BEIJING — The Nasdaq stock exchange in the U.S. is planning listing requirements that will make it harder for small Chinese companies to list in New York, after a flood of tiny initial public offerings.
As part of proposed changes, companies operating primarily in China will need to raise at least $25 million in initial public offerings to list on the exchange, Nasdaq said late Wednesday local time.
The move comes as tensions between the U.S. and China simmer, and as the Nasdaq faces broader financial market issues.
“It will be more difficult for small Chinese companies to go IPO [on the] Nasdaq under the new rule,” said Winston Ma, adjunct professor at NYU School of Law. “The new rule reacts to some IPO cases of ‘pump and dump’ due to small float size.”
There have been been few large Chinese IPOs in the U.S. since the fallout around ride-hailing company Didi’s New York listing in 2021. But in 2024, 35 small China-based companies listed in New York, roughly twice the 17 U.S.-based microcap listings, Renaissance Capital said in December.
Microcaps typically refer to stocks with market capitalizations of between $50 million and $300 million, meaning the companies raised only a few million in the initial public offering.
The rule change is “a positive,” said Gary Dvorchak, managing director at Blueshirt Group, whose business includes advising Chinese companies on IPOs. “I think it’s going to instill more confidence that the companies are listing are doing it for legitimate reasons and there’s less likely to be games being played with the stock and it really protects the companies as well.”
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China has a deficit of $57 million in optical fiber trade with the U.S. in the first seven months this year, according to the official customs figures.
That imbalance may have given Beijing the “technical pretext to act,” said Tianchen Xu, senior economist at Economist Intelligence Unit, noting that the items that China imports from the U.S. are largely more advanced and thus more expensive per item.
“The exchange of fire [between the U.S. and China] will continue in many ways,” Xu predicts, which might derail plans for a meeting between the two countries’ presidents.
The decision came a day after Washington revoked Taiwan Semiconductor Manufacturing Co’s authorization to ship key chipmaking equipment and technology to its manufacturing plant in China, the latest move to curb Beijing’s semiconductor advances.
China’s optical fiber tariff “signals displeasure” on recent U.S. moves to restrict Beijing’s access to advanced chips and participation in the undersea cable supply chain, said Alfredo Montufar-Helu, managing director at advisory firm GreenPoint.
But the tariff is “also targeted and restrained enough to avoid shattering months of trade negotiations. And it also serves as a reminder that China’s leverage extends beyond rare earths,” Montufar-Helu said.
Years of growing of scrutiny
While China has sought to encourage domestic financial development, it has also been keen to control capital outflows, including stock offerings overseas. New policies in the last three years have required Chinese companies to get the securities regulator’s approval for overseas listings, especially if their business has a large domestic user base.
Stateside, Nasdaq’s move marks a big step in what’s been growing regulatory scrutiny on tiny Chinese IPOs over the last several years.
Underwriters for IPOs with market capitalizations below $600 million saw their average commission triple over four years to 12% in 2020, the Hong Kong stock exchange and local securities regulator said in a joint statement back in May 2021.
Then in November 2022, the Financial Industry Regulatory Authority in the U.S. warned investors about “significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries.” The notice mentioned China in particular.
FINRA added it “has concerns” about how foreign nationals have opened accounts at U.S. broker-dealers to invest in IPOs and then placed “manipulative orders and trades to inflate aftermarket prices.”
In a FINRA podcast dated Nov. 12, 2024, Peter Gonzalez of the special investigations unit said the “ramp and dump” schemes have evolved — now occurring weeks or months after the IPO, instead of only a few days.
source: CNBC.com
