Nasdaq boosts scrutiny of investors in IPOs from China, HK

HONG KONG - Nasdaq is once again increasing scrutiny of small initial public offerings (IPOs) from China and Hong Kong to avoid a repeat of the wild swings that followed a handful of deals two years ago, according to people familiar with the matter.

Several Hong Kong- and China-based IPO applicants have faced a series of questions from Nasdaq, the people said. Questions centered on the identity and independence of the firms’ pre-IPO investors selling shares in the listings, the people said.

A growing number of small firms from China and Hong Kong are turning to the Nasdaq to raise money, even as geopolitical tensions rise ahead of the US election. China has relaxed its grip on overseas listings, offering a lifeline to firms unable to tap funding at home amid a prolonged market slump. Hong Kong’s small-cap exchange was effectively closed for years until earlier this month, making Nasdaq an attractive alternative.

The heightened grilling comes after several micro-cap stocks from China and Hong Kong, including AMTD Digital and Addentax Group, surged as much as 32,000 per cent in their 2022 trading debuts, only to crash in the ensuing weeks. That prompted a round of questioning in New York at the time.

No IPOs have so far been halted due to the heightened queries, but the process has been lengthened by weeks, adding uncertainty and costs to what’s normally a quick review, the people said. They declined to name any of the companies facing scrutiny.

A spokesperson for Nasdaq exchange declined to comment.

Some 20 companies from China and Hong Kong have floated shares on Nasdaq this year, raising a combined US$195 million (S$263 million). Recent listings include Jiade, a Chinese education software firm, and personal care company Raytech Holding. NIP Group, an esports company backed by a Hong Kong pop star, recently filed an IPO application.

Jiade is down 77 per cent since listing in May and Raytech is down about 15 per cent.

As part of the review, Nasdaq officials have asked about the backgrounds of the selling shareholders, their ties and history with the company and to each other. In some cases, Nasdaq required documentation to support the valuation of the private shares, as well as bank documents to prove money actually changed hands in the purchase, the people said.

These types of questions were rare in the past, despite long-standing rules governing selling shareholders, the people said. There’s been a noticeable increase in companies registering their pre-IPO investors to fulfill the minimum public-float requirements.

Proving investor independence is essential to allay any suspicions of orchestrated pump-and-dump moves shortly after listing, the people said. The exchange is also seeking to ensure US-based investors make up the majority of these Asia-originated IPOs, the people said.

IPO hopefuls getting targeted inquiries are mostly those qualifying under the “equity standard” or “market value of listed securities standard,” the people said. The two streams - both requiring a minimum public float of US$15 million - are often preferred by smaller companies that can’t meet the net income standard of US$750,000 in annual profit in the past three years.

Momentum is slowly rising for Chinese and Hong Kong firms seeking to go public in the United States after a lengthy dry spell. Last month, Zeekr Intelligent Technology Holding, a high-end electric car brand, debuted in New York after raising US$441 million in the biggest US IPO by a China-based company since 2021.

Still, mid-to-large offerings by Chinese firms in the US remain scarce. Of the Chinese companies that listed since 2023, only five raised more than US$50 million. BLOOMBERG