Why I Am Still Optimistic on China

At an open meeting on March 30, 2022, the Securities and Exchange Commission proposed far-reaching changes to the regulations of special purpose acquisition companies, or SPACs, that could eliminate many of the advantages the vehicles have enjoyed over traditional IPOs.

For two decades, IPOs by most Chinese companies on U.S. stock markets have existed in a regulatory no man's land. Technically, investment in the sectors most enticing to overseas investors — including internet, media, telecom, and education — was off-limits to foreign ownership. But beginning with the listing of Sina Corporation in 2000, Western lawyers and investment bankers were able to successfully skirt these rules using a variable interest entity, or VIE, structure. Foreign investors could not own the assets of or exert direct control over the Chinese operating company but theoretically had a claim on the profits and cash flows and the right to acquire ownership should Chinese law change to make that permissible in the future.

What can management do to avoid becoming the next short-seller roadkill?

With 417 funded SPACs currently in search mode for the perfect private company to merge with, 2021 is becoming the “Year of the de-SPAC” following the “Year of the SPAC” in 2020 that carried over into the exuberance of the first quarter of 2021. These SPAC sponsor teams are sitting on about $140 billion of capital in trust, supplemented by tens of billions more in PIPE investments, which could theoretically generate a trillion dollars of market capitalization for newly formed public companies.