Institutional Investors Scrutinize Nasdaq's China Listing Rules
The Council of Institutional Investors has submitted a letter to Nasdaq regarding its proposed additional listing criteria for companies primarily operating in China. The letter, highlighted by the Harvard Law School Forum on Corporate Governance, signals heightened regulatory and investor scrutiny over the governance and diligence standards for cross-border listings.
- Nasdaq's proposed rule change would require companies with principal operations in China to raise a minimum of $25 million in their initial public offering. This is part of a broader effort by Nasdaq to increase its listing standards to enhance market integrity and investor protection. - The proposed changes also include an accelerated process for suspending and delisting companies that are deficient in listing standards and have a market value of listed securities below $5 million. For companies listing under the net income standard, the minimum public float market value would increase to $15 million. - This regulatory scrutiny is not new and builds upon the Holding Foreign Companies Accountable Act (HFCAA) of 2020. The HFCAA mandates that companies listed on U.S. exchanges disclose whether they are owned or controlled by a foreign government and allows for their delisting if the Public Company Accounting Oversight Board (PCAOB) cannot inspect their audits for two consecutive years. - The push for tighter rules is a response to a history of accounting scandals and a lack of transparency among some U.S.-listed Chinese firms, which has increased risks for investors. Chinese law has historically restricted the ability of U.S. regulators to conduct on-site inspections of Chinese audit firms. - Since 2022, Nasdaq has observed that nearly 70% of its referrals to the SEC or FINRA for market manipulation concerns have been related to Chinese companies, although they constitute less than 10% of all listings. - The Council of Institutional Investors (CII), which represents U.S. public, corporate, and union employee benefit funds with approximately $5.2 trillion in assets, has expressed general support for Nasdaq's proposal. However, some, like Charles Schwab & Co., have questioned the sole focus on Chinese companies, suggesting the rules should apply to all microcap companies in high-risk jurisdictions. - For Chinese companies seeking to list via a de-SPAC transaction, a parallel requirement for a minimum market value of unrestricted publicly held shares of $25 million has been proposed. Additionally, the proposal would prohibit China-based companies from direct listing on the Nasdaq Capital Market. - While these regulations aim to protect U.S. investors, they also create a complex environment for U.S.-China economic relations, adding to existing tensions around tariffs, supply chain security, and technology competition.
