As a new “silicon curtain” crashes down between the technological infrastructure of America and some of its allies and China and the countries in its sphere of influence, there has begun to be talk about restricting flows of capital as well as goods between the two nations. Some have fretted that China might dump its holdings of US treasuries in retaliation for escalating tariffs. Other analysts have speculated that U.S. financial institutions might soon be prohibited from investing in securities in mainland China’s state-owned enterprises. And now Senator Marco Rubio has put the nuclear option on the table with a bill and editorial in the Wall Street Journal, “You Can’t Trust a Chinese Audit,” proposing to potentially boot hundreds of Chinese companies off of U.S. stock markets.
Tencent Music’s (NYSE:TME) $1.1 billion IPO on the NYSE last week put a shiny bow on a banner year for Chinese IPOs on U.S. stock markets, with over $8 billion raised year-to-date, twice the IPO haul for Chinese companies in 2017. With 30 Chinese companies having listed on NASDAQ or NYSE it’s the best year since 2014, when Alibaba’s (NYSE:BABA) $25 billion IPO broke all previous records. What’s more, there is a sizable pipeline of China “unicorns” with multi-billion dollar private valuations hoping to score listings in the near future.
Given the deteriorating trade relations between China and the U.S., why are so many of China’s most innovative and valuable private companies still seeking to ring the opening bell in New York? And can this blistering pace of new IPOs be sustained?
NYU accounting and finance professor Baruch Lev is one of the most incisive contrarian critics of current accounting practices. In his recent book, The End of Accounting (written with Feng Gu) and his blog, Lev argues that current accounting methods have become hopelessly out of step with how value is created in the modern economy, and that an accumulation of new accounting regulations have only made things worse. Professor Lev backs up his critique with reams of market data and regression analyses to demonstrate how flawed accounting measurements have caused earnings and book value to become nearly meaningless to investors and now create very serious managerial biases and errors in how capital is allocated.
MarcumBP’s Drew Bernstein met with him to understand his views on where the principles of accounting went awry and how the structure of accounting might be reformed.
2018 has been a banner year for Chinese IPOs thus far, with 23 Chinese companies going public on the U.S. stock markets in the first nine months. In the technology sector, Chinese innovators are outpacing American companies in the race to the opening bell. And there is a gathering herd of Chinese “unicorns” with multi-billion dollar valuations and strong backing from large private equity funds waiting for their turn to tap the public markets.
Effective July 10, 2017, the Securities & Exchange Commission ("SEC") began allowing all companies to submit non-public, draft registration statements for initial public offerings ("IPOs"). Why make this significant change? In altering the disclosure requirements, the SEC hopes to reduce organizations’ exposure to market fluctuations while going through the IPO process, rationalize the filing process so that compliance is less burdensome and expensive for small organizations, and further streamline disclosures to make them more meaningful and useful to investors.
The SEC’s new rule is largely an effort to reverse the decline in IPOs, encourage more public offerings, among both U.S. and foreign companies, on U.S. exchanges, and provide investors with access to a wider range of small, successful companies in which to invest. While this ruling may encourage more companies to consider (or reconsider) listing within the U.S. market, for foreign issuers, numerous complexities remain that should be considered.
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