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Ending a regulatory freeze initiated in 2021, China’s securities regulator has published its final set of rules for offshore IPOs of domestic firms, reviving the means of capital raising for mainland firms. China overseas listing will now be monitored by the regulator, and the new rules come into effect on March 31.
As per the document published by the China Securities Regulatory Commission (CSRC), the new rules will require firms to adopt a new filing system and will also give specific guidance to companies wishing to raise money outside China, such as the US.
Trouble around China overseas listing rules
The rules published last week are similar to a draft issued in late 2021 by the CSRC, but China overseas listing rules now provide clarity to companies seeking to raise money from the US. Beijing had tried to block certain firms from going overseas in a protectionist bid, citing national security and personal data protection.
The new rules mandate mainland companies to comply with these national security measures and laws related to data protection before seeking an offshore IPO.
US and China have been at loggerheads over the company audit issue, which finally came to an end late last year when Beijing agreed to certain demands. The move substantially reduced the risk of the US delisting Chinese firms.
CSRC’s rules end the unregulated process of China overseas listing. “Offshore listing is a key component of China’s capital markets opening,” the securities regulator said in its statement.
Under the new regulations, the CSRC can block overseas IPOs that impede state security, or if any companies or their shareholders are under investigation for corruption and bribery.
The variable interest entity structure often used by Chinese firms is still valid. Like before, mainland companies can list in the US through a shell company, usually established in the Cayman Islands. Additionally, China overseas listing rules mandate IPO underwriters to report to the regulator about their involvement in any firms seeking offshore fundraising.
A key clause is that CSRC can also fine companies and individuals up to $1.5 m for providing misleading information or violating other rules.
Offshore listings from China ground to a halt after cab aggregator Didi Chuxing’s massive IPO in the US in June 2021. Didi, like other tech companies in China, handle a large amount of user data, which raised Beijing’s concerns about their IPOs oversees. In the ensuing audit issue with the US, Didi was forced to delist again after a little less than 12 months.
The new rules, combined with the fading risk of US delisting, will allow Chinese firms to turn to overseas markets, such as New York, to raise money. CSRC has said that companies operating in sensitive sectors must undergo a cybersecurity review and seek clearances from relevant authorities before filing for overseas IPOs.
