SEC chief Gary Gensler details the risks of US-listed Chinese stocks in his most direct warning to investors yet

• Many investors don't know the risks of US-listed Chinese stocks, SEC chief Gary Gensler warned.
• They may be handing their money to a Cayman Islands shell company, he said.
• The SEC has frozen US listings of Chinese companies until they meet regulatory disclosures.

Few US investors know that the Chinese government doesn't let foreigners own or invest in many of the country's companies, SEC Chairman Gary Gensler said on Monday in his most direct warning about US-listed Chinese stocks yet.

China-based operating companies establish contracts with shell companies in other countries to escape the government's directive on foreign ownership, Gensler said.

"Those shell companies then raise the money on US exchanges," he said in a video message on Monday. "So when you think you're investing in a Chinese company, you're more than likely actually investing in a shell company in the Caymans or another part of the world."

His remarks came weeks after the SEC stopped processing IPO listings from Chinese companies, on the grounds that they should meet new disclosure requirements about risks to investors posed by government intervention.

Gensler said he's asked the SEC's staff to request that businesses provide full and fair disclosure to investors that their investments are being directed to shell companies.

"That means disclosing the political and regulatory risk that the government of China could, as they've done a number of times recently, significantly change the rules in the middle of the game," he said.

He also flagged that auditors in Chinese companies haven't agreed to inspection, since the government hasn't allowed this to happen for the last 17 years. To protect American investors, the House of Representatives passed a law in December that could kick China companies off US stock exchanges if they don't fully comply with financial audit rules.

"If the auditors of Chinese operating companies don't open up their books and records in the next three years, the companies - Cayman or Chinese - won't be able to be listed here in the US," Gensler said.

Investors have watched as China's months-long crackdown has extended to multiple key industries, targeting unfair competition and the use of critical data, leaving a range of companies to deal with an uncertain environment.

It's not just foreign investors who have been troubled by the crackdown, but even China's richest industrialists have lost billions since the start of July from the regulatory assault.

Read More: Maximize passive income from real estate investments with 3 easy strategies