SEC Lists Over 80 Companies That Could Be Booted From US Exchanges

A flag waves outside the U.S. Securities and Exchange Commission headquarters in Washington on Feb. 23, 2022. (Al Drago/Bloomberg via Getty Images)

The U.S. Securities and Exchange Commission (SEC) on May 4 added more than 80 companies to its list of entities that face possible expulsion from U.S. exchanges.

Among those listed are some of China’s most prominent tech companies, such as e-commerce company JD.com, agriculture-focused e-commerce platform Pinduoduo Inc., video-sharing platform Bilibili, and internet technology company NetEase Inc.

Those entities now face delisting within three years if they fail to allow U.S. regulators access to their books under the Trump-era law that requires foreign companies trading on U.S.exchanges to meet U.S. accounting standards.

Trump signed the Holding Foreign Companies Accountable Act (HFCA Act) into law in 2020 with the aim to protect investors from foreign companies that don’t comply with U.S. audit standards.

Under the law, foreign companies that fail to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three consecutive years could potentially be delisted from U.S. exchanges.

Companies that don’t allow inspections by the PCAOB due to a position taken by an authority in the foreign jurisdiction are also required to prove that the companies aren’t owned or controlled by a foreign government.

The same rules also apply to companies that trade over-the-counter stocks.

Audit firms based in China have largely evaded inspection by the PCAOB for more than a decade.

This is because the ruling Chinese Communist Party refused to allow for such inspections of publicly traded companies headquartered in mainland China and Hong Kong, claiming this was due to national security and privacy reasons.

Specifically, government officials claim that such financial reports may contain data related to state-backed projects, or “state secrets.”

Despite failing to comply with audit requests, the United States allowed for such companies to remain on U.S. exchanges.

But the HFCA Act could persuade the companies to allow the audit oversight required by U.S. investors or else face delisting.

New additions to the SEC’s list include a host of Chinese companies, such as China Southern Airlines Company Limited, NIO Inc., JinkoSolar Holding Co. Ltd., China Petroleum & Chemical Corporation, and Chindata Group Holdings Limited.

Non-Chinese foreign entities listed include Canadian Solar Inc. and Connecticut-based ReneSola Ltd.

The newly added companies have until May 25 to submit evidence disputing the SEC’s identification.

In total, there are more than 120 U.S.-listed companies set to be potentially delisted. There are currently about 250 Chinese companies listed on U.S. exchanges, which together hold a combined market capitalization of more than $1 trillion, according to The Wall Street Journal.

While Trump’s law was widely welcomed by bipartisan lawmakers, including Rep. Brad Sherman (D-Calif.), who hailed it as the “most significant piece of investor protection legislation passed in several years,” it faced resistance in China.

Chinese regulators in April offered to change the confidentiality rules for offshore-listed companies to comply with U.S.-listing audit requirements. However, those firms would still need to protect “state secrets.”

The China Securities Regulatory Commission stated that the changes will facilitate “cross-border regulatory cooperation, including joint inspections, which will help safeguard interest of global investors.”

Despite that proposal, the SEC is asking for Chinese companies to be fully compliant with the HFCA act.