The House on February 4, 2022, voted 222 to 210 to pass a sweeping bill designed to strengthen U.S. economic competition with China, containing a provision that would accelerate an upcoming deadline to prohibit U.S. trading of public companies with uninspected audits.
H.R. 4521, the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (America COMPETES) Act of 2022, also includes an amendment that would require companies raising capital through certain exemptions to provide information to the SEC on beneficial ownership and use of proceeds, among other data.
Another provision would require the Treasury Department, in consultation with the SEC and Secretary of State, to report to Congress on capital raising activities in the U.S. by Chinese companies, as well non-Chinese companies “that predominately invest in companies incorporated in the” People’s Republic of China (PRC).
The America COMPETES Act, which passed on a nearly party-line vote, represents the House’s response to a Senate measure, S. 1260, United States Innovation and Competition Act, which passed the chamber in June 2021 with greater bipartisan support. The House and Senate will now need to hammer out differences in the two bills.
Republicans remain broadly opposed to the House version. Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, in a statement following the bill’s passage warned that “Congressional Democrats are more focused on stifling American innovation than confronting the generational threat posed by the Chinese Communist Party.”
The trading ban acceleration comes directly from H.R. 6285, the Accelerating Holding Foreign Companies Accountable Act, a measure introduced in the House in December 2021 by Rep. Brad Sherman, a California Democrat who chairs the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.
The acceleration bill ratchets up existing pressure created by the Holding Foreign Companies Accountable Act (HFCA Act), a 2020 law designed to ban U.S. trading in companies whose audits cannot be inspected by the PCAOB for three consecutive years, as well as mandate new disclosures around foreign government control. The HFCA Act addressed a protracted stand-off between the PCAOB and the Chinese government over the latter’s refusal to allow inspections of audits of U.S.-listed companies from China and Hong Kong, which has resulted in widespread ongoing violations of the Sarbanes-Oxley Act of 2002.
That three-year deadline would be shortened to two years under the Accelerating Holding Foreign Companies Accountable Act.
The Senate passed the standalone acceleration bill in June 2021, sponsored by Sen. John Kennedy, a Louisiana Republican.
Sherman also sponsored the America COMPETES Act amendment mandating the new SEC filing requirements, which was included in a bundle of other Democratic amendments. The amendment does not dictate whether the information would be publicly disclosed or kept confidential.
Sherman’s amendment would apply the new filing requirements to companies using the exemptions from registration in Rule 506(b) in Regulation D under the Securities Act of 1933, as well as Rule 144A and Regulation S, to raise either $25 million or more in a single issuance or $50 million or more over a year period.
Those companies would be required to file with the commission information on the identity and place of incorporation of the issuer; the total amount and net proceeds; the principal beneficial owners; and the intended use of proceeds, including each country and industry in which the issuer plans to invest the proceeds.
Investor protection advocates backed the Sherman amendment, which Americans for Financial Reform praised for closing “some of the gaps that allow covered companies to escape from financial reporting requirements with the Securities and Exchange Commission” through the exemptions.
“This would increase transparency and accountability,” the group said in February 2 letter.
Under the provision, the SEC would be directed to issue and revise rules, regulations and forms as necessary to carry out the changes, and would be specifically required to issue rules “to set conditions for future use of the exemptions for those issuers who do not comply with the disclosure requirements of this section.”
The changes would apply 270 days after the bill’s enactment.
“The inclusion of these important pieces of legislation in the America COMPETES Act represents an important step forward in our ability to understand and manage the aggressive capital raising activity we have seen from China-based companies in U.S. markets,” Sherman said in a statement. “Together, these provisions will ensure that, in our public markets, Chinese companies are playing by the same rules of the road as everyone else, and in our private markets regulators have a clear understanding of what is going on.”
This article originally appeared in the February 7, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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