Gary Gensler Mark Wilson/ Getty ImagesReuters first reported that the SEC has stopped processing IPO listings by Chinese companies.New disclosure requirements have been introduced in China, centered around variable interest entities (a unique listing structure for Chinese companies).The SEC is concerned that US investors don't understand that purchasing stock in variable-interest entities is different from buying other shares.Subscribe to our daily newsletter 10 Things Before The Opening Bell.Until Chinese companies meet the new disclosure requirements, the SEC will no longer process IPO listings.Gary Gensler, Chair of the SEC, stated in a statement that China companies would be required to disclose information about their IPO structures and the risk of Chinese government intervention.Gensler's statement was made following a Reuters report that confirmed that the SEC had placed the US listing of Chinese firms on ice. This was in anticipation of the new disclosure requirements.China's IPO activity has stagnated in the wake the government's strict line on a number of newly listed companies, including Didi Chuxing, the ride-hailing company. As regulatory uncertainty has increased, investment banks have been trying to shift Chinese IPOs to Hong Kong from New York.New disclosure requirements center around variable interest entities, a unique listing structure that is only available to Chinese companies.VIEs are the best way for US capital and US companies to be exposed to Chinese public companies. They were created in response to China's early 2000s market liberalization. GMT Research found that 69% of Chinese companies listed on the NYSE and Nasdaq use this structure.VIEs are a complex web of contracts, subsidiaries and shell corporations that allow the end investor to own mock shares in the underlying business. The SEC is concerned that American investors don't understand that stock purchased in VIE-listed Chinese companies is different from buying regular US-listed shares. It does not grant any ownership rights.Gensler stated, "I worry that average investors might not realize that they have stock in a Shell company rather than a China based operating company."China's disclosure requirements will force Chinese companies to disclose more information about the risk of government meddling in the business, including whether an IPO approval has been given by the state.Gensler said that such disclosures were crucial for informed investment decision-making, and are central to the SEC's mandate of protecting investors in the US capital markets.
