China’s New IPO Rules Could Hinder Companies From Bike-Rental Firm Hello to Spark Education Preparing For US Listings

By Chad Bray and Enoch Yiu

2021-7-7

On July 7, Gao Feng Advisory’s CEO Dr. Edward Tse was quoted by South China Morning Post on China’s new IPO rules.

Alibaba Group Holding backed bike rental company Hello, Tencent backed Spark Education and medical data solution provider LinkDoc Technology are among more than a dozen Chinese companies that could face challenges to their listing plans in the US after Beijing announced it was tightening its rules on initial public offerings.

China’s State Council said late on Tuesday it would undertake a sweeping overhaul of its regulations on how companies raise capital both domestically and overseas, which could stymie efforts for high-flying technology companies to access the American capital markets.

The announcement comes after nearly three dozen Chinese companies raised an eye-popping US$12.5 billion through IPOs in the US in the first half of this year. More than 20 companies have filed paperwork to pursue listings on American bourses, with dozens more waiting in the wings, according to regulatory documents reviewed by the Post.

The new rules could slow what has been a steady stream of listings by Chinese firms in the US, but are not likely to end them completely as American financial markets remain some of the deepest and most liquid in the world and are still attractive to Chinese entrepreneurs, particularly the founders of technology firms, according to accountants, lawyers and other deal makers.

“It will be inevitable that some Chinese companies may hold up their US listing plan as they will check on how they can comply with the new mainland regulation,” said Tom Chan Pak-lam, chairman of the Hong Kong Institute of Securities Dealers, the industry body for local brokers in the city.

The rule changes came in on Tuesday just days after the Chinese Administration of Cyberspace (CAC) said it was conducting a review of Chinese ride-hailing giant Didi Chuxing’s data collection policies on “national security” grounds and would conduct similar reviews of several Chinese tech companies who recently listed in the US.

Didi’s US$4.4 billion IPO was the biggest by a Chinese company on an American bourse since Alibaba, the owner of the Post, raised US$25 billion in 2014.

One regulatory source said Didi “forced its way” to go public in New York despite an incomplete data security assessment by the CAC. The new regulations sent Didi’s shares down more than 20 per cent in New York in trading on Tuesday.

It is the latest in a series of crackdowns on the country’s tech sector after regulators shelved the dual listings of Ant Group in Hong Kong and in Shanghai in November just days before they were set to happen and ordered a series of anti-monopoly inquiries in the sector.

“This is not an issue about whether China is encouraging US listings or not … it is about data security,” said Edward Tse, founder and chief executive of Gao Feng Advisory Company. “Big data [owned by tech companies] does have national security implications. It’s not new, and the issue is always there. The point is, whether companies like Didi have recognised the issue. Are they factoring in the national security issue when they applied to go public [in the US]?”

In the first half of the year, 34 Chinese companies combined to raise US$12.5 billion in the US, the most in more than a decade and more than the US$10 billion raised by companies on the Shenzhen Stock Exchange in the same period, according to financial data provider Refinitiv. That compared with US$20.5 billion raised in Shanghai and US$28.59 billion in Hong Kong in the first six months of the year.

However, a number of companies have delayed their listings in recent months as valuations have waned somewhat for tech firms, and China has taken a series of regulatory measures to reshape the industry.

Hello, podcast provider Ximalaya and cloud computing company Qiniu all reportedly delayed their IPOs in May as valuations declined, but are among the companies still in the pipeline for potential listings in the US.

Other companies that reportedly delayed their listings in recent months, but are still pending, include Chinese dating app Soulgate and Spark Education, which is known as Huohua Siwei in Chinese.

Hello, also called Hello TransTech, declined to comment, while the other companies did not immediately have a comment or respond to requests for comment on the status of their IPOs on Wednesday.

Atour Lifestyle Holdings, a Chinese lifestyle brand and hotel operator under the Yaduo brand name, said on Wednesday that its US listing remains in progress. The company filed to go public in June.

Among firms that have not yet filed, but are highly anticipated to go public is short-video platform Douyin, which is part of China’s most valuable unicorn ByteDance, according to a person familiar with the matter. The company may well list in New York or Hong Kong.

“It is still very unclear what impact any new regulations that may be issued based on this high level guidance will have. Having said that, this is another signal among many signals from both the US and China that will likely lead to a considerable amount of uncertainty in the next few years, particularly for Chinese companies listed on US exchanges,” said Marcia Ellis, partner and global chair of law firm Morrison & Foerster’s private equity group.

One question is whether the rule changes will ultimately force Chinese firms incorporated overseas through so-called variable interest entity (VIE) structures to restructure or seek approval to list from Chinese authorities.

The legally ambiguous structure has allowed companies to skirt restrictions on foreign investment in certain industries in China by incorporating part of their business overseas, such as in the Cayman Islands. It has proven particularly popular with Chinese technology companies listing in the US.

Chinese regulators are considering requiring companies who use a VIE to seek approval before listing outside the country, Bloomberg News reported Wednesday, citing people familiar with the discussions.

“Global investors are already hyper nervous at this point and fearful the worst is yet to come. Every single Chinese tech company planning to list in the US will have to think twice, and most likely be forced to abandon the plans altogether,” said Fred Hu, founder of Primavera Capital. “[However,] China has a massive pipeline of IPO candidates. I believe the Chinese regulators do not intend to block companies from going public. A vibrant capital market and ability to raise capital remain essential for China’s economic growth and tech innovation.”