U.S. capital markets, industry players, and securities regulators are attempting to come up with their own solution to properly regulate foreign companies listing in the country to avoid possible intervention by lawmakers. The scramble to find a swift resolution comes amid the impending imposition of a new law that could result in an exodus of Chinese companies from the country's stock exchanges.
For quite some time, regulators have been having issues in implementing comprehensive audits on Chinese companies listed in the country. Most companies have been refusing to take part in mandatory audits, citing Chinese state secret laws.
Industry participants have been calling for a market-driven approach as opposed to government-passed laws to resolve the issue. They claim that it would be far more effective in preventing fraudulent foreign companies from taking advantage of U.S. investors. A market-driven approach could also prevent existing companies from leaving the country's exchanges, thereby allowing US investors the opportunity to gain from the continued growth of China's economy and other emerging markets.
Muddy Waters Capital founder and chief executive officer, Carson Block, suggested that exchange operators, auditors, investment banks, and listing lawyers should be held materially responsible for any fraud and discrepancies. He added that auditing firms should be required to provide collateral in the form of financial guarantees.
Block's proposal echoes the sentiments of the wider market and its call for self-policing instead of having Congress making the decisions. As of the moment, a proposed law, called the Holding Foreign Companies Accountable Act, is now pending approval from the House of Representatives. If it is approved, it will effectively require any foreign company wishing to list in the US to submit to an audit and inspection. Failing to do so would result in immediate delisting and a three-year ban.
Proponents of the bill have pointed out that it is a privilege to be a public company in the country. By being allowed to have access to capital from retail investors, listed companies should be open to inspections and audits. On the other side of the fence, critics of the bill have called it a "blunt" approach and that is passing should only be done as a last resort.
The move to impose stricter scrutiny on foreign companies, particularly those based in China, comes after a series of recently exposed financial reporting scandals that had robbed investors of billions of dollars. The most recent issue can be traced back to the financial misconduct of Chinese coffee chain operator Luckin Coffee. The company had revealed earlier in the year that one of its employees had faked their 2019 financial reports, bloating its earnings by more than $300 million.
