US increases disclosure requirements for foreign listings
The US Securities and Exchange Commission (SEC) has introduced rules that compel foreign companies seeking US listings to file their registration documents publicly. Previously, IPO documentation remained confidential until the issuers were ready to launch their deals. Domestic companies, meanwhile, had to disclose every change made to their prospectuses.
The new policy comes after a number of US-listed Chinese companies were found to have committed accounting fraud, prompting a loss of investor confidence in small to mid-cap China-based firms trading on foreign exchanges. However, reverse merger listings, the process through which many of the scandal-hit Chinese companies went public, are not affected by the new ruling, The Wall Street Journal reported.
The SEC said the policy is designed to "promote transparency and investor protection." It is also likely to deter or delay some companies from listing in the US, but ultimately bolster investor confidence in foreign issuers' disclosure standards. Consultants and attorneys who advise on IPOs added that forcing more disclosure could weed out companies that aren't ready for a US listing.
Amendments made to a prospectus prior to SEC approval often indicate potential problem areas that have been flagged up by the regulator.
Financial irregularities on the books of overseas-listed Chinese companies first came to the fore in mid to late 2010 when fraud claims leveled at Rino International Corp. by short seller research firm Muddy Waters were found to be true. The case gave fresh impetus to a host of short-sellers and hedge funds to scour the operations of companies and identify those who had misrepresented themselves to public investors.
The rot focused on the US bourses but wasn't restricted to it. Mid-cap Chinese firms trading everywhere from Toronto to Hong Kong were implicated and prices took a hit, regardless of whether they were guilty of fraud or simply tainted by association. China Agritech and China Forestry Holdings, both of which are backed by The Carlyle Group's Asia Growth funds, are the highest profile of a raft of cases involving private equity firms. Anecdotal evidence suggests that problems also exist at plenty of other, as yet unlisted, portfolio companies.
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