The SEC has frozen US listings of Chinese companies as it demands new disclosures of government meddling risks

• The SEC has stopped processing IPO listings from Chinese companies, Reuters first reported.
• A spate of new disclosure requirements revolves around a listing structure unique to Chinese companies, called variable interest entities.
• The SEC worries US investors do not understand that buying stock in variable interest entities is not the same as buying other shares.

The SEC has stopped processing IPO listings from Chinese companies until they meet new disclosure requirements announced by the agency on Friday.

SEC Chair Gary Gensler said in a statement that the SEC would start requiring Chinese companies to disclose information about the structure of their IPOs and the risks of Chinese government intervention.

Gensler's statement came on the heels of a Reuters report, now confirmed by the SEC, that the agency had put US listings of Chinese firms on ice, pending the new disclosure requirements.

Chinese IPO activity has stalled in the wake of the government's hard line on an array of newly listed firms, most prominently ride-hailer Didi Chuxing. Investment banks have reportedly been scrambling to shift Chinese IPOs from New York to Hong Kong as the regulatory uncertainty on the mainland has mounted.

The new spate of disclosure requirements revolves around a listing structure unique to Chinese companies, called variable interest entities.

VIEs, which grew out of China's early-2000s market liberalization period, have become the preeminent way for US capital to gain exposure to public Chinese companies. 69% of NYSE- and Nasdaq-listed Chinese companies use the structure, according to GMT Research.

A VIE involves a tangled web of contracts, subsidiaries, and shell corporations, ultimately letting the end investor own mock shares in the underlying company. But the SEC worries American investors do not understand that buying stock in a VIE-listed Chinese company is not the same as buying regular US-listed shares and does not confer any ownership rights.

"I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company," said Gensler.

The disclosure requirements will also force Chinese companies to say more about the risks of government meddling in their business, including whether an IPO has been approved by the state.

"I believe such disclosures are crucial to informed investment decision-making and are at the heart of the SEC's mandate to protect investors in US capital markets," Gensler added.