On March 31st, the SEC’s Acting Chief Accountant, Paul Munter, issued a lengthy “public statement” detailing concerns about private companies' readiness that go public through a SPAC merger to be successful as listed companies. His admonitions come as SPAC IPOs have exploded in the first quarter of 2021, with 298 SPACs raising over $87 billion, nearly 24 times the $3.49 billion raised by 13 SPACs during the comparable period in 2020. At the same time, SPAC IPOs that had been trading at huge premia to the cash held in trust and outperforming the S&P back in February have seen a significant retrenchment, with an average return of just 1.5% for SPACs that debuted in Q1 2021, according to Renaissance Capital.
On December 2nd, 2020, the House of Representatives unanimously approved a bill that would bar Chinese companies from trading in the U.S. if their auditors are not subject to inspections by the PCAOB within three years. The "Holding Foreign Companies Accountable Act" was passed by the Senate in May and will now be sent to President Trump to be signed into law.
While special purpose acquisition companies (SPACs) have existed since the early 1990s, these investment vehicles have gained popularity in recent years. SPAC IPOs have raised over $49 billion thus far in 2020, outstripping all prior records, and many more have filed to go public by the end of the year. While in the past, most SPACs were taken public by boutique investment bankers and raised tens of millions of dollars, today, nearly every "bulge bracket" firm has led a SPACs deal, with proceeds up to hundreds of millions or even billions of dollars.
Amid this year’s white-hot IPO market, the SPAC, or special purpose acquisition company, has incinerated previous records for this once-obscure financing vehicle. Thus far, in 2020, 116 SPACs have been funded through initial public offerings, raising $40 billion. SPACs make up the single largest “industry” group in 2020’s crop of IPOs, accounting for 45% of the number of new issues and 44% of total capital raised. More "blank check" companies debuted on NASDAQ and NYSE in August and September than "real" operating companies. The financing vehicle has attracted a host of luminaries, from investment icons like Bill Ackman of Pershing Square and Peter Thiel, baseball savant Billy Beane of “Moneyball,” and former Speaker of the House Paul Ryan.
On August 7th, the President's Working Group on Financial Markets weighed in on the dangers that investing in Chinese companies posed to U.S. investors. This report is the latest salvo following the passage of Senate's Holding Foreign Companies Accountable Act in May and an SEC roundtable on the risks of investing in emerging markets in July.
The COVID-19 pandemic has created novel challenges for the audit profession that could have lingering impacts on the quality and reliability of independent accounting firm’s work if not carefully addressed. The increased reliance on remote auditing needs to be carefully managed particularly for auditors with clients in areas like China and Europe, where travel restrictions limit site visits compared to domestic locations that can be visited with COVID protocols in place. Management, audit committees, and investors all need to be aware of the limitations that auditors are operating under and the steps that can be taken to ensure that audit quality remains robust during this period.
The safety of our staff, clients and their families is the top priority amid the coronavirus. During this time, we are offering flexibility to our staff to work from home if they are able to do so. We are also shipping thousands of supplies to our staff in China. For our staff who can work remotely, we are conducting trainings intended to keep skills sharp.
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.
The role of a Chief Financial Officer for a Chinese company listed on the U.S. stock market is intensely challenging. While the job of CFO generally has become increasingly complex due to the growth in regulatory oversight and the pressure from institutional shareholders, Chinese CFOs need to also bridge two very different business and legal cultures.
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?