Here’s What Some Chinese Firms Are Adding to U.S. IPO Filings

(Bloomberg) -- Chinese firms planning to list on American exchanges are slowly starting to tackle increasingly detailed queries from the U.S. Securities and Exchange Commission, which has been pushing for full disclosure of political and regulatory risks they face in their home country.

A camellia-seed oil producer, whose modest $20 million share sale is awaiting approval, updated its filing Monday to spell out its offshore corporate structure and its so-called “variable interest entity.” An electronic components seller, which filed for an initial public offering in New York on Monday, said that it conducts a substantial majority of its business through units and a VIE in China.

VIEs -- commonly used by Chinese firms to circumvent Beijing’s restrictions on foreign ownership -- have come under SEC scrutiny following China’s announcement in July that rules for overseas listings would be revised, potentially impacting the VIE route.

Though the IPOs by Huake Holding Biology Co. and Iczoom Group Inc. are tiny, the filings offer a peek into how bankers and lawyers are beginning to deal with SEC’s demands in the wake of China’s recent regulatory crackdown that abruptly halted U.S. IPO plans of many mainland companies including social media and e-commerce startup Xiaohongshu, or “Little Red Book” and logistics firm Lalamove. It still isn’t clear if the additional information will help meet the latest requirements. 

Separately, the U.S. regulator has also halted pending IPOs by Chinese companies until full disclosures are made, warning investors may not be aware they are actually buying shares of shell companies instead of direct stakes in businesses. SEC Chairman Gary Gensler said last week that there’s a lot that American investors don’t know about some Chinese companies that are listed on U.S. stock exchanges.

The SEC has sent prospective issuers as many as 20 questions that focus on the VIE structure and the nature and direction of cash that flows through them, apart from the risks in China, Bloomberg News reported last week. 

Iczoom said it’s “subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations.” In its updated filing, Huake said investors won’t be buying shares of its VIE, called Aokai Fa, but those of an entity that controls and receives economic benefits from it through “a series of contractual agreements.”

Here are some parts added to Huake’s Aug. 23 filing that were not present in its June 29 document: 

• “Our VIE Agreements may not be effective in providing control over Aokai Fa.”
• “We may also be subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory Commission if we fail to comply with their rules and regulations.”
• “PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in our VIE’s operations, significant depreciation of the value of our ordinary shares, or a complete hindrance of our ability to offer or continue to offer our securities to investors.”

Huake also alluded to the regulatory onslaught which has targeted sectors from tech to ride-hailing to food delivery, pushing Hong Kong’s benchmark into a bear market, and sowed concern among investors about how far China is willing to go to reform its private sector.

“Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement,” the filing reads.

Similar changes were seen in a filing by fresh and healthy products retailer Loha Co., that is seeking a listing on the Nasdaq. The company disclosed in an Aug. 18 filing that it is incorporated in the Cayman Islands and has “no material operations” of its own.  

Some other parts updated by Loha in last week’s document that were not included in a filing on June 21: 

• “Investors are cautioned that you are not buying shares of a China-based operating company but instead are buying shares of a shell company issuer that maintains contractual arrangements with the associated operating company.”
• “Our PRC subsidiaries have nominal operations or assets. We conduct our business in China through our consolidated VIE and its subsidiaries.”

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