In Depth: Chinese Companies’ Route to Wall Street Faces SEC Scrutiny

Chinese companies listed on U.S. stock exchanges may soon face tighter oversight as the U.S. Securities and Exchange Commission (SEC) considers updating decades-old rules governing foreign private issuers (FPIs). The SEC’s potential rule changes could push many smaller Chinese firms to delist from U.S. markets and further strain China-U.S. relations, which are already tense due to ongoing disputes over trade, export controls, and financial market access.[para. 1][para. 5]

In recent years, a growing number of foreign—especially Chinese—firms have used offshore tax havens like the Cayman Islands to list on U.S. exchanges. FPI status gives these companies exemptions from many disclosure and regulatory requirements that apply to U.S. firms, making it challenging for American regulators to oversee them effectively.[para. 2][para. 11] The SEC issued a concept release on June 4, 2024, seeking public comment on proposals that would impose stricter criteria for FPI qualification. The agency noted that the global landscape and financial risks have changed substantially, requiring updates to ensure adequate investor protection and a fair competitive environment between foreign and domestic issuers.[para. 3][para. 4]

SEC Chairman Paul S. Atkins emphasized the need to balance attracting foreign listings with ensuring transparency for U.S. investors and maintaining a level playing field for domestic firms. At issue are exemptions enjoyed by FPIs, such as reduced reporting, insider trading requirements, and the use of non-U.S. accounting standards. This “dual regulatory exemption” can mean some companies escape strict oversight both in their home country and in the U.S.[para. 4][para. 11]

These proposed reforms come amid calls for tougher action against Chinese companies. In May 2024, Republican lawmakers urged the SEC to delist firms posing national security and investor risks, targeting major names like Alibaba, Baidu, Hesai Group, and Zeekr. In April, Senator Rick Scott put forward legislation to protect U.S. investors and challenge China’s influence in American markets.[para. 6]

As of March 7, 2024, 286 Chinese companies were listed in the U.S., with a combined market capitalization of $1.1 trillion. Over the past two decades, the Cayman Islands has become the leading jurisdiction for FPI incorporation, with FPIs from that region jumping from 13 to 322. Meanwhile, China has overtaken Canada as the most common headquarters location, with the number of Chinese-headquartered FPIs rising from 20 to 219, now accounting for 22.6% of the total.[para. 7][para. 8][para. 9]

Many well-known U.S.-listed Chinese companies—including Alibaba, Baidu, and PDD Holdings—use the variable interest entity (VIE) structure to circumvent Chinese restrictions on foreign ownership. The SEC previously warned that such structures increase risks to U.S. investors, including potential loss of control, exposure to Chinese government penalties, and possible asset forfeiture.[para. 13][para. 14]

China’s Ministry of Foreign Affairs has called for fair, non-discriminatory treatment of Chinese firms and warned that China will protect its companies’ interests if unfair measures are imposed. The SEC is considering multiple new criteria for FPI status, such as a lower threshold for U.S. ownership, revised business contact tests, requirements for trading volume on non-U.S. markets, and mandatory listings on recognized foreign exchanges.[para. 15][para. 17][para. 18]

Legal experts warn that stricter criteria and higher compliance costs could discourage new Chinese listings in the U.S., especially for companies with VIE structures and those whose trading volume is concentrated on U.S. markets.[para. 22] The SEC is inviting public comment until September 8, 2024. Any changes could reshape the ability of Chinese firms to tap U.S. capital markets, potentially further decoupling the world’s largest economies.[para. 23]