Nasdaq cracks down on IPOs of small Chinese companies

"Nasdaq's concern about low liquidity and high volatility in the marketplace brought about by such Chinese IPOs has become very obvious since mid-2018," said Ralph De Martino, chair of U.S. law firm Schiff Hardin LLP's Asia practice, which advises Chinese companies on their IPOs.

STRICTER RULES

Nasdaq's new listing rules have raised the average trading volume requirements for a stock, and call for at least 50% of a company's shareholders to invest a minimum of $2,500 each in an IPO.

Nasdaq also said in June that it may delay the U.S. listing of a company that does not demonstrate a strong enough nexus to the U.S. capital markets, including having no shareholders, operations, management or board members with links to the United States.

Small Chinese firms pursue these IPOs because they allow their founders and backers to cash out, rewarding them with U.S. dollars they cannot easily access because of China's capital controls. The companies also use their Nasdaq-listed status to convince lenders in China to fund them and often get subsidies from Chinese local authorities for becoming publicly traded.

Unlike Nasdaq, the Chinese stock market has strict listing criteria that prevent some loss-making companies from going public. The geographically adjacent Hong Kong stock exchange is also viewed by IPO hopefuls as more strict compared to Nasdaq.

Chinese companies have raised over 70 billion in the U.S. stock market since 2000, according to Refinitiv data. While the biggest ones, such as e-commerce giants Alibaba Group Holding Ltd, Pingduoduo Inc and JD.com Inc, have attracted major U.S. stock market investors, many small ones have proved unpopular.

This is largely due to their poor track record. Shares of Chinese IPOs that raised $200 million or less have traded down 38% on average since their IPO through July 31 in the last 18 months, compared to a rise of 13.9% for U.S. companies of the same size, according to Dealogic data.