China said it plans to ban overseas IPOs for technology companies with data security risks

China is establishing rules to ban Internet companies whose data poses potential security risks from being listed outside the country, including in the United States, according to a person familiar with the matter.

The ban must also be imposed on companies involved in ideological issues, said the source, who declined to be identified because the matter is private.

Beijing said last month it plans to strengthen oversight of all overseas listed companies, a radical regulatory shift that came after a cybersecurity investigation into giant Didi Global just days after its listing in the United States.

Under the planned rules, the Chinese securities regulator would restrict scrutiny of foreign IPO-linked companies and ban those that collect large amounts of user data or create content that could pose potential security risks, the person said.

All Internet companies would be asked to voluntarily apply for reviews with the powerful China Cyber ​​Security Administration (CAC) if they intend to list their shares outside of China, the person said.

The CAC would conduct the review, if necessary, with other relevant ministries and regulators, the person said, adding that upon approval of the cybersecurity watchdog, companies would be allowed to submit an application to the securities regulator.

The China Securities Regulatory Commission (CSRC) and CAC did not immediately respond to Reuters’ request for comment.

The plan is one of several proposals being considered by Chinese regulators as Beijing tightened its grip on the country’s Internet platforms in recent months, including seeking a closer look at overseas listings.

The crackdown, which has crushed stocks and severely undermined investor sentiment, has particularly targeted unfair competition and Internet companies’ handling of a huge cache of consumer data after years of a more laissez-faire approach.

The Wall Street Journal published for the first time new rules that would prohibit Internet companies that possess a large amount of user-related data from listing abroad.

Societal structure

The rules being drafted would also place emphasis on the legal liability of underwriters in overseas listings and would require more complete disclosure of ownership for those with the so-called variable interest entity (VIE) structure.

The VIE framework was created two decades ago to circumvent rules that restrict foreign investment in sensitive sectors such as media and telecommunications, allowing Chinese companies to raise funds abroad through offshore listings.

It has been widely adopted by China’s new economy companies, primarily Internet companies, which are generally incorporated in the Cayman Islands and the British Virgin Islands and therefore outside the legal jurisdiction of Beijing.

This gives companies more flexibility to raise capital abroad, while bypassing the scrutiny and lengthy IPO verification process that locally incorporated companies have to go through.

Reuters reported last month that China’s securities regulator was assembling a team to review Chinese companies’ plans for overseas IPOs, including those using the VIE corporate structure that Beijing says has spawned abuses.

© Thomson Reuters 2021

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