Nasdaq will tighten requirements for companies seeking to go public on its exchange, a move that will affect a set of countries that includes China.
The New York-based stock exchange will require companies to raise at least $25m in equity capital in an initial public offering or a sum equivalent to a quarter of the value of the group once listed, according to documents filed by Nasdaq to the Securities and Exchange Commission on Monday.
The rules will apply to listings from countries such as China that have secrecy laws and regulations that bar access to information from US regulators.
The exchange has also mandated that companies from these regions hire a special adviser familiar with the levels of transparency and accountability required of US public companies if they do not have senior management that have worked at US-listed groups.
The changes follow the accounting scandal at Luckin Coffee, one of the biggest Chinese listings on the US stock market in recent years.
According to the regulatory filing seen by the Financial Times, Nasdaq noted that some companies “lacked familiarity with the requirements to be a Nasdaq-listed public company in the US or [were] otherwise unprepared for the rigours of operating as a public company”.
Nigel Stevenson, an analyst at accounting investigation firm GMT Research, said: “Obviously they don’t want to explicitly target [the rule change] at China but that’s clearly the main country they’re intending it to cover.”
Scrutiny of listings from China has increased after the implosion of Luckin Coffee, a would-be local rival to Starbucks. The start-up admitted in April to fabricating $310m worth of sales in 2019 and last week dismissed its chief executive and chief operating officer. Shares in the company, which was one of last year’s biggest IPOs, tumbled almost 75 per cent on the day the scandal was revealed.
The debacle spurred officials at the SEC and Public Company Accounting Oversight Board to issue a joint warning to investors on Chinese companies’ book-keeping standards, which Nasdaq referenced in its submission on Monday.
“This would impact a lot of newly listed Chinese companies, particularly ones without much of a record and which had been brought to market relatively quickly,” Mr Stevenson added.
Close to a quarter of the 59 Chinese IPOs on Nasdaq since the end of 2016 were smaller than $25m, according to data from Dealogic, accounting for just 2 per cent of the funds raised by Chinese companies on the exchange during the period. However, these listings have performed poorly, losing on average 67 per cent of value from their IPO price.
Jason Elder, a partner at law firm Mayer Brown in Hong Kong, said the rule requiring management with experience of working at a US-listed company was intended to boost accountability to shareholders.
“Those rules are intended to get that voice in the room, so that when decisions are being made somebody will be thinking, ‘What do the rules say we should do as a public company?'” he said.
The Luckin scandal has also played into the hands of China hawks in Washington already emboldened by the Trump administration’s trade war with Beijing, once again highlighting the accounting risks faced by investors in US-listed Chinese companies.
In April, the SEC announced a meeting this summer to address issues of investing in companies with different levels of transparency. “Investments in emerging markets, including China, entail significant disclosure, financial reporting and other risks for US investors,” Jay Clayton, SEC chair, said.