Nasdaq Proposals, U.S. Senate Bill, and Presidential Memorandum Seeking to Address Risks with Emerging Market Investments and Audit Concerns

Wilson Sonsini Goodrich & Rosati

In May 2020, The Nasdaq Stock Market LLC (Nasdaq) filed with the U.S. Securities and Exchange Commission (SEC) three proposals to adopt new listing requirements for Restrictive Market1 companies and address certain audit concerns. The U.S. Senate also recently passed S.945, the Holding Foreign Companies Accountable Act by unanimous consent, which, if passed by the U.S. House of Representatives and signed by the President, would, among other things, direct the SEC to prohibit the securities of any publicly-traded company from being listed on any U.S. securities exchange or over-the-counter market if the Public Company Accounting and Oversight Board (PCAOB) has been unable to inspect the audit work of the company's auditor for three consecutive years. In addition, on June 4, 2020, President Donald Trump issued a Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies, which requires the President's Working Group on Financial Markets (PWG) to submit a report that includes recommendations for actions that the executive branch, the SEC, the PCAOB, and any other federal agency, as applicable, should take to protect investors in Chinese companies, or companies from other countries that do not comply with U.S. securities laws and investor protections.


The Sarbanes-Oxley Act of 2002 (SOX) requires that auditors of the financial statements of publicly-traded companies are registered with, and subject to the jurisdiction of, the PCAOB.2 In addition, the listing rules of the two largest U.S. national securities exchanges, the New York Stock Exchange and Nasdaq, require that the financial statements of publicly-traded companies are audited by PCAOB-registered independent public accounting firms.3 As part of its jurisdiction and oversight over registered public accounting firms, the PCAOB is required to conduct periodic inspections to assess the auditor's compliance with U.S. laws and professional standards in connection with its audits of publicly-traded companies.4

Over the past couple of years, the SEC and PCAOB leadership have met with senior representatives from U.S. audit firms and have issued public statements discussing the issues and challenges faced in auditing publicly-traded companies with operations in emerging markets, including China, and the risks of emerging market investments resulting, in part, from these audit concerns.5

Following on the heels of these meetings and statements, 1) Nasdaq filed a series of proposals that are intended to address certain concerns expressed in the public statement issued by SEC and PCAOB leadership in April 2020 (April 2020 Statement) relating to emerging market investments, 2) the U.S. Senate passed S.945 by unanimous consent in May 2020, which is a bill that is intended to address the PCAOB's continued inability to inspect the audit work of PCAOB-registered accounting firms' affiliates in China, and 3) the White House issued last week a Presidential Memorandum intended to address concerns with investments in Chinese companies listed on U.S. stock exchanges.

Nasdaq Proposals

The first two proposals filed by Nasdaq would add new listing requirements for Restrictive Market companies. In determining whether a company's business is principally administered in a Restrictive Market, "Nasdaq may consider the geographic locations of the Company's: (a) principal business segments, operations or assets; (b) board and shareholders' meetings; (c) headquarters or principal executive officers; (d) senior management and employees; and (e) books and records."6 The third proposal filed by Nasdaq clarifies and codifies Nasdaq's discretionary authority relating to audit concerns of Nasdaq-listed issuers, and extends this discretionary authority to Restrictive Market companies generally.

Some of the key highlights of the Nasdaq proposals include the following:

  • Proposal One - Company Management.
    • Initial Listing Requirement. Nasdaq is proposing to renumber and add new Rule 5210(c), which would "require that listing applicants from Restrictive Market countries have, and certify to Nasdaq that they will continue to have, a member of senior management or a director with relevant past employment experience at a U.S.-listed public company or other experience, training or background which results in the individual's general familiarity with the regulatory and reporting requirements applicable to a U.S.-listed public company under Nasdaq rules and federal securities laws." If listing applicants do not have such an individual, then, as an alternative, "the company could retain on an ongoing basis an advisor or advisors, acceptable to Nasdaq, that will provide such guidance to the company." Nasdaq stated that it expects this individual "would be a resource to the company on matters such as the Nasdaq corporate governance requirements, disclosure of material information, SEC reporting obligations, related party transactions, insider trading restrictions, whistleblower protections and investor communications."
    • Continued Listing Obligation. Nasdaq is also proposing to add new Rule 5250(g), which would require that any company that was subject to proposed Rule 5210(c) upon listing and that continues to be a Restrictive Market company, to have the requisite individual(s) or advisor(s) similar to those required at initial listing. No further certification to Nasdaq is required. Companies required to comply with proposed Rule 5250(g) but that fall out of compliance, would be permitted to provide the Nasdaq staff with a plan to regain compliance. Depending on the circumstances, Nasdaq staff may provide these companies with up to 180 days to regain compliance. Regardless of the plan to regain compliance, these companies would be required to disclose publicly that they do not meet this continued listing obligation in accordance with Rule 5810(b).
    Notably, if approved by the SEC, these amendments would apply to Restrictive Market companies that apply to list on Nasdaq after the effective date of the proposal; these amendments would not apply to companies from Restrictive Market countries already listed on Nasdaq prior to the effective date.
  • Proposal Two - Minimum Offering Size or Public Float and Direct Listings.
    • Minimum Offering Size or Public Float: IPOs and Business Combinations. Nasdaq is proposing to add new Rule 5210(l), which would require a minimum offering size or public float for Restrictive Market companies listing on Nasdaq in connection with an IPO or a business combination.
      • IPOs. For Restrictive Market companies listing on Nasdaq in connection with an IPO, Nasdaq is proposing new Rule 5210(l)(i), which would require a Restrictive Market company that is listing its Primary Equity Security on Nasdaq in connection with its IPO "to offer a minimum amount of securities in a Firm Commitment Offering in the U.S. to Public Holders that: (i) will result in gross proceeds to the company of at least $25 million; or (ii) will represent at least 25% of the company's post-offering Market Value of Listed Securities, whichever is lower." [Emphasis added.]7 These Restrictive Market companies would also need to comply with all other applicable listing requirements.
      • Business Combinations. For Restrictive Market companies listing on Nasdaq in connection with a business combination (e.g., through a reverse takeover or acquisition by a SPAC), Nasdaq is proposing new Rule 5210(l)(ii), which would require any company that is conducting a business combination with a Restrictive Market company to "have a minimum Market Value of Unrestricted Publicly Held Shares following the business combination equal to the lesser of: (i) $25 million; or (ii) 25% of the post-business combination entity's Market Value of Listed Securities." These Restrictive Market companies would also need to comply with all other applicable listing requirements.
    • Direct Listings. Nasdaq is also proposing to add new Rule 5210(l)(iii), which would permit Restrictive Market companies to list on the Nasdaq Global Select Market or the Nasdaq Global Market if they are undertaking a direct listing, assuming they meet all of the other applicable requirements but would prohibit Restrictive Market companies from listing on the Nasdaq Capital Market if they are undertaking a direct listing, regardless of whether they meet the applicable requirements or not. In the proposal, Nasdaq states that it believes this prohibition "will help to ensure that the company has sufficient public float, investor base, and trading interest likely to generate depth and liquidity necessary to promote fair and orderly trading on the secondary market."
  • Proposal Three - Audit Concerns. In its third proposal, Nasdaq discussed its broad discretionary authority over the initial and continued listing of securities pursuant to Rule 5101, and, in particular, how such authority may be used "to deny initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstances that exists or occurs that makes initial or continued listing of the securities on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial and continued listing on Nasdaq."

    In an effort to "increase transparency to investors, companies and market participants," and in light of the concerns raised in the April 2020 Statement and the report issued by the PCAOB in April 2020 relating to the constraints on the PCAOB's ability to conduct inspections in China and certain other emerging markets, Nasdaq is proposing to add new IM-5101-1(b) "that sets forth factors Nasdaq may consider in applying additional and more stringent criteria to an applicant or listed company based on the qualifications of the company's auditor." These factors relate to, among other things, PCAOB inspections (or lack thereof) and the sufficiency of the auditor's resources, personnel, and experience. If, based on Nasdaq's assessment of these factors, Nasdaq determines to apply additional or more stringent criteria for the initial or continued listing of the securities, then IM-5101-1(b) provides a non-exhaustive list of criteria including "requiring: (i) higher equity, assets, earnings, or liquidity measures than otherwise required under the Rule 5000 Series; (ii) that any offering be underwritten on a firm commitment basis, which typically involves more due diligence by the broker-dealer than would be done in connection with a best-efforts offering; or (iii) companies to impose lock-up restrictions on officers and directors to allow market mechanisms to determine an appropriate price for the Company before such insiders can sell shares."

    The foregoing changes would not be limited to Restrictive Market companies. However, Nasdaq is also proposing to renumber and amend IM-5101-1(c) to clarify that it may use its discretionary authority, including imposing additional or more stringent criteria, in other circumstances, such as in the case of Restrictive Market companies.

The SEC has 45 days (or up to 90 days if it designates a second 45-day review period) from the date of publication in the Federal Register to issue an order approving or disapproving these proposals or instituting proceedings to determine whether these proposals should be disapproved. Public comments on these proposals may be submitted to the SEC here. We will continue to monitor developments.

S.945, Holding Foreign Companies Accountable Act

S.945, the Holding Foreign Companies Accountable Act,8 co-sponsored by Senators Chris Van Hollen (D-MD), Kevin Cramer (R-ND), Rick Scott (R-FL), and Tom Cotton (R-AR), was passed by unanimous consent in May 2020. Some of the key highlights from this bill include the following:

  • Disclosures to SEC. The bill would require that the SEC identify each publicly-traded company that retains an auditor that has a branch or office that 1) is located in a foreign jurisdiction and 2) the PCAOB is unable to inspect because of the position taken by an authority in the foreign jurisdiction. In addition, the bill directs the SEC to issue rules requiring each public-traded company so identified by the SEC to submit to the SEC documentation that the company is not owned or controlled by a governmental entity in the same foreign jurisdiction as the location of its auditor.
  • Delisting by SEC. The bill would require that if the SEC determines that the PCAOB is unable to inspect the auditor of a publicly-traded company for three consecutive years, then the SEC shall prohibit the securities of such company from being traded on a national securities exchange or through any other method that is within the jurisdiction of the SEC (e.g., over-the-counter). If the publicly-traded company certifies to the SEC that it has retained an auditor that the PCAOB has inspected to the satisfaction of the SEC, then the SEC will end this prohibition. However, if, following relisting, the SEC again determines that the auditor is not subject to PCAOB inspection for any one-year period, then the company would be prohibited from listing on a national exchange or through any other method within the jurisdiction of the SEC for five years.
  • Other Disclosures. The bill would require each foreign issuer9 with an auditor that has not been subject to PCAOB inspection to disclose in the applicable form (typically a Form 10-K or Form 20-F): (1) that, during the period covered by the applicable form, a registered public accounting firm that has not been subject to PCAOB inspection has prepared an audit report for the issuer; "(2) the percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized; (3) whether governmental entities in the applicable foreign jurisdiction with respect to the registered public accounting firm have a controlling financial interest with respect to the issuer; (4) the name of each official of the Chinese Communist Party who is a member of the board of directors of—(A) the issuer; or (B) the operating entity with respect to the issuer; and (5) whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter."

As of the date of this Alert, the bill has been sent to the U.S. House of Representatives. In addition, on May 22, Representative Brad Sherman (D-CA) introduced a similar bill in the U.S. House of Representatives but no further action has been taken. Either bill must be passed by both houses of Congress and signed by the President prior to becoming law. In addition, the Senate bill would require additional SEC rulemaking to implement many of its requirements. We will continue to monitor developments.

Presidential Memorandum

The Presidential Memorandum notes that while Chinese companies have secured the benefits of U.S. capital markets, "the Chinese government has consistently prevented Chinese companies and companies with significant operations in China from abiding by the investor protections that apply to all companies listing on United States stock exchanges." In particular, the Presidential Memorandum cites the Chinese government's refusal "to allow audit firms registered with the Public Company Accounting Oversight Board (PCAOB) to provide audit work papers to the PCAOB so that it can fulfill its statutory obligation to inspect audit work and enforce audit standards[,]" noting that "the Chinese government enacted a statute that expressly prevents audit firms from providing this information without the prior consent of Chinese financial regulators."

The Presidential Memorandum requires that the PWG, chaired by the Secretary of the Treasury, or his designee, and comprised of the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the SEC, and the Chairman of the Commodity Futures Trading Commission, or their designees, 1) convene to discuss the risks to investors noted therein, including those risks "posed by the Chinese government's failure to uphold its international commitments to transparency and accountability and its refusal to permit companies to comply with the United States law[,]" and 2) within 60 days of the date of the Presidential Memorandum, submit to the President, "a report that includes:

  • Recommendations for actions the executive branch may take to protect investors in United States financial markets from the failure of the Chinese government to allow PCAOB-registered audit firms to comply with United States securities laws and investor protections;
  • Recommendations for actions the SEC or PCAOB should take, including inspection or enforcement actions, with respect to PCAOB-registered audit firms that fail to provide requested audit working papers or otherwise fail to comply with United States securities laws; and
  • Recommendations for additional actions the SEC or any other Federal agency or department should take as a means to protect investors in Chinese companies, or companies from other countries that do not comply with United States securities laws and investor protections, including initiating a notice of proposed rulemaking that would set new listing rules or governance safeguards. Any such actions should take into account the impact on investors and ensure the continued fair and orderly operation of United States financial markets."

It remains to be examined the full extent of the ramifications of the Nasdaq proposals, the U.S. Senate bill, and the Presidential Memorandum discussed above, especially to issuers and IPO applicants with substantial operations in China. As the U.S. Senate bill and the Presidential Memorandum touch upon the jurisdictional authority over the examination of the audit work conducted in China (which may create extraterritorial conflicts with certain Chinese laws), if and when the U.S. Senate bill is enacted in its current form and strictly implemented through SEC rulemaking, and if the U.S. and China governments are unable to work out a cross-border joint enforcement mechanism by that time, then China-based issuers might face substantial compliance risks and even listing uncertainties.

For more information on Nasdaq's proposals, S.945, the Presidential Memorandum, or any related matter, please contact any member of the firm's Greater China or capital markets practices.

[1] Nasdaq is proposing to amend Rule 5005 to add a definition for “Restrictive Market.” Proposed Nasdaq Rule 5005(a)(37) would define “Restrictive Market” to mean a jurisdiction that Nasdaq determines to have secrecy laws, blocking statutes, national security laws, or other laws of regulations restricting access to information by regulators of U.S.-listed companies in such jurisdiction. SR-NASDAQ-2020-027, p. 40 (May 29, 2020).

[2] See Section 102 of SOX [15 USC 7212] available at (“[I]t shall be unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer.”).

[3] See Nasdaq Rule 5210(b) and NYSE Listed Company Manual Section 107.02. (“Each company applying for initial listing must be audited by an independent public accountant that is registered as a public accounting firm with the Public Company Accounting Oversight Board, as provided for in Section 102 of the Sarbanes-Oxley Act of 2002.”)

[4] See Section 104 of SOX [15 USC 7214].

[5] See, e.g., SEC Chairman Jay Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William D. Duhnke III, Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally— Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China (Dec. 7, 2018), available at; SEC Chief Accountant Sagar Teotia, Statement in Connection with the 2019 AICPA Conference on Current SEC and PCAOB Developments (Dec. 9, 2019), available at; SEC Chairman Jay Clayton, SEC Division of Corporation Finance Director Bill Hinman, SEC Chief Accountant Sagar Teotia, PCAOB Chairman William D. Duhnke III, Statement on Continued Dialogue with Audit Firm Representatives on Audit Quality in China and Other Emerging Markets; Coronavirus—Reporting Considerations and Potential Relief (Feb. 19, 2020), available at; PCAOB, Public Companies that are Audit Clients of PCAOB-Registered firms from Non-U.S. Jurisdictions where the PCAOB is Denied Access to Conduct Inspections (April 1, 2020), available at; and SEC Chairman Jay Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman, SEC Division of Investment Management Director Dalia Blass, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (April 21, 2020), available at

[6] Proposed Nasdaq Rule 5005(a)(37). SR-NASDAQ-2020-027, p. 39 (May 18, 2020).

[7] Capitalized terms used are defined in Rule 5005 of the Nasdaq Rules. Rule 5005(a)(33) defines “Primary Equity Security” as a company’s first class of Common Stock, Ordinary Shares, Shares or Certificates of Beneficial Interest of Trust, Limited Partnership Interests or American Depository Receipts (ADR) or Shares (ADS). Rule 5005(a)(17) defines “Firm Commitment Offering” as an offering of securities by participants in a selling syndicate under an agreement that imposes a financial commitment on participants in such syndicate to purchase such securities. Rule 5005(a)(36) defines “Public Holders” as holders of a security that includes both beneficial holders and holders of record, but does not include any holder who is, either directly or indirectly, an Executive Officer, director, or the beneficial holder of more than 10 percent of the total shares outstanding. Rule 5005(a)(23) defines “Market Value” as the consolidated closing bid price multiplied by the measure to be valued (e.g., a company’s Market Value of Publicly Held Shares is equal to the consolidated closing bid price multiplied by a company’s Publicly Held Shares). Rule 5005(a)(22) defines “Listed Securities” as securities listed on Nasdaq or another national securities exchange.

[8] See S.945, the Holding Foreign Companies Accountable Act available at

[9] Foreign issuer is defined in 17 CFR § 240.3b-4 as any issuer which is a foreign government, a national of any foreign country, or a corporation or other organization incorporated or organized under the laws of any foreign country.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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