NASDAQ Inc is cracking down on initial public offerings (IPOs) of small Chinese companies by tightening restrictions and slowing down their approval, according to regulatory filings, corporate executives and investment bankers.
NASDAQ’s attempt to limit these stock market flotations comes as a growing number of them end up raising most of the capital in their IPO from Chinese sources, rather than from US investors.
The shares of most small Chinese companies trade thinly following their US listing, because most of them stay in the hands of a few insiders.
Their low liquidity makes them unattractive to many large institutional investors, to whom NASDAQ is seeking to cater.
For example, when 111 Inc (壹號大藥房), a Chinese online pharmacy network, raised US$100 million in its IPO on NASDAQ last year, shares were mainly sold to connections of the company’s executives, 111 chief executive Liu Junling (劉峻嶺) said in an interview.
Digital influencer incubator Ruhnn Holding Ltd (如涵控股), after-school education provider Puxin Ltd (朴新教育科技集團) and pet product manufacturer Dogness International Corp (多尼斯國際) are other examples of Chinese companies that listed on NASDAQ in the past two years with more investors from China snapping up their shares than from the US, according to sources close to the companies.
The three did not respond to requests for comment.
“One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies. The statutory obligation of all US equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for US investors,” a NASDAQ spokeswoman said.
She declined to comment specifically on the impact of the changes in the listing rules on the US IPOs of small Chinese companies.
NASDAQ first proposed changing the listing rules in October last year, and the changes took effect in August.
NASDAQ’s new listing rules have raised the average trading volume requirements for a stock, and call for at least 50 percent of a company’s shareholders to invest a minimum of US$2,500 each in an IPO.
NASDAQ also said in June that it might delay the US listing of a company that does not demonstrate a strong enough nexus to the US capital markets, including having no shareholders, operations, management or board members with links to the US.
Small Chinese firms pursue these IPOs because they allow their founders and backers to cash out, rewarding them with US dollars they cannot easily access because of China’s capital controls.
The firms also use their NASDAQ-listed status to convince lenders in China to fund them and often get subsidies from local authorities for becoming publicly traded.
Unlike NASDAQ, the Chinese stock market has strict listing criteria that prevent some loss-making companies from going public.
The Hong Kong stock exchange is also viewed by IPO hopefuls as stricter than NASDAQ.
Chinese companies have raised more than US$70 billion in the US stock market since 2000, according to Refinitiv data.
While the biggest ones, such as e-commerce giants Alibaba Group Holding Ltd (阿里巴巴), Pinduoduo Inc (拼多多) and JD.com Inc (京東), have attracted major US stock market investors, many small ones have proved unpopular.
Shares of Chinese IPOs that raised US$200 million or less have traded down 38 percent on average since their IPO through July 31 in the last 18 months, compared with a rise of 13.9 percent for US companies of the same size, Dealogic data showed.
About 19 Chinese companies went public on the NASDAQ last year, up from 8 in 2017, based on submissions by investment banks underwriting them to Dealogic.
The New York Stock Exchange is looking closely at Chinese listings, according to a source familiar with the matter.
However, it has yet to introduce rule changes similar to NASDAQ’s.
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