Nasdaq crackdown spells trouble for Chinese blockchain firms

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Nasdaq will be making it more difficult for foreign companies, including blockchain firms, to list on its exchange. This move by Nasdaq comes shortly after an internal investigation of Luckin Coffee ($LK)—the Chinese coffee company and coffeehouse chain–discovered that the company had fabricated their 2019 sales by $310 million.

The new rules

Nasdaq’s new rules require that foreign companies raise $25 million in their initial public offering (IPO) or 25% of their post-listing market cap. The rules also require auditors to make sure foreign companies are following global compliance standards, and requires companies to hire a special advisor that is familiar with the transparency practices in the United States if they do not already have senior management that has worked at a U.S.-listed company.

The rule change aims to tackle the lack of transparency in foreign companies, and is the first time that Nasdaq has ever required companies to raise a minimum value in their IPO.

A jab at Chinese companies

Nasdaq’s new rules will significantly affect Chinese companies that are looking to go public on their exchange. Nigel Stevenson, an analyst from accounting investigation firm GMT Research, told the Financial Times that:

Obviously they [Naqdaq] don’t want to explicitly target [the rule change] at China but that’s clearly the main country they’re intending it to cover.

According to Refinitiv Data, out of the 155 Chinese companies that listed on Nasdaq since 2000, 40 of them raised below $25 million in their IPO. In addition, many of these companies performed poorly after their IPO, losing 67% of the value from their IPO price according to the Financial Times. If Nasdaq had these rules in place earlier, these poor-performing companies would not have been able to go public via their exchange.

Luckin Coffee scandal

In April, an internal investigation of Luckin Coffee ($LK), a Chinese business that is listed on Nasdaq, revealed that the company had fabricated $310 million worth of sales in 2019. If Nasdaq had their new rules in place earlier, they could have steered clear from supporting Luckin Coffee.

The lack of transparency into Luckin Coffee allowed the company to get away with the scandal before the internal investigation took place. Once it was discovered, their CEO Jenny Zhiya Qian and COO Jian Liu were ousted from the company. Trading of Luckin Coffee was halted shortly afterward; but on May 20, shares of Luckin Coffee resumed trading—the stock is down 52% since resumption.

Luckin’s recent scandal has made U.S. investors wary of investing in foreign companies, and Nasdaq’s rule change looks to provide increased protection for investors.

Chinese blockchain firms struggle In U.S. Market

Several China-based digital currency hardware manufacturers have gone public or tried to go public in the United States but were met with little success. Canaan Creative went public on Nasdaq on November 21, 2019. A few weeks before Canaan went public, Credit Suisse, one of the biggest supporters of their IPO, backed out, and the size of the Canaan IPO was significantly reduced. Shares initially sold for $8.99 but are down more than 58% today, as $CAN trades around $3.80.

Bitmain and Ebang have also filed to go public in the United States, but are struggling to make it a reality. Both Bitmain and Ebang, as well as Canaan, filed to go public on The Stock Exchange of Hong Kong (HKEx) before filing in the United States. However, each firm failed because local regulators were hesitant to allow a crypto-related company to trade on the HKEx.

Although Canaan is currently publicly trade in the United States, both Bitmain and Ebang are bound to have a significantly harder time now that Nasdaq has a more stringent set of rules around IPOs.