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Nasdaq Set to Tighten Listing Rules, Impacting Chinese IPOs

Crystal Tse and Julia Fioretti

(Bloomberg) -- Nasdaq Inc. is planning new rules that would make initial public offerings more difficult for some Chinese companies, thrusting the U.S. exchange into the middle of an increasingly contentious debate over financial linkages between the world’s largest economies.

The proposed regulations include minimum fundraising thresholds and stricter requirements for auditors, according to Nasdaq filings with the Securities and Exchange Commission seen by Bloomberg News. While the rules wouldn’t only apply to China, companies from there would be among the most affected.

Nasdaq’s proposal follows a string of accounting scandals at Chinese firms that have burned some of the biggest names on Wall Street and drawn the attention of Donald Trump. The U.S. president said last week he’s “looking at” Chinese companies that don’t follow American accounting rules, while his administration moved to stop a federal retirement savings fund from investing in the Asian nation’s stocks. Relations between the superpowers have deteriorated in recent months across multiple fronts, from trade to the coronavirus.

“The latest news will likely be seen as a bit more pointed, showing a bit more teeth in terms of the U.S.-China trade tensions,” said Jingyi Pan, market strategist at IG Asia Pte.

Nasdaq’s proposals include requiring companies from certain countries to raise at least $25 million in their IPO, or alternatively, an amount equal to at least a quarter of their post-listing market capitalization. Of the 29 Chinese companies that went public on the Nasdaq last year, 10 raised less than $25 million, data compiled by Bloomberg show.

Restrictive Markets

Many Chinese IPOs that fall below Nasdaq’s proposed threshold are thinly traded, due in part to shares being held by a small group of insiders. A minimum size would provide greater price support, Nasdaq said in its filings.

The proposals, which require approval from the SEC, apply to companies from so-called restrictive markets that have national security or other laws restricting U.S. regulators’ access to information.

China is one of four locations that Nasdaq names in the filings as having refused to share company financial records and details of audits with the Public Company Accounting Oversight Board, along with Belgium, France and Hong Kong where it concerns mainland Chinese companies. The SEC and PCAOB warned in a strongly worded statement last month that investors should beware the lack of visibility into the books of companies from emerging markets including China.

Read more: Marco Rubio Wants the U.S. to Take a Harder Line on China

The current regulations allow Nasdaq to deny the listing of firms from restrictive market countries whose auditors have not been or are not permitted to be inspected by the PCAOB. Nasdaq is now proposing a more stringent set of criteria, including requiring auditors to show that they have sufficient expertise with international accounting standards in the offices doing the audit.

The new rules would also require that companies have a member of either senior management or a director with relevant experience at a U.S. listed public company, or that they have hired advisers with similar experience.

A representative for Nasdaq declined to comment on the filings, which were first reported by Reuters. Chinese firms currently in the pipe for U.S. IPOs include Dada Nexus Ltd., an operator of crowd-sourced delivery platforms in China backed by JD.Com. It plans to raise $500 million.

Some investors played down the potential impact of Nasdaq’s proposals, saying that underwriters have already been tightening standards. Several international banks have recently curbed work on some U.S. listings by Chinese firms, concerned about rising reputational risks after a string of disappointing deals.

Meanwhile, exchanges in China and Hong Kong have relaxed listing standards to entice more companies to go public closer to home.

“It is China that has a surplus of capital due to a high savings rate,” said Gary Dugan, chief executive officer at the Global CIO Office in Singapore. “Many of these younger companies can get funded from within.”

(Updates throughout)

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