Foreign companies are now required to adhere to U.S. accounting rules, according to a new law signed by President Donald Trump on Dec. 18.
The Holding Foreign Companies Accountable Act, originally passed by the Senate in May and unanimously by the House of Representatives earlier in December, aims to “protect American investors and their savings from foreign companies that operate on U.S. stock exchanges while refusing to submit to Securities and Exchange Commission (SEC) oversight,” according to a press release by Sen. John Kennedy (R-LA) posted on his website.
Kennedy’s press release says in no uncertain terms that the bill specifically targets the Chinese Communist Party (CCP): “Communist China has been the bully on the playground of America’s stock exchanges for years, and that stops today.
“With President Trump’s signature, Chinese firms that flout the rules that American and other companies follow do so at their own peril.”
The Act, which was co-sponsored with Sen. Chris Van Hollen (D-MD), prohibits companies from being listed on a United States exchange if they fail to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row.
The bill also requires publicly traded companies to disclose whether they are owned or controlled by a foreign government.
Kennedy’s press release states that currently the CCP does not allow the PCAOB to inspect audits of companies registered in China or Hong Kong, noting that nearly 11% of all securities-related class action lawsuits in 2011 were brought against Chinese companies.
U.S. listed companies that are located in countries that interfere with PCAOB inspections represent a staggering $1.8 trillion in market capitalization.
Rep. Brad Sherman (D-CA), who co-sponsored the bill in the House, said in a statement: “The purpose is not to de-list any company, but to persuade China to allow the audit oversight that U.S. investors need, and the U.S. investors get when investing in U.S. companies or companies in over 50 foreign jurisdictions.”
Last week, scandal besieged Luckin Coffee agreed to pay the SEC $180 million in penalties after overstating its 2019 revenue and understating a net loss to defraud investors.
Luckin was de-listed from the Nasdaq Exchange earlier in the year after the coffee startup said an internal investigation found that its chief operating officer had falsely inflated 2019 sales by approximately $310 million.
The firm’s shares on the over-the-counter marketplace fell from a high of $51 in January to as low as $0.95 in June.