It has been a rough few months for Luckin Coffee. The company once compared as China’s homegrown Starbucks ignited controversy when it disclosed earlier this year that much of its 2019 revenues were fabricated. Its problems were only beginning. On May 12, 2020, Luckin announced it had fired its CEO as well as its chief operating officer, the latter of which had already been suspended for misconduct. One week later Luckin disclosed NASDAQ planned to delist the shares, which sent the stocks tumbling before their trading was tentatively halted. Luckin has 45 days to appeal, and its co-founder again apologized for the scandal, saying he has been “losing sleep” over Wall Street’s decision to delist the company.
Luckin’s ongoing woes coincide with increased cross-border investment scrutiny: U.S. regulators and lawmakers continue to increase their focus on US-listed companies based in or with significant operations in China. On May 20, 2020, the U.S. Senate approved broad new legislation that could ultimately bar Chinese companies from listing their shares on US exchanges or from raising money from American investors.
The Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy (R-Louisiana) and Chris Van Hollen (D-Maryland), would amend Sarbanes Oxley Act of 2002 to impose requirements on a public company that is audited by a registered public accounting firm with a branch hoffice located in a foreign jurisdiction that the Public Company Accounting Oversight Board (PCAOB) is prohibited from inspecting, which as a practical matter targets companies based in China. Among other things, it would require companies to establish they are not owned by a foreign government. The bill, which was approved without objection in the Senate, must still pass the House. If passed, the bill could affect more than 200 companies beyond the reach of the PCAOB. Most of these companies are from China, but there are a smattering of others from France, Belgium and Hong Kong.
Not to be outdone, on the same day the SEC formally announced its July roundtable on emerging markets. In its announcement the SEC noted that “while U.S. securities laws and regulations applicable to US public companies, the practical effects often are substantially different, based on the inability of U.S. regulators to inspect for compliance these new rules and regulations.”
Keeping with this theme, NASDAQ has three new proposals that would affect companies in “restrictive markets:” (1) a proposal to adopt stricter requirement related to management qualifications; (2) a proposal for more stringent listing criteria relating to liquidity and offering size; and (3) a proposal for stricter criteria related to the company’s auditor.
Those involved in M&A should pour themselves a cup of coffee as they prepare to assess how these regulations, along with those enacted by the Committee of Foreign Investment in the United States (CFIUS) will affect cross-border investments, particularly in China.