On Monday, the SEC's Division of Corporation Finance ("CorpFin") issued CF Disclosure Guidance: Topic No. 10, outlining views regarding "certain disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China." In its guidance, CorpFin notes that "China, while often viewed from an investing perspective as an emerging market, is the world’s second largest economy and, through direct investment as well as index-based investing, U.S. investors have increased their exposure to China-based Issuers over the past decade." In addition, "limitations on U.S. regulatory oversight of China-based Issuers can magnify [the] risks and differences...associated with issuers operating in emerging markets or foreign private issuers more generally."
Both China-based Issuers, and investors (or potential investors) in those issuers, would be well advised to review this guidance and determine whether any changes to disclosure or investment practices may be warranted. Among the risks cited by CorpFin include those associated with:
- restrictions on the Public Company Accounting Oversight Board’s (“PCAOB”) ability to inspect audit work and practices of PCAOB-registered public accounting firms in China;
- restrictions imposed on U.S. regulators’ access to information and the ability to investigate or pursue remedies with respect to China-based Issuers, as a result of state secrecy and national security laws, blocking statutes, or other laws or regulations;
- the fact that legal claims, including federal securities law claims, against China-based Issuers, or their officers, directors, and gatekeepers, may be difficult or impossible for investors to pursue in U.S. courts; and
- evolving laws and regulations, which could impede issuers' ability to obtain or maintain permits or licenses required to conduct business in China, and the risk of imposition of material sanctions or penalties in the absence of those permits or licenses.
As China's role in the global economy continues to expand, considerations like these are likely only to take greater precedence among securities regulators, and are certainly worth further evaluation by participants in the capital markets.
High-quality, reliable disclosure, including financial reporting, is at the core of the Commission’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Although China-based Issuers that access the U.S. public capital markets generally have the same disclosure obligations and legal responsibilities as other non-U.S. issuers, the Commission’s ability to promote and enforce high-quality disclosure standards for China-based Issuers may be materially limited. As a result, there is substantially greater risk that their disclosures may be incomplete or misleading.
https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuers
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