What Is an IPO and What Is Its Purpose?
An IPO is an initial public offering in which a company receives financing in exchange for equity. It provides capital without creating debt and often results in changes to managerial structure. Companies can list in any jurisdiction, with many choosing the New York Stock Exchange due to its size, liquidity and relatively fewer listing requirements. Although an IPO does not require a listing, most large firms list simultaneously to access investors. Equity financing is crucial because it often carries less risk than debt.
What Occurred Before the Crackdown?
Before 2021, Chinese companies frequently listed on the NYSE using variable interest entities. At the peak, Chinese firms raised more than USD 25 billion in a single year through US listings. Approximately 48 per cent of these companies were in the tech sector and used the capital to expand rapidly. The Golden Dragon Index, which tracked China‑based stocks listed in the US, reached USD 20,000.
Hong Kong was also a major listing venue. Chinese firms raised approximately USD 30 billion annually on the HKSE. Although listing requirements were stricter, Hong Kong's close ties to mainland authorities provided investors with stability.
What Happened During the Crackdown?
The turning point came in 2021. DiDi Chuxing completed a USD 4.4 billion IPO on the NYSE, but within 3 days the Cyberspace Administration of China ordered the service to halt operations. The CAC investigated whether sensitive data could fall into the hands of foreign regulators. New rules required companies with more than 1 million users to undergo security checks and obtain approval before listing overseas.
Jack Ma’s Ant Group faced similar consequences. Regulators blocked its proposed USD 37 billion IPO.
Market confidence collapsed. Overseas financing fell from USD 40 billion in 2021 to USD 5 billion in 2022. US IPO activity dropped by 98 per cent. The Golden Dragon Index fell 75 per cent to approximately USD 5,000. Investors also faced risk because Chinese authorities refused to allow companies to release full financial statements required by US regulators.
What Is Happening Now?
New regulations have been formalised by the China Securities Regulation Commission and will be enforced from 31 March. Some view this as a reversal, but others argue it is a reassertion of state power.
Previously, only PRCs had to file with the CSRC. Now both PRCs and VIEs must register and secure approval before listing internationally. Companies must file annual reports and may face fines of up to 10 million yuan for non‑compliance.
VIEs once allowed Chinese firms to bypass restrictions by creating offshore entities, often in the Cayman Islands, and using contracts to mimic shareholding. During the crackdown, investors feared VIEs would be banned entirely. Instead, the CSRC now regulates them directly.
These rules do not close the market, but they do not restore the previous laissez‑faire environment. US listings are unlikely to return to earlier levels due to geopolitical tension. Firms risk sanctions from the US or operational restrictions from China. As a result, Chinese IPOs are expected to shift toward Hong Kong, although even that market has not fully recovered.
Impact on Law Firms
IPOs generate substantial legal work and fees for international firms. US firms may see a slight increase if companies decide to proceed with postponed listings despite the risks. London firms may also benefit, as the LSE has hosted several Chinese companies, including 5 PRC companies, in recent years.
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