Senate Approves Bill That Could Limit Chinese Companies' Access to U.S. Capital Markets

Legislators are taking steps to delist Chinese companies from American stock exchanges through unanimous consent of the Holding Foreign Companies Accountable Act. The Senate passed the bill on May 20, 2020, which outlines additional disclosure requirements for foreign companies listed on the U.S. Securities Exchanges, including a company's ties to the Chinese Communist Party. Foreign companies risk being delisted from U.S. exchanges if they are not compliant with the new disclosure requirements.

The Holding Foreign Companies Accountable Act amends the existing Sarbanes-Oxley Act of 2002 and extends the U.S. Securities Exchange Commission's (SEC) oversight of foreign issuers. In addition to certifying that they are not owned or controlled by a foreign government, foreign companies must allow the U.S. Public Company Accounting Oversight Board (PCAOB) access to review the company's audit. If the PCAOB is unable to inspect the foreign issuer's public accounting firm audit for three consecutive years, the SEC will ban the company's securities from trade on the U.S. securities exchanges.

The bill also requires foreign companies to disclose:

• Whether a registered public accounting firm has issued an audit report;
• Percentage of shares owned by foreign governmental entities;
• Whether governmental entities have a controlling financial interest in the company;
• Chinese Communist Party officials that serve on the board of directors; and
• "Whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter."

While not exclusive to Chinese companies, the new legislation is largely focused on restricting Chinese companies' access to the U.S. capital market. Chinese companies have avoided PCAOB audit inspections in the past by claiming state secrecy and national security. From a total of 156 Chinese companies listed in the U.S. as of February 25, 2019, 49 (or 31%) companies denied the PCAOB access to conduct inspections.

On May 15, 2020, Luckin Coffee announced it received delisting notice from NASDAQ after admitting to inflating sales by RMB 2.2 billion (USD $310 million). Luckin Coffee's stock price has since collapsed more than 75% in just one day.

The Holding Foreign Companies Accountable Act now goes to the House of Representatives for approval. If enacted, the SEC will issue additional guidance regarding how foreign companies are required to comply with the new legislation.