Hong Kong’s wild stock swings hit New York after IPO crackdown

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Bloomberg

17th August 2022 – (New York) The wild stock swings that Hong Kong regulators have been trying to stamp out for more than half a decade are now emerging in New York.

Shares in the world’s financial capital have stunned investors by thousands of percent in recent weeks following the listing of two little-known Hong Kong companies. In fact, seven out of 10 tiny Chinese and Hong Kong listings have collapsed this year before suddenly collapsing and drawing the attention of the top US regulator. Securities and Exchange Commission Chairman Gary Gensler said last week that authorities are well placed to investigate wild swings.

Investors watching from Hong Kong are familiar with such inexplicable price jumps. The city was once a hotbed of massive stock moves, prompting repeated warnings from regulators of “troublesome IPOs” and “ramp-and-dump programs,” leading to a drastic tightening of stock listing rules affecting the small cap board.

“The situation looks very similar to what it was three, four years ago with penny stocks in the Hong Kong market,” said Kakei Lam, fund investment officer at Metaverse Securities Ltd. “Some large shareholders would try to support share prices and lure small investors.”

While New York has long been home to some of China’s biggest companies like Alibaba Group Holding Ltd. it’s now seeing an influx of lesser-known names, particularly from Hong Kong, trying to avoid new hurdles in their hometown. The US listing of AMTD Digital Inc., whose recent stratospheric rise has captivated investors, comes after an IPO of another unit of its parent company was rejected by regulators in Chinese territory.

But the US operates under a disclosure-based system, meaning no approval is required to go public. Hong Kong operates on a permit-based system that makes permitting more arbitrary.

Hong Kong regulators have cracked down on potential issuers, warning of unusually high underwriting commissions and price-to-earnings ratios and stocks controlled by a limited number of people. The exchange is tightening the rules by raising the minimum breakeven point while requiring a public offering rather than just selling the shares to a private select group. It has warned that problematic applications will be subject to increased scrutiny.

Regulators also consider the nature of the deal, set a “listing eligibility” threshold and require approval from both the exchange and the Securities and Futures Commission.

Two recent volatile New York stocks, AMTD Digital and Magic Empire Global Ltd., both qualified as “emerging growth companies” under US law, enjoying relaxed disclosures when they go public. Such companies are permitted by the SEC to provide fewer narrative disclosures, file only two annual financial statements, and waive auditor certification.

AMTD Digital and Magic Empire did not immediately respond to requests for comment.

Desperate

“There is a trend for smaller companies to seek an alternative listing in the US due to the endless questions on Hong Kong IPO applications,” said Mike Leung, investment manager at Hong Kong-based Wocom Securities Ltd., which specializes in small-cap stocks. Stocks is specialized coverage. “It’s a desperate mess to do all the advisory and audit work just to clear the impossible regulatory hurdle of going public in her hometown.”

Certainly, AMTD Digital’s journey to a U.S. listing has not been without scrutiny, especially amid rising bilateral tensions.

The SEC has repeatedly urged the company for further disclosures about its corporate structure and the potential to be influenced by the Chinese government, filings released last week show. In a letter dated June 22 from SEC officials, AMTD Digital was asked to specifically comment on the Chinese government’s power to restrict its ability to transfer or use cash outside of mainland China or Hong Kong.

In a previous letter dated June 3, AMTD Digital was urged to make it clear to investors that controlling shareholder, AMTD Idea Group, could be delisted from the NYSE as early as 2024. Regulators also urged AMTD Digital to disclose the individuals with voting or controlling powers in both AMTD Idea Group and AMTD Group Co. Ltd., the parent company of both companies.

The SEC did not immediately respond to a request for comment.

The twists come as Washington and Beijing seek to break an impasse on scrutiny of US-listed Chinese firms in order not to force companies like Alibaba and Baidu Inc. off US stock exchanges. About 200 Chinese companies could be delisted from US stock exchanges as early as next year.

“For at least 20 years, there has been concern that Chinese companies are not operating to the same level of disclosure and accounting standards that US companies adhere to,” said Howard Fischer, a partner at Moses & Singer and a former SEC chief litigator. “The fact that there is this wild spike in price for no reason that anyone can spot suggests this concern could be well received,” he said of AMTD Digital’s recent volatile trade.

For Hong Kong, the wild rides of its domestic companies are at risk of becoming yet another blemish. Its status as a financial center has tarnished in recent years after Beijing cracked down on freedoms in the city and Covid restrictions sealed it off from the rest of the world.

“Given the current trajectory of US-China relations and the fact that neither side seems ready to throw in the towel on the PCAOB/examination oversight standoff, I would assume there is more reputational damage being done by these factors as the rise and fall of a meme stock, said Jane Moir, research director for Hong Kong and Singapore at the Asian Corporate Governance Association.

While it may not be familiar to investors outside of Hong Kong, it is common for smaller companies in the city to partner with investors to underwrite new shares to ensure a successful debut, along with an implicit promise to raise prices at the outset support, Wocoms Leung said.

Companies that post large profits or losses are also usually tightly controlled by large shareholders and only provide a small free float. AMTD Idea controls 88.7% of AMTD Digital, while Magic Empire’s Chairman and Chief Executive Officer together own 66%.

Investors said the spread of wild stock moves could force US regulators to act.

“This is a complete joke and I expect US regulators will step in to protect the integrity of financial markets,” said Soren Aandahl, founder and chief investment officer of short selling firm Blue Orca Capital LLC, adding that the company has no position and intends to trade these shares.

However, Wocom’s Leung said New York could be more promising for this type of company. US regulators are “less parental” than their Hong Kong counterparts, he said. “It’s a buyer’s market, after all.”

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