Hong Kong’s wild stock swings hit New York after IPO clampdown
THE wild stock swings that Hong Kong regulators spent more than half a decade trying
to stamp out are now popping up in New York.
Post-listing spikes of thousands of percent in two little-known Hong Kong firms over the past few weeks have baffled investors in the world’s financial capital.
In fact, seven of 10 tiny listings from China and Hong Kong have gone on a tear this year before sudden collapses, catching the eye of the top United States regulator.
Securities and Exchange Commission (SEC) chairman Gary Gensler said last week that authorities are well-placed to look into wild gyrations.
For investors watching from Hong Kong such unexplained stock jumps are familiar. The city was once a hotbed of massive share moves, prompting repeated warnings from regulators on “problematic IPOS” and “ramp-and-dump schemes,” which led to a drastic tightening of listing rules that all but killed off the Asian hub’s small-cap board.
“The situation is looking a lot like what happened with penny stocks in the Hong Kong market three, four years ago,” said Kakei Lam, fund investment officer at Metaverse Securities Ltd.
“Some big shareholders would try to prop up the share prices and lure in small inves
tors.”
Stratospheric rise
While New York has long been home to some of China’s biggest companies such as Alibaba Group Holding Ltd, it’s now seeing an influx of lesser-known names, especially from Hong Kong, who are seeking to avoid new hurdles in their home town.
The US listing of AMTD Digital Inc, whose recent stratospheric rise captivated inves
tors, came after an IPO of another unit of its parent company was rejected by regulators in the Chinese territory.
Prospective issuers
But the US operates under a disclosure-based system, meaning there’s no permission needed to go public. Hong Kong works through a permission-based system, which makes getting approval more arbitrary.
Hong Kong’s watchdog has clamped down on prospective issuers, raising red flags about unusually high underwriting commissions and price-to-earnings ratios as well as shares being controlled by a limited number of people.
The stock exchange is tightening rules by raising the minimum profit threshold, while requiring a public offering rather than the shares just being sold to a private select group. It has warned that problematic applications will face heightened scrutiny.
Regulators also look at the type of business,
setting a threshold for “listing suitability” and requiring approval from both the exchange and the Securities and Futures Commission.
Two recent volatile stocks in New York, AMTD Digital and Magic Empire Global Ltd, both qualified as an “emerging growth company” under US law, which enjoy relaxed disclosures when going public.
Such companies are allowed to provide less narrative disclosure, file just two years of financial statements and forgo an attestation of auditors, according to the SEC.
Desperate scramble
AMTD Digital and Magic Empire didn’t immediately respond to requests for comment.
“There’s a trend of smaller companies seeking an alternative US listing due to the never-ending queries during IPO applications in Hong Kong,” said Mike Leung, investment manager at Hong Kong-based Wocom Securities Ltd, who specialises in small-cap stocks coverage.
“It’s a desperate scramble to get all the advisory and audit work done, only to meet the impossible regulatory hurdle to go public in their home city.”
To be sure, AMTD Digital’s path to a US listing was not without scrutiny, especially in the wake of rising bilateral tensions.
The SEC repeatedly pressed the firm for more disclosures about its corporate struc
ture and the potential to be influenced by the Chinese government, filings released last week show.
A June 22 letter from SEC staff called on AMTD Digital to be explicit about the Chinese government’s authority to limit its ability to transfer or use cash outside mainland China or Hong Kong.
Majority shareholder
An earlier letter dated June 3 asked AMTD Digital to make clear to investors that the majority shareholder, AMTD Idea Group, could be delisted from the NYSE as soon as 2024.
Regulators also pressed AMTD Digital to disclose the individuals with voting or controlling power in both AMTD Idea Group and AMTD Group Co Ltd, the parent company of both entities.
The SEC didn’t immediately respond to a request seeking comment.
The gyrations come as Washington and Beijing try to break an impasse over audits on Us-listed Chinese firms to avoid forcing companies such as Alibaba and Baidu Inc off American exchanges.
About 200 Chinese companies could be kicked off US exchanges as early as next year. — Bloomberg