China blockchain firms may lose access to US capital markets

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Sunlight is often said to be the best of disinfectant. For publicly traded companies, that sunlight comes in the form of transparency and reporting. Last Wednesday, the U.S. Senate took steps toward forcing Chinese companies to adhere to the same transparency rules as other corporations or risk losing access to U.S.-based stock exchanges. 

For China-based ASIC hardware manufacturers, this new regulation might be the last nail in the coffin for their U.S. capital market aspirations. It could lead to delisting for those already traded.

Controversy has followed many leading China hardware makers when they have attempted to list publically in the past. Canaan and Bitmain were accused of misleading investors regarding their financial well-being in the lead-up to an initial public offering (IPO).

Online reports claim Bitmain omitted negative Q2 2018 info on their investment prospectus during its ill-fated first attempt at an IPO listing. A lawsuit filed by Scott+Scott Attorneys accuses Canaan of misleading an investor before their recent NASDAQ sale, which only raised less than one quarter of its $400 million initial target.

Ebang has recently announced they filed for a $100 million IPO with the U.S. Securities and Exchange Commission (SEC). The company’s prospectus shows it made over $109 million in 2019, but it also had a deficit of around $41 million.

The IPO move comes two years after its aborted listing on the Hong Kong Stock Exchange (HKEx). Chinese news outlet Sina Finance reported that Ebang halted that $1 billion IPO raise while under a cloud of alleged involvement in illicit financial activities. In late December 2019, 8BTC reported the company was under investigation by Beijing authorities. 

The bipartisan bill, known as the Holding Foreign Companies Accountable Act, passed unanimously. It requires Chinese companies to disclose if they are owned or controlled by a foreign government. The companies must also submit to an audit that the Public Company Accounting Oversight Board (PCAOB) can review for three consecutive years.

There are over 150 Chinese registered companies listed on the most prominent three U.S. stock exchanges. These companies are currently not subject to PCAOB audits.

Some organizations might look to repatriate back home to the stock exchange in Hong Kong or Shanghai rather than submit to this enhanced regulation. Proponents of the bill point to the recent Luckin Coffee scandal were employees fabricated $300 million in sales to justify the critical need for investors to know more about the foreign organization being listed. 

Alongside new congressional regulations, Reuters reported that the Nasdaq exchange is preparing to unveil its own new restrictions on IPOs, which will also make it more difficult for smaller China-based companies to get listed. 

Small Chinese firms often pursue IPOs because it allows their founders and early backers to cash out, rewarding them with U.S. dollars they typically cannot easily access. The founders can use their new Nasdaq-listed status to convince lenders in PRC to fund them or get subsidies from Chinese local authorities after going public.

Per the report, what motivates the proposed rules is, in part, concerns that some Chinese IPO hopefuls lack accounting transparency, have low liquidity, and close ties to powerful government insiders. 

The upcoming rule change will require companies from certain countries to raise $25 million in their IPO or at least a quarter of their post-listing market capitalization. It would also require auditing firms to ensure that their international franchises comply with global standards. Nasdaq will inspect the auditing of small U.S. firms that audit the accounts of foreign IPO hopeful. 

In any event, the future for these Chinese ASIC hardware companies doesn’t look for investors. Because of the market price stagnation of BTC, there is no demand for their products. Geopolitical issues aside, they built their revenue models based on the demand growing from a digital currency that has no intrinsic value or utility.