Despite a directive from a White House working group that could lead the SEC to close the door to companies whose auditors are not PCAOB-inspected, Chinese companies continued to raise significant amounts of capital on U.S. exchanges in the third quarter of 2020.
Amid this year’s white-hot IPO market, the SPAC, or special purpose acquisition company, has incinerated previous records for this once-obscure financing vehicle. Thus far, in 2020, 116 SPACs have been funded through initial public offerings, raising $40 billion. SPACs make up the single largest “industry” group in 2020’s crop of IPOs, accounting for 45% of the number of new issues and 44% of total capital raised. More "blank check" companies debuted on NASDAQ and NYSE in August and September than "real" operating companies. The financing vehicle has attracted a host of luminaries, from investment icons like Bill Ackman of Pershing Square and Peter Thiel, baseball savant Billy Beane of “Moneyball,” and former Speaker of the House Paul Ryan.
On August 7th, the President's Working Group on Financial Markets weighed in on the dangers that investing in Chinese companies posed to U.S. investors. This report is the latest salvo following the passage of Senate's Holding Foreign Companies Accountable Act in May and an SEC roundtable on the risks of investing in emerging markets in July.
The COVID-19 pandemic has created novel challenges for the audit profession that could have lingering impacts on the quality and reliability of independent accounting firm’s work if not carefully addressed. The increased reliance on remote auditing needs to be carefully managed particularly for auditors with clients in areas like China and Europe, where travel restrictions limit site visits compared to domestic locations that can be visited with COVID protocols in place. Management, audit committees, and investors all need to be aware of the limitations that auditors are operating under and the steps that can be taken to ensure that audit quality remains robust during this period.
Reading the headlines, one would think that this would be the worst of all possible moments for a Chinese company to contemplate a U.S. IPO. Tensions over issues ranging from trade to managing the COVID-19 pandemic are at a boiling point. The Senate recently passed legislation requiring the SEC to delist Chinese companies whose auditors do not comply with U.S. regulators' inspections. Some commentators have predicted a looming “divorce” between the world’s two largest economies.
For years I have heard a familiar refrain from American investors: They would love to be able to participate in China’s economic growth, if only they could trust the accuracy of the accounting. Unfortunately, episodic blowups of listed Chinese companies have sown doubts about the reliability of their financial reporting and governance practices. In cases when serious problems emerged, there was limited recourse available to hold management accountable or secure compensation.
On May 20th, the U.S. Senate passed legislation to force Chinese issuers to comply with inspections by the Public Accounting Oversight Board (PCAOB) and to certify that they are not owned or controlled by the Chinese government.
On May 18th, NASDAQ proposed new rules for IPOs from “Restrictive Markets” that would raise the bar for smaller Chinese companies seeking to complete an initial public offering on the U.S. markets. The new rules formalize the enhanced scrutiny that smaller Chinese companies have received over the past year.
Even as the U.S. government extended social distancing guidelines through the end of April, China is announcing the success of its “back to work” campaign now that aggressive measures have contained the spread of the COVID-19 virus. Nearly 99% of major industrial companies are back in operations, with 90% of workers again on the job, according to government statements. More than 75% of small and medium businesses have also restarted operations.
As the Dow Jones officially entered bear market territory and the WHO declared COVID-19 to be a pandemic, over 150 companies have lowered or withdrawn their earnings guidance as of March 11, 2020. As an increasing number of countries take dramatic steps to slow the spread of the virus and the disruption to business operations increases, that list is sure to grow.