SEC Expands U.S. Investor Warning on Chinese Stock Investments

(Bloomberg) -- Securities and Exchange Commission officials are expanding on their warnings for investors considering buying stock in Chinese companies that trade in U.S. markets.

In an investor alert on Monday, SEC staff detailed concerns it says people should weigh when evaluating share purchases, including the shell-company structure the Chinese companies use to list in the U.S. Since July, the regulator has refused to approve new listings for Chinese firms, and Chair Gary Gensler has warned that more than 250 companies already trading will soon face similar disclosure requirements.  

The SEC, which urged investors to review companies’ annual reports, said some issues of particular concern include:

• The way the Chinese firms account for the shell-company relationships in their financial reports
• How the relationship is structured between a U.S.-listed shell company and the Chinese operating firm
• Risks that the Chinese government could crack down on the shell-company arrangements, known as VIEs, that firms use to list in the U.S.
• Risks around investing in China’s private-education businesses
• Potential conflicts of interest between the owners of a Chinese operating company and investors in the shell company that trades in the U.S.

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