Factbox-What the U.S. securities regulator wants Chinese issuers to disclose

By Katanga Johnson

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission will not process registrations of securities by Chinese companies unless they provide disclosures on the implications of a regulatory crackdown by Beijing and other risks, the agency said on Friday, confirming an exclusive https://www.reuters.com/business/finance/exclusive-us-regulator-freezes-chinese-company-ipos-over-risk-disclosures-2021-07-30 Reuters report.

The following is an outline of three categories of risks that SEC Chair Gary Gensler says all China-based operating companies seeking to register securities with the SEC - either directly or through a shell company - must disclose about their businesses before the agency gives the nod to list shares on U.S. exchanges:

OFFSHORE STRUCTURES

In a number of sectors in China, companies are not allowed to have foreign ownership and cannot directly list on overseas exchanges. Many China-based operating companies therefore raise money overseas through an offshore entity that then contracts with the China-based operating company - a structure that creates additional legal risks for investors.

The SEC said Chinese issuers must disclose that U.S. investors are purchasing shares of a shell company, not shares of a China-based operating company, that maintains service agreements with the associated operating company.

CHINA GOVERNMENT INTERFERENCE

Given Beijing's tight grip on the U.S. economy and markets, the SEC will require that Chinese companies disclose that they face "uncertainty about future actions by the government of China that could significantly affect the operating company's financial performance" and the enforceability of certain contractual arrangements. They must also disclose whether the shell company and its investors are affected by these risks.

The regulator will also require disclosure in cases when an operating company and the issuer may have received or were denied permission from Chinese authorities to list on U.S. exchanges. Companies must spell out the risks that such approval could be denied or rescinded.

OTHER RISKS

Companies must also tell investors that the 2020 Holding Foreign Companies Accountable Act, which requires that the Public Company Accounting Oversight Board be permitted to inspect the issuer's public accounting firm within three years, may result in the delisting of the operating company in the future if the PCAOB is unable to inspect the firm.

Companies will be also subject to targeted additional reviews of filings for companies with significant China-based operations, the SEC said.

(Reporting by Katanga Johnson in Washington, D.C.; Editing by Michelle Price and Dan Grebler)