Based on regulatory filings, investment bankers, and corporate executives, Nasdaq is going after initial public offerings or IPOs of small Chinese companies through the reinforcement of restrictions and slow down in the approval process.
Nasdaq’s crackdown comes after finding out that an increasing number of these companies are raising most of their IPO capital not from U.S. sources but from Chinese investors.
Following their listing in the U.S., the shares of these companies are thinly traded. This is because most of these shares remain with some of the company insiders. The low liquidity of the stocks means that they are not appealing to large-scale investors.
To cite an example, take a look at 111 Inc. which is a Chinese online pharmacy network. In 2018, it was able to raise $100 million for its Nasdaq listing. According to its CEO, Liu Junling, the company’s shares were mostly sold to those connected with the company’s executives.
In the past two years, other companies from China like pet product manufacturer Dogness International Corp, digital influencer incubator Ruhnn Holding Ltd, and after-school education provider Puxin Ltd have listed on Nasdaq. These companies have more investors from China buying their shares than those from the United States.
“One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies. The statutory obligation of all US equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for US investors,” said a Nasdaq spokeswoman.
Nasdaq’s clampdown on the IPOs of these Chinese companies comes at a time when the tension between China and the United States continues to escalate.
The shares of Chinese companies listed in the U.S. fell hard following reports that the Trump administration is planning on curbing U.S. investments into China. This includes the delisting of Chinese companies from U.S. stock exchanges.
According to a U.S. Treasury official said that at this time, Washington is not prohibiting Chinese companies from listing their shares on U.S. stock exchanges.
Just this June, lawmakers in the United States presented a bill that would require Chinese companies that are listed on U.S. stock exchanges to submit their regulatory oversight. These companies must adhere to the law or else they face delisting.
Nasdaq initiated the changes to the listing rules last October 2018. However, the changes were only implemented last month.
According to the new listing rules, the average trading volume requirements have been increased. In every listing, at least 50% of a company’s shareholders should be able to invest a $2,500 minimum.
“Nasdaq’s concern about low liquidity and high volatility in the marketplace brought about by such Chinese IPOs has become very obvious since mid-2018,” said the chair of US law firm Schiff Hardin LLP, Ralph De Martino.
In June, Nasdaq has also mentioned that it can delay the listing of a company that does not show a strong link to the U.S. capital markets. This includes having no operations, shareholders, board members, or management with a substantial connection to the United States.
Small companies from China have been keen with these IPOs because they grant their founders and backers cashouts. They award them with U.S. dollars that they cannot easily get their hands on because of the strong capital controls in China.
These companies also use their status as a Nasdaq-listed firm to be able to persuade lenders from their country to give them funding. They also often get aid from local authorities in China.