President Donald Trump signed into law on Friday (Dec. 18) a bipartisan legislation that would force foreign companies listed on U.S. exchanges to comply with U.S. accounting rules. The law, when it goes into effect, could lead to the delisting of Chinese companies from U.S. exchanges.
The bill, called the Holding Foreign Companies Accountable Act, would require Chinese companies to comply with U.S. auditing and reporting standards or be delisted from U.S. stock exchanges. The bill passed the House of Representatives unanimously earlier this month and the Senate by unanimous consent in May.
It would require foreign companies to be delisted from U.S. exchanges if they fail to comply with Public Company Accounting Oversight Board (PCAOB) audits for three consecutive years. The rule also applies to unlisted stocks traded over the counter (OTC).
The measure affects Chinese companies such as Alibaba Group Holding (NYSE: Baba), Jingdong (Nasdaq: JD) and China Mobile (NYSE: CHL).
Those companies that cannot be audited by the commission must also determine that they are not controlled or owned by a foreign government.
Currently, the Communist Party of China prevents overseas regulators, including the SEC and PCAOB, from inspecting the complete audit reports of companies headquartered in mainland China and Hong Kong, citing national security and privacy concerns.
Lawmakers from both parties welcomed the bill’s signing into law, with Rep. Brad Sherman, D-California, describing it as “the most important investor protection legislation passed in years.
Sherman, who co-sponsored the bill in the House, said in a statement, “The goal is not to delist any company, but to convince China to allow the same audit oversight that U.S. investors need when they invest in U.S. companies or companies in more than 50 foreign jurisdictions.”
Sen. Chris Van Hollen, D-Maryland, a co-sponsor of the Senate bill, described the law as “the best way to protect American investors from fraudulent companies.”
Recently, Chinese companies have come under intense scrutiny for fraudulent practices. Last week, China-based startup Luckin Coffee agreed to pay a $180 million fine to the Securities and Exchange Commission (SEC) in a settlement that the SEC said “intentionally and materially” inflated revenue and expenses and understated net losses in its 2019 earnings report. Although it did not admit or deny the allegations, RuiXing has agreed to pay the fine.
Earlier this year, RuiXing Coffee said an internal investigation found that its chief operating officer misrepresented 2019 sales by about $310 million, prompting Nasdaq to delist the company.
More than a dozen U.S.-listed Chinese companies have gone private this year, and more are set to announce delisting plans as Washington intensifies its scrutiny of Chinese companies, The Wall Street Journal reported.
Separately, Trump issued an executive order last month banning U.S. investments in dozens of companies with ties to the Chinese Communist Party’s military. The order will take effect in early January and gives U.S. investors until November 2021 to divest affected securities.
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