Chinese bid tests SEC on IPO aim
Sale of exchange raising concerns
BEN BAIN AND ANNIE MASSA As a former Wall Street deals lawyer, Jay Clayton has been clear that he wants to make it easier for companies to raise money through stock sales now that he runs the Securities and Exchange Commission.
His first test of that goal is fraught with politics: It involves a Chinese conglomerate with little experience in the financial industry leading a group of investors vying to buy the Chicago Stock Exchange.
While the bidders’ objective is to transform the sleepy exchange into a destination for small companies to list their shares, a bipartisan group of lawmakers urged Clayton, the SEC’s chairman, to reject the offer last month. And even President Donald Trump criticized the planned acquisition on the campaign trail, citing it as an example of America losing its competitive edge.
The SEC, which oversees the nation’s exchanges, faces a deadline today on whether to approve the deal. The main buyer is China’s Chongqing Casin Enterprise Group Co., a company that invests in real estate and operates sewage-treatment plants.
The acquisition’s backers, including the Chicago Stock
● Exchange, say the new owners will provide a much-needed venue for initial public offerings, which have been falling in the U.S. for two decades. Opponents argue that regulators will have limited visibility into how a foreign entity is running the business, and that the Chicago exchange could became a destination where Chinese companies with questionable financials take advantage of U.S. investors.
“There are a number of concerns about the deal,” said Spencer Mindlin, an analyst who focuses on capital markets at the research and consulting
firm Aite Group. “It might end up being more about the optics.”
Clayton and the Chicago Stock Exchange declined to comment through spokesmen. When asked whether the Trump administration has a view on Casin’s bid, the White House also declined to comment.
In December, the proposed buyout passed muster with the Committee on Foreign Investment in the U.S., which evaluates the security risk of takeovers by foreign companies. The SEC has delayed making a decision, using the maximum amount of time legally permitted to review Casin’s proposal.
Clayton, who became SEC chairman in May, hasn’t
weighed in on the deal publicly. However, he has said that the reduction in the number of public U.S. companies is “a serious issue for our markets and the country.” As an attorney working in private practice, his career highlights included working on Alibaba Group Holding’s record U.S. initial public offering.
The SEC’s deadline to make a decision on the Chicago Stock Exchange comes as political and economic tensions between Washington and Beijing rise.
In a July 10 letter, 11 House lawmakers led by Rep. Robert Pittenger raised concerns that the SEC won’t be able to monitor any relationship between Casin and the Chinese government,
including conflicts of interest. As a result, a foreign power may be able to exert undue influence over a major U.S. exchange, the lawmakers wrote to Clayton and other SEC commissioners.
“It’s very naive for anyone to say the Chinese would not have influence” if the deal is approved, Pittenger, R-N.C., said Monday in an interview. “I’m trying to protect American interests, particularly related to our security concerns.”
The Chicago Stock Exchange has repeatedly dismissed similar arguments as fear-mongering, adding that any national security issues would have been flagged by the Committee on Foreign Investment in the U.S. The exchange
also has said there is no connection between Casin and the Chinese government.
Still, establishing a new pathway for Chinese companies to sell shares in the U.S. could pose other risks. In June 2011, the SEC issued a bulletin alerting investors to the dangers of Chinese companies buying firms already listed in the U.S. to get around the costs and regulatory burdens of an IPO. The agency took action after hundreds of companies raised money this way, despite the fact that some were frauds and others weren’t adhering to U.S. accounting requirements.