Last week, the SEC dropped the final “regulatory shoe” by specifying the rules and procedures that will implement the accounting compliance requirements outlined in the Holding Foreign Companies Accountable Act (HFCAA) on foreign companies listed on US stock exchanges. Right on cue, every Chinese company currently listed in the US promptly plummeted on the news. Invesco’s Golden Dragon China ETF, which tracks the NASDAQ’s Golden Dragon China Index, dropped close to 10% last Friday.
The designation that the SEC will use on companies to be scrutinized is called “Commission-Identified Issuers” (aka Santa’s “naughty list”). To be clear, these auditing standards have been around since the Sarbanes-Oxley Act of 2002. They are just poorly enforced by the Public Company Accounting Oversight Board (PCAOB) when it comes to Chinese companies, likely because helping these companies IPO in the US has been so profitable for Wall Street.
In the coming weeks and months, we will find out which company will end up on the “naughty list” on this SEC webpage. In the meantime, I see three paths that these US-listed Chinese companies will take: secondary to primary, dual-primary listing, and total exit.
Path 1: HKEX Secondary to Primary (Alibaba)
Ever since the HFCAA started gaining momentum in the US Congress two years ago, Chinese tech companies have been looking for a Plan B. Alibaba led the way by doing a secondary listing on the Hong Kong Stock Exchange (HKEX) in November 2019. Many other tech companies -- Netease, Baidu, BiliBili, etc. -- followed suit.
There are a few aspects of the HKEX secondary listing option (aka Path 1) that makes it a natural offramp from the US, especially for large Chinese tech companies.
First, this option is only available to companies who’ve already listed for more than two years on the NYSE, NASDAQ, or the premium listing on the London Stock Exchange, which by proxy shows these companies have met a high standard of compliance and disclosure. Thus, the required paperwork to execute a secondary listing on HKEX is much less than a primary listing (aka Path 2, see below). The timeline is also shorter -- approximately 90 days for a secondary listing versus 180-200 days on average for a primary listing. Alibaba, Netease, and Baidu obviously qualify, given their size and age. BiliBili, a relatively newcomer, filed for HKEX secondary listing as soon as it qualified -- its NASDAQ debut was March 2018 and its HKEX secondary started trading in March 2021.
Second, the HKEX changed its rules in April 2018 to allow a dual-class share structure, which is common among tech companies. It was one of the main reasons why Alibaba decided not to go public in Hong Kong back in 2014. Companies who have this structure, called weighted voting rights (WVR) in HKEX parlance, also have to meet a certain revenue threshold. Given this “new and improved” HKEX, tech companies like Alibaba no longer have to compromise on its corporate structure.
Third, and perhaps least well-known, if the trading volume of a company via its HKEX secondary listing exceeds 55% of its global volume, Hong Kong automatically becomes the company’s primary regulator, not Uncle Sam’s SEC. Thus, for example, if the SEC puts Alibaba on the “naughty list” as a Commission-Identified Issuer, and Alibaba decides to either not comply or fail to meet the PCAOB’s standards, its trading volume in the US would fall sharply while its Hong Kong volume would grow. By then, it’s just a matter of time when the 55% threshold is reached in Hong Kong, and Alibaba naturally leaves the SEC’s jurisdiction with Hong Kong’s Securities and Futures Commission (SFC) becoming its primary regulator.
This Path 1 -- HKEX Secondary to Primary -- is not available to every company. For the ones who do qualify, it’s the cheapest and quickest way to build a Plan B from the US.
Path 2: Dual-Primary Listing (XPeng)
For companies who cannot, or don’t want to, pursue Path 1, another path forward is a dual-primary listing on both an American exchange and the HKEX. XPeng, a leading Chinese electric vehicle (EV) maker, paved this path in July by IPOing on the HKEX less than one year after its IPO on the NYSE. Li Auto, an XPeng competitor, followed suit in August. NIO, another Chinese EV maker, also attempted to follow but its Hong Kong listing is delayed until 2022.
There are some advantages to pursuing a HKEX primary listing, the most important of which is access to Mainland Chinese investors via the stock connect that links Hong Kong to investors trading in Shanghai and Shenzhen.
There are some drawbacks as well. First, the company can’t piggyback off of the work already done for its US public listing in its HKEX primary listing application. Hong Kong’s SFC is a compliance-oriented regulatory regime, which is quite different from the SEC’s disclosure-oriented regime. Second, the timeline is also longer, as I noted above. Third, the ongoing filing, auditing, and compliance cost to make two primary regulators happy is no chump change.
However, for Chinese tech companies who want to maintain exposure to the US public capital market and don’t qualify for HKEX secondary listing, Path 2 -- a dual-primary listing -- may be their only option. Luckily, XPeng has built some prior art for others to copy. And for certain types of tech products that need a growth story beyond China, EVs being a good example, keeping a US listing and complying with the SEC is still worth the trouble.
Path 3: Total Exit (Didi)
Path 1 and 2 are both hedges against a forced delisting. I believe companies who’ve chosen these two paths still intend to work with the SEC to comply and hopefully stay listed in the US. Path 3 is a total exit, which is appealing for companies that have no business prospects or ambition in the US anyways, and dealing with the SEC is a waste of time.
Didi is one good example and has already begun the process to delist. While Didi has some international ambition in Latin America, as I’ve documented during my travels there, it has no prospect in the US. I can see companies like Pinduoduo, Beke, TAL Education, and Lufax doing the same. Leaving the US will likely be followed by a primary listing on the HKEX. However, compliance does not necessarily get easier for these companies with a Hong Kong listing. Didi chose to IPO on the NYSE and went against Chinese regulators’ wishes partly because it would have to do a lot more work to change its business structure and model to meet HKEX’s requirements. Ironically, with the HFCAA and the SEC’s new rules, Didi can no longer escape Hong Kong.
As the SEC works through its process, there will be plenty of Chinese companies on the “naughty list” and many of them will simply choose Path 3, leaving the US once and for all. What may be more interesting to speculate on is which company will pass the SEC’s compliance gauntlet and end up on the “nice list”! Out of the more than 200 US-listed Chinese companies, there ought to be at least a few companies who do follow solid accounting practices and are not owned by the Party or anyone the US government deems questionable characters. These companies would be the true unicorns!
Regardless of which company ends on which list, the “great delisting” will keep plenty of accountants, lawyers, and of course bankers busy and gainfully employed.
让 "大退市" 开始吧
上周，美国证券交易委员会（SEC）最后的一只 "监管鞋" 落地了，明确了在美国上市的外国公司履行《外国公司责任法》（HFCAA）中规定的会计合规要求的规则和程序。随即，所有目前在美国上市的中国公司因此消息立即暴跌。追踪纳斯达克的金龙中国指数的Invesco的金龙中国ETF，上周五下跌接近10%。
SEC命名要被审查的公司的专用词是“Commission-Identified Issuers”，也可以理解为是圣诞老人的 "淘气名单"（naughty list）。说白了，这些审计标准自2002年的萨班斯 · 奥克斯利法案以来就一直存在。只是当涉及到中国公司时，上市公司会计监督委员会（Public Company Accounting Oversight Board，PCAOB）执行不力，很可能是因为帮助中国公司赴美上市对华尔街来说太赚了。
在未来几周和几个月内，这个 "淘气名单" 会逐渐在SEC网页上公布。同时，我认为这些在美国上市的中国公司将采取三种途径：二级转一级，双一级上市，或完全退出。
自从两年前HFCAA开始在美国国会受到重视以后，中国科技公司一直在寻找Plan B。阿里率先于2019年11月在港交所进行二级上市。许多其他科技公司 —— 网易、百度、B站等 —— 也纷纷效仿。
首先，此选择只适用于已经在纽约证券交易所、纳斯达克或伦敦证券交易所高级上市超过两年的公司，以证明这些公司在合规和公布信息方面符合了较高的监管标准。因此，在港交所进行二级上市所需的文件比一级上市（即途径2，见下文）要少得多。需要花的时间也更短 —— 二级上市大约90天，而一级上市平均需要180-200天。鉴于阿里、网易和百度的规模和年龄，它们显然是符合条件的。BiliBili作为一个相对较年轻的公司，一符合条件就申请了在港交所二级上市。它是2018年3月在纳斯达克上市的，而在2021年3月就开始在港交所进行二级交易了。
其次，港交所在2018年4月改变了规则，允许双类股权结构。这种股权结构在科技公司中很常见，这也是为什么阿里早在2014年决定不在香港上市的主要原因之一，当时港交所还不允许这种结构。想保持这种结构的公司（用港交所的说法叫加权投票权，weighted voting rights，WVR），还必须达到一定的收入门槛。鉴于这个 "新改进的" 港交所，像阿里这样的科技公司不再需要在其公司股权结构上做出妥协了。
这个途径1 —— 港交所二级转一级 —— 并不是每家公司都可以使用的。对于那些符合条件的公司来说，这是退市美国Plan B里最便宜、最快捷的方式。
然而，对于那些希望保持在美国上市，但又不符合港交所二级上市条件的中国公司来说，途径2 —— 双一级上市 —— 可能是它们唯一的选择。幸亏小鹏已经把这条路走通了，供其他公司复制。对于某些科技产品来说，海外市场的增长故事是必须的，电动车就是一个很好的例子。同时，企图保持在美国上市并遵守SEC的规定还是值得做的。
随着SEC开始执行它的流程，将有许多中国公司被列入 "淘气名单"，其中许多公司将直接选择“途径3”，一劳永逸地离开美国。猜起来更有意思的是，哪家公司会通过SEC的合规审查并最终被列入到 "乖孩子名单"！在大约200多家已在美国上市的中国公司中，应该至少有几家公司确实遵循了扎实可靠的会计流程，并且不被党或美国政府认为有问题的人所控制。这种公司才是真正的独角兽!