SEC Chairman Gary Gensler has directed staff to "take a pause" from listing shell companies of China-based operating companies on U.S. exchanges and warned investors about the risks associated with investing in such stocks.
The Chinese government doesn't allow investment from people outside China in sectors like technology and the internet, Mr. Gensler said in a video posted to Twitter on Monday. In order to raise money on U.S. exchanges, China-based operating companies establish contracts with shell companies in other countries like the Cayman Islands, he added.
"So I've asked staff that we take a pause on such listings of shell company issuers associated with China-based operating companies," Mr. Gensler said. "I've asked the SEC staff to ensure that the companies provide full and fair disclosure that what we're investing in is actually a shell company in The Caymans."
Mr. Gensler also said that company auditors have to be willing to be inspected.
The Holding Foreign Companies Accountable Act was signed into law in December and prohibits listing of securities of a company failing to comply with Public Company Accounting Oversight Board audits for three years in a row. The bill also requires public companies to disclose whether they are owned or controlled by a foreign government.
The SEC is working with the PCAOB, a U.S. regulator that oversees audits of public companies, broker-dealers and others, to implement the law, Mr. Gensler said.
Furthermore, Mr. Gensler on July 30 issued a statement in which he said China-based operating companies will need to make certain disclosures before they can go public in the U.S.
"Without being able to look at the books and records and 'audit the auditors,' so to speak, you're more at risk," Mr. Gensler said Monday. "I think companies should have to disclose this important information to American investors so that we can make informed decisions about where to put our hard-earned money."
