Taking Stock of ‘China, Inc.’: Examining Risks to Investors and the U.S. Posed... (EventID=114186)

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Connect with the House Financial Services Committee Get the latest news: https://democrats-financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinancialCmte Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Wednesday, October 26, 2021, at 10:00 a.m. (ET) Investor Protection, Entrepreneurship, and Capital Markets Subcommittee Chairman Sherman and Ranking Member Huizenga will host a virtual hearing entitled, “Taking Stock of ‘China, Inc.’: Examining Risks to Investors and the U.S. Posed by Foreign Issuers in U.S. Markets." - - - - - - - - Witnesses for this one-panel hearing will be: • Karen Sutter, Specialist in Asian Trade and Finance, Congressional Research Service • Samantha Ross, Founder, AssuranceMark, The Investors’ Consortium for Assurance • Claire Chu, Senior Analyst, RWR Advisory Group • Eric Lorber, Senior Director of the Center on Economic and Financial Power, Foundation for Defense of Democracies Overview In recent years, growing engagement between U.S. investors and China-based companies, which have sought to raise capital by issuing registered and unregistered securities in the U.S., has produced a number of risks to investor protection, the American economy, and national security. Among the risks to U.S. investors include: lack of corporate transparency and reliable financial information, increased corporate fraud, lack of legal recourse for U.S. investors, and other legal barriers that prevent U.S. securities regulators from conducting effective oversight of foreign issuers, and more recently, an increase in regulatory activity by Chinese authorities targeting China-based companies. Background on Investment Vehicles Used By China-based Companies Listed and Public Markets The issuance of equity and debt securities, both registered and unregistered, by China-based foreign companies in U.S. markets has increased significantly over the past two decades. According to data from Ernest & Young, 50 percent of foreign initial public offerings (IPOs) completed in the U.S. during the first half of 2021 were by companies based in China. These offerings represented nearly 15 percent of total IPO proceeds raised in the U.S. during that period.2 The IPO of online Chinese retail marketplace Alibaba (listed on September 18, 2014) on the New York Stock Exchange, which generated proceeds of nearly $22 billion, remains the second largest IPO in U.S. history. As of October 2, 2020, there are a total of 248 China-based firms listed on U.S. stock exchanges, representing a combined market capitalization of $2.2 trillion—but it is unclear how much of this $2.2 trillion is held by U.S. investors. Exempt and Non-Public Markets Foreign issuers aiming to raise capital from U.S. investors also have access to the “exempt offerings” regime, which—unlike publicly listed and SEC-registered securities—allows for issuers to sell their securities without registering with the SEC or providing regular and detailed disclosures. More than two-thirds of capital raised through the securities markets in the United States is conducted through these exempt offerings (Figure 1). In 2019 alone, over $2.7 trillion was raised through exempt offerings in the U.S. Foreign issuers “accounted for approximately 22% of the total amount reported sold during 2017.” Regulation D and Rule 144A are the most frequently used exemption to issue and sell unregistered securities. Data on unregistered offerings by China-based or China-related issuers (e.g., issuers that are based outside China but raise capital for firms based in China) is limited, but some of these companies currently do raise capital through exempt offerings. Should currently U.S.-listed China-based companies be de-listed or “go dark,” they may migrate to the exempt offerings space. Variable Interest Entity China’s government generally prohibits China-based companies from accepting investments that would result in foreign ownership of the firm. Since 2000, many China-based companies have circumvented this restriction to raise equity capital in the U.S. through the use of a variable interest entity (VIE) structure. Although not officially authorized or regulated by the Chinese government, this VIE structure is employed to avoid foreign ownership of any company in a restricted industry, and instead provides foreign investors with an economic interest in the company through contractual agreements.10 In a simple VIE structure, two new legal entities are formed to join the existing China-based operating company. One entity is an offshore shell company, typically formed in the Cayman Islands or another similar jurisdiction. This shell company is the entity which is listed on an U.S. exchange. The other new entity is a company established in China which is wholly owned by the offshore shell... Hearing page: https://democrats-financialservices.house.gov/events/eventsingle.aspx?EventID=408558