Chi­nese bid tests SEC on IPO aim

Sale of ex­change rais­ing con­cerns

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - In­for­ma­tion for this ar­ti­cle was contributed by Char­lotte Chilton and To­luse Olorun­nipa of Bloomberg News.

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.

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