Senate Bill to De-List Chinese Companies – Are SPACs at Risk?

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Senate Bill to De-List Chinese Companies – Are SPACs at Risk?

May 22, 2020 INTEL by Kristi Marvin

Most people have probably already seen a few of the headlines surrounding the U.S. Senate passing a bill that could result in Chinese companies being de-listed from U.S. exchanges. However, what is still unclear is which companies are truly at risk.

What we currently do know is that the bill would require Chinese companies that are listed in the U.S. (or would like to list), establish that they are not owned or controlled by a foreign government. Additionally, they must be audited by an accredited firm and their audits must be monitored by the Public Company Accounting Oversight Board (PCAOB), which oversees audits of all U.S. companies that seek to raise money in public markets.

Keep in mind that while this bill has passed the Senate, it still needs to pass the House of Representatives before it can go before the President to be signed into law.  However, it appears many are speculating that this is likely to pass the House since this bill has bipartisan support.

If the Bill is signed into law, it’s unclear how the SEC would confirm whether a company was owned or controlled by a foreign government, but presumably, the SEC would issue guidance.

As for how this affects SPACs, clearly we have a number of Asia-focused SPACs looking for target companies, but since a SPAC is not beholden to any sector, industry, and most importantly, geography, it would be fairly easy to pivot to search for companies outside of China.  However, what about the SPACs with a currently announced combination or even a SPAC itself with its headquarters listed in China?

After speaking with an auditor, who said his firm is currently working on this, while it’s still not 100% clear which companies would fall under this umbrella, the current thinking is the following:  If the auditor provided the Auditor’s Opinion from a U.S. office address, it’s probably safe.  To be more specific, if you review a SPAC’s proxy or IPO filing and look up the Auditors Opinion and it lists a firm with a U.S. address, it’s probably compliant.  Meaning, if the company IS owned or controlled by a foreign government, and specifically China, a U.S. based Audit would NOT be allowed to occur in the first place. It’s just an easy way to check.

However, there is still the issue of whether the majority of the company’s business is conducted in China. Further to that, the thinking is that “China” includes companies based in Hong Kong since the PCAOB is currently blocked from reviewing companies headquartered there as well.

Finally, even if a company is deemed non-compliant, the Bill (linked HERE) would only de-list a company if it doesn’t comply within three years.  That’s a long time to gain compliance for currently listed companies.

In summary, this is not a law yet, but it’s something to keep an eye on to see what develops.