternatively, at least a quarter of their post-listing market capitalization.

This is the first time Nasdaq has put a minimum value on the size of IPOs. The development would have checked several Chinese companies currently listed on the Nasdaq from going public. Out of 155 Chinese companies that listed on Nasdaq since 2000, 40 grossed IPO proceeds below $25 million, according to Refinitiv data.

Small Chinese firms pursue these IPOs because they allow their founders and backers to cash out, compensating them with U.S. dollars they cannot easily obtain because of China’s capital controls. The companies also use their Nasdaq-listed status to influence lenders in China to fund them and often get grants from Chinese local authorities for becoming publicly traded.

Newly proposed rules will also expect auditing firms to guarantee that their international franchises comply with global standards. Nasdaq will also examine the auditing of small U.S. firms that audit the accounts of Chinese IPO seekers.

The U.S. Securities and Exchange Commission (SEC) is planning to host a roundtable this summer for companies, auditors, advisers and other parties to discuss issues with IPOs of foreign companies and their accounting disclosures.