More than 200 Chinese companies have listed in U.S. stock market to date. Still, this represents a very small percentage of the more than 10,000 public companies in the U.S. U.S. and China now remain as the world’s two largest economies. Further cooperation in economic arena should benefit both countries.
For U.S. investors, China represents a significant growth opportunity due to its large and still rapidly growing economy. Even in the global economy downturn in recently years, China has not showed much sign of slowing down.
For Chinese investors, U.S. represents a land of opportunities, the largest consumer market, and well-regulated capital environment. In this global economy, there are lot things that Chinese can learn from American.
What attracts Chinese companies to U.S.?
There are two types of companies in China, Sate Owned Enterprises and private companies. Right now, the Chinese economy is largely driven by high growth small and medium-sized private enterprises. Private ownership of businesses and assets is currently encouraged by the Chinese government because they provide majority of jobs, variety of products, and most growth. However, Chinese domestic listings are very difficult for these medium sized companies, if not nearly impossible, dues to long waiting period as a result of the thousands of listing candidates waiting in the pipeline. Therefore, global markets in Hong Kong, U.S., and U.K. have become attractive alternatives. Hong Kong so far is the number one choice, but recently, more and more Chinese companies consider the market in the U.S., maybe because of seeing the success of some Chinese companies listed in the U.S.
How to get listed in U.S.?
There are two common ways to get listing in U.S., an IPO and reverse merger. IPO is relatively known to most people. An IPO is accomplished by filing some forms with SEC. After SEC review, a company can go public by raising capital at an agreed price through an underwriting firm. A reverse merger is a transaction whereby a shell company (an incorporated entity with no business operations) that is already listed on an American Exchange “buys” the Chinese company that is seeking to go public. After that, the company usually undergoes a capital raise. Finally, the company files forms with SEC and go through full SEC review. Capital raise in a reverse merger usually through PIPE (Private Investment In Public Equity, used primarily by mutual funds and private investment firms where they buy discount stock in order to raise capital) or other means.
It does not matter which method is used by Chinese companies. The important things are exercising due diligence, following disclosure rules and corporate governance. Healthy companies will get noticed by investors over the long run. Path to the public does not indicate success. There are many failed reverse mergers, but probably more failed traditional IPOs. It is the management’s ability to create value for its shareholders that determines the ultimate success in U.S. market.
A multi-cultural global environment involves many complexities. Chinese companies who think about going public in U.S. market should consider the difference in culture, regulatory framework, and political environment. Sometimes a seemingly small difference may have huge implication. For example, the definition of “organic” varies from country to country. An “organic” product in Chinese local market might not be labeled as “organic” in U.S. market.
Another concern is that many Chinese companies could not even pass the first step in U.S. acquisition. Many transactions have been blocked by U.S. government because of security concerns. Still more have been blocked even without any threat to U. S. security. This is because most large Chinese companies are State Owned, with close ties to the Chinese Government. This makes the U.S. lawmakers wary about Chinese investments. These include Chinese acquisitions in steel, oil and gas, media companies, and some technology companies which have no tie to national security. Still, Chinese companies now look to expand abroad, not only in U.S. market. They have spent massive capital on acquisition of foreign assets. This does provide international investors a great opportunity to participate in China’s entrepreneurial spirit, economic prosperity, and creativity and diligence.
Lei Jiang Law Firm provides many legal service in China related transactions. For more detailed information, tailored analyses, and legal opinion, please contact us.