Nasdaq Freezes Chinese Small-Cap IPOs After Price Spikes

The Nasdaq stock market has quietly halted listings of Chinese small-caps, delaying approval letters and demanding more information about related parties in deals, after a series of meteoric rises and dramatic collapses in IPOs this year.

Shares of more than 20 recently listed companies have risen more than 100% on their first day of trading. They include Hong Kong-based fintech company AMTD Digital Inc.,

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which briefly jumped more than 320 times after its listing in July, and Chinese apparel maker Addentax Group corporation

ATXG -2.11%

, which increased more than 130 times in its market debut in August. Since then, the two stocks have lost more than 98% of their value.

The exchange has privately informed lawyers over the past few weeks that new listings of small-cap companies were subject to additional reviews and approvals were put on hold until further notice. It also requested details of the investors who have been allocated shares in an initial public offering, the lawyers said.

Although companies in general faced this heightened scrutiny, the exchange has paid special attention to companies from China and the rest of Asia, said Douglas S. Ellenoff, a partner at the law firm Ellenoff Grossman & Schole. He said this was because IPO price swings in recent months involved companies from Asia.

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The crackdown adds more bad news for Chinese companies still waiting to raise money and go public in the US. The Nasdaq Golden Dragon China Index, which captures US-listed Chinese companies, has fallen 42% this year. Tensions between China and the US in recent years have also made things increasingly difficult for would-be IPOs.

The Securities and Exchange Commission turned bearish on variable interest entities last year, a key method Chinese companies have used to sell shares on US exchanges. The two countries have also been in a longstanding dispute over audits. Although they recently moved closer to a resolution on auditing rules, five state-owned companies have already decided to delist from US exchanges.

Nasdaq has not announced any official changes to its listing rules. But more than a dozen small-cap IPO filings, including those from financial and tax adviser Lichen China Ltd. and Japanese real estate developer Lead Real Estate Co., have been stalled for weeks because the exchange has not issued approval letters, according to people familiar with the matter. These letters are a prerequisite before companies can launch their IPOs.

Since Nasdaq stepped up its scrutiny of small-cap IPOs in late September, only a handful of such deals, all by US companies, have gone public. The exchange’s rulebook stipulates that it has broad discretionary authority over Nasdaq-listed securities to maintain confidence in its market, prevent fraudulent acts and protect the interests of investors.

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Lichen China and Lead Real Estate did not respond to requests for comment.

Mitchell Nussbaum, a vice president at Loeb & Loeb LLP, said his clients have been frustrated by the lack of progress on their IPOs in recent weeks, with some pulling out of deals due to uncertainty about when they would be approved.

The exchange is also asking subscribers to disclose the names and account details of end investors in the listings. Small-cap IPOs often get high demand from individual investors.

There are two main phases to the disclosure of information. After a deal is priced but before it begins trading, investment banks must provide a full list of syndicated companies to which shares are allocated during the initial public offering. But once the deal begins trading, Nasdaq also wants the list of investors who received shares directly from both the lead underwriters and syndicated firms, though it will accept that information after the shares begin trading.

“We’re not sure if this is a temporary measure or if it’s here to stay,” said Daniel McClory, head of China at Boustead Securities, an investment bank. “But it’s the kind of information we don’t have before we operate.”

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More than 30 companies from Asia, most of which are from China, have filed for US IPOs that would raise less than $40 million each, representing more than half of the small caps in the pipeline, based on data compiled by Renaissance Capital. , a provider of pre-IPO research.


What’s next for the IPO market? Join the conversation below.

Matthew Kennedy, a senior strategist at Renaissance Capital, said he noticed in recent IPO filings that the Nasdaq was giving a potential Chinese issuer a second look. “We haven’t seen that before,” he said.

Andrew Tucker, a partner at Nelson Mullins Riley & Scarborough LLP, said Nasdaq has asked a variety of questions about share allocations and block deals in recent weeks. The goal is to ensure that the public float is not controlled by a handful of related parties and to avoid possible price manipulation, he said.

Tucker said requests for additional information and scrutiny from Nasdaq were unusually difficult. “They didn’t ask these questions even during the dotcom bubble,” he said.

Email Michelle Chan at [email protected]

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