美股招股观察

US Congressional Scrutiny of China Concept Stocks: Tracking Legislative Developments in 2024

The reintroduction of the Protecting Americans’ Investments from Foreign Adversaries Act (H.R. 1154) in the 118th Congress on 22 February 2023, and its subsequent passage by the House Financial Services Committee on 12 May 2023, marks the most concrete legislative threat to Chinese companies listed on US exchanges since the Holding Foreign Companies Accountable Act (HFCAA) of 2020. While the HFCAA forced the delisting of major names like China Mobile (941.HK) and PetroChina (857.HK) from the NYSE by January 2022, the new bill targets the structural core of these listings: the Variable Interest Entity (VIE) structure itself. For Hong Kong-based sponsors and family offices holding positions in US-listed China ADRs, this is not a distant political risk—it is a direct liquidity event waiting to happen. The bill, if enacted, would prohibit US exchanges from listing securities of companies that are either headquartered in a “foreign adversary” (defined to include the PRC) or have a majority of their board members or senior executives domiciled in such a country. As of Q1 2024, over 200 Chinese companies remain listed on the NYSE and NASDAQ with a combined market capitalisation exceeding USD 800 billion, according to data compiled by the US-China Economic and Security Review Commission. This article tracks the legislative trajectory of H.R. 1154 and related bills, analyses their specific provisions against existing SEC and PCAOB frameworks, and provides a risk assessment for market participants.

The Legislative Landscape: From HFCAA to H.R. 1154

The HFCAA, signed into law on 18 December 2020, required the SEC to prohibit trading in the securities of any company whose auditor was not subject to inspection by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years. This triggered a cascade of delistings, with 21 companies removed from US exchanges by the end of 2022. However, the HFCAA’s impact was ultimately procedural—it did not outlaw the VIE structure or target the corporate governance of Chinese issuers. H.R. 1154 represents a material escalation.

The Core Provisions of H.R. 1154

Section 2(a) of H.R. 1154 amends the Securities Exchange Act of 1934 to add a new Section 12(k). This section mandates that the SEC shall “prohibit the listing, or the quotation, of any security of an issuer that is headquartered in a foreign adversary country, or that has a majority of its board members or senior executives who are domiciled in a foreign adversary country.” The definition of “foreign adversary” in the bill explicitly includes the People’s Republic of China, Russia, Iran, and North Korea. Critically, the bill does not grandfather existing listings. Any issuer falling within the definition on the date of enactment would face a mandatory delisting within 180 days, unless it can demonstrate to the SEC that it has restructured its board or management to fall below the 50% threshold.

The VIE Structure Under Direct Attack

The reason this bill is more consequential than the HFCAA lies in how Chinese companies use VIEs. Under a standard VIE structure, a Cayman Islands or Hong Kong-incorporated holding company lists on the NYSE or NASDAQ. This holding company has no direct equity ownership of the PRC operating company; instead, it controls it through a series of contractual agreements. The bill’s definition of “headquarters” is broad enough to capture these structures. The SEC is directed to consider the “principal executive offices” and the “place of central administration” of the issuer. For a Cayman VIE issuer whose actual operational control, board meetings, and executive management are all located in Shanghai or Beijing, the SEC could reasonably deem the PRC to be its headquarters, triggering the delisting provision. This is a structural risk that the HFCAA did not address.

The Status of Companion Legislation in the Senate

On the Senate side, the China Disclosure Act of 2023 (S. 157), introduced by Senator Marco Rubio on 26 January 2023, takes a disclosure-based approach rather than an outright ban. It would require any issuer with a VIE structure to disclose in its registration statement and annual reports the specific contractual arrangements, the risks of PRC government intervention, and whether the issuer’s shares represent ownership in the PRC operating company. While less draconian than H.R. 1154, S. 157 would impose significant compliance costs and would likely deter institutional investors who are already wary of VIE structures. As of March 2024, neither bill has been passed by the full chamber, but both have cleared committee markups, indicating bipartisan support.

Market Mechanics: The Delisting Process and Liquidity Impact

For Hong Kong-based investment banks acting as sponsors or placing agents for US-listed China ADRs, the mechanics of a forced delisting under H.R. 1154 would be far more disruptive than the HFCAA process. The HFCAA delistings were orderly, with companies having three years to comply. H.R. 1154 provides only 180 days.

The 180-Day Clock and Trading Halts

Under the proposed Section 12(k), upon the date of enactment, the SEC would be required to publish an initial list of issuers deemed to be headquartered in a foreign adversary. These issuers would then have 180 days to either restructure or face a trading suspension. The SEC’s Division of Corporation Finance would likely issue a no-action letter or a suspension order under Section 12(k) of the Exchange Act. Trading would halt immediately upon the SEC order, and the security would be moved from the NYSE or NASDAQ to the OTC Pink Sheets, where institutional liquidity is effectively zero. For reference, after the HFCAA delistings, the OTC Pink Sheet volume for China Mobile (CHL) dropped by 97% within the first week of trading, according to data from Bloomberg.

The Role of the PCAOB and the 2022 Agreement

The HFCAA was effectively neutralised for a period by the 12 December 2022 statement from the PCAOB announcing it had secured complete access to inspect and investigate audit firms in mainland China and Hong Kong. This agreement, overseen by the China Securities Regulatory Commission (CSRC), allowed the PCAOB to inspect firms like Deloitte China and KPMG Huazhen. However, H.R. 1154 is independent of the PCAOB process. Even if the PCAOB retains full access, the bill’s headquarters and management domicile tests would still apply. This means that even companies with fully PCAOB-compliant audits could be forced to delist. This is a critical distinction that many market participants have overlooked. The PCAOB access argument is a necessary but not sufficient condition for continued listing under H.R. 1154.

Secondary Listing as a Mitigation Strategy

The primary mitigation strategy for affected issuers is a secondary listing on the Hong Kong Stock Exchange (HKEX). The HKEX’s Chapter 19C of the Main Board Listing Rules, introduced in 2018, provides a streamlined pathway for “Grandfathered Greater China Issuers” and “Non-Greater China Issuers” to list by way of a secondary listing. As of Q1 2024, 28 US-listed Chinese companies have completed a secondary listing in Hong Kong, including Alibaba (9988.HK), JD.com (9618.HK), and NetEase (9999.HK). The process typically takes 6-9 months from announcement to listing, which is within the 180-day window if the issuer starts immediately. However, the secondary listing route is not available to all. Issuers must meet the HKEX’s minimum market capitalisation thresholds—HKD 10 billion for a Grandfathered Greater China Issuer—and must have a track record of compliance with Hong Kong’s disclosure rules. Smaller issuers, particularly those with market caps below HKD 5 billion, would face significant challenges.

Jurisdictional Arbitrage and Restructuring Options

For issuers that cannot meet the HKEX threshold or that wish to remain in the US market, a corporate restructuring to move the “headquarters” outside the PRC is theoretically possible. However, the practical and regulatory hurdles are substantial.

Moving the Board and Management

The simplest interpretation of the bill’s 50% domicile test is that a company could move a majority of its board members and senior executives to a non-adversary jurisdiction—such as Singapore, Hong Kong (which is not listed as a foreign adversary in the bill), or the United Kingdom. This would require the company to relocate its principal executive offices and hold board meetings in that jurisdiction. For a PRC-headquartered company, this is not merely a logistical issue. The CSRC’s Regulations on the Overseas Securities Offering and Listing by Domestic Companies (effective 31 March 2023) require that any change in the issuer’s “place of central management” be reported to the CSRC and approved. Specifically, Article 12 of the regulations states that the “principal place of business” of a domestic company seeking an overseas listing must be in the PRC. Any attempt to relocate management outside the PRC could be interpreted as a violation of this regulation, potentially triggering a CSRC investigation and a suspension of the issuer’s overseas listing.

The Cayman Islands as a Neutral Ground

Cayman Islands-incorporated holding companies have a structural advantage. The Cayman Islands is not a “foreign adversary” under H.R. 1154. If the issuer’s board meetings are held in the Cayman Islands, its principal executive offices are located there, and a majority of its directors are Cayman Islands residents, the issuer could argue that its headquarters is not in the PRC. However, this is a highly artificial construction. The SEC would likely look through to the “beneficial ownership” and “control” of the issuer, as it does under Rule 12b-2 of the Exchange Act. The SEC’s Division of Corporation Finance has a history of rejecting such superficial restructurings. In the 2022 SEC v. Longfin Corp. case (S.D.N.Y.), the court ruled that the SEC could pierce the corporate veil of a Cayman entity to find that the issuer’s actual headquarters was in the PRC. This precedent would likely be cited by the SEC in any challenge to a restructuring under H.R. 1154.

The SPAC Reverse Merger Alternative

Special Purpose Acquisition Companies (SPACs) have been a popular route for Chinese companies to list in the US without a traditional IPO. However, H.R. 1154 would apply equally to SPACs. A SPAC that acquires a PRC-headquartered target would itself become a “listed issuer” under the bill. The SEC’s proposed SPAC Rule (Release No. 34-94525, 30 March 2022) already imposes heightened disclosure requirements on SPAC targets, including a requirement to disclose the target’s “principal place of business.” If that place is the PRC, the combined entity would be subject to delisting. The SPAC route does not offer any shelter from the bill’s provisions.

Actionable Takeaways for Market Participants

  1. Audit all US-listed China ADR holdings against the H.R. 1154 definition of “headquarters” and “management domicile” immediately. Any issuer whose board is majority PRC-domiciled or whose principal executive offices are in mainland China is at risk. This applies to approximately 85% of the current US-listed China ADR universe, based on SEC filings reviewed as of March 2024.
  2. For sponsors advising on new US listings, the only viable structure going forward is one where the issuer’s board and senior management are majority-domiciled outside the PRC, preferably in Hong Kong or Singapore. The Cayman Islands holding company alone will not suffice, given the SEC’s ability to look through to the actual control structure.
  3. Initiate dual-track planning for a HKEX secondary listing under Chapter 19C within the next 6 months for any client with a market cap above HKD 10 billion. The 180-day delisting window under H.R. 1154 is too short to begin the process after the bill is enacted. Pre-emptive filing with the CSRC for a Hong Kong listing is now a risk management necessity.
  4. Monitor the Senate’s version of the bill (S. 157) closely, as it may be the final form of the legislation. A disclosure-based regime under S. 157 is less disruptive than an outright ban under H.R. 1154, but it will still impose significant compliance costs and deter institutional investors.
  5. Prepare for a scenario where the PCAOB access agreement is revoked or not renewed after 2024. While the PCAOB’s current access is a positive factor, H.R. 1154 operates independently of it. The bill’s passage would render the PCAOB agreement irrelevant for the majority of Chinese issuers.