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Leading Edge

Writer's picture: Peter K F Cheung SBSPeter K F Cheung SBS

Updated: Dec 12, 2020

  1. FADE IN.


  2. Act 1


  3. INT. SLEEPING ROOM - MORNING


  4. Checking the phone diary, PETER remembers something.


  5. PETER (V.O.): I've registered a Webinar on securities issues.


  6. Pausing.


  7. PETER (V.O.) (Cont'd): I'm curious about securities regulation in US. How come Mainland Chinese private firms loved to conduct their initial public offerings (IPOs) on the New York Stock Exchange? Not London and not Hong Kong.


  8. Pausing.


  9. PETER (V.O.) (Cont'd): I still want to drive IP securitisation.


  10. Finding a link on his phone, Peter joins a Webinar. SOMEONE on screen is talking about PCAOB.


  11. PETER (V.O.) (Cont'd): What's that?


  12. Soon, the Webinar ends. It's before 10.am.


  13. PETER (V.O.) (Cont'd): Okay. the professor-speakers are from US and China.


  14. Act 2


  15. INT. STUDY - LATER


  16. Surfing the web with his phone, Peter researches.


  17. PETER (V.O.): Over 250 China-based firms have accessed to the US capital markets through reverse merger.


  18. Pausing.


  19. PETER (V.O.) (Cont'd): Under the legal vehicle, an existing US public shell company acquires an existing Mainland Chinese operating company.


  20. Researching.


  21. PETER (V.O.)(Cont'd): The US public shell company with little or no assets has registered securities compliant with the US Securities Exchange Act 1934.


  22. Researching.


  23. PETER (V.O.)(Cont'd): Then, the shareholders of the Mainland Chinese company exchange their shares for a large majority of the shell company's shares, and the shell company survives the merger.


  24. Researching.


  25. PETER (V.O.)(Cont'd): PCAOB is Public Office Accounting Oversight Board. It was established under the Sarbanes & Oxley Act 2002 in the wake of high-profile accounting scandals.


  26. Researching.


  27. PETER (V.O.)(Cont'd): The US Securities and Exchange Commission oversees the PCAOB. PCAOB conducts regular inspections of all US and foreign firms that issue audits to US-listed companies.


  28. Researching.


  29. PETER (V.O.) (Cont'd): PCAOB has a Memorandum of Understanding on Enforcement Cooperation with Mainland China's Securities Regulatory Commission 2013. But it's said that PCAOB hasn't generally been able to do inspections in Mainland China.


  30. Researching.


  31. PETER (V.O.) (Cont'd): In its website, PCAOB lists firms including those Mainland China and Hong Kong-based ones that it hasn't inspected.


  32. Thinking.


  33. PETER (V.O.) (Cont'd): Investors beware.


  34. Researching.


  35. PETER (V.O.) (Cont'd): Many Mainland Chinese-based firms have their domiciles in Cayman Islands or British Virgin Islands, rather than in a US state. They're foreign private issuer (FPI). Under US law, FPIs only need to file less-detailed annual reports and have other convenience.


  36. Pausing.


  37. PETER (V.O.) (Cont'd): That's the bait to lure them to list in US.

  38. Researching.


  39. PETER (V.O.) (Cont'd): It's believed that the Cayman corporate law is less protective of shareholders than US' corporate law. And Cayman's procedure is said to be defendant-friendly.


  40. Researching.


  41. PETER (V.O.) (Cont'd): What's that procedural barrier? ...Foss v Harbottle?


  42. Recalling.


  43. PETER (V.O.) (Cont'd): That was a hallmark British precedent I studied back in 1984.


  44. Researching.


  45. PETER (V.O.) (Cont'd): The case decided that derivative claims are owned and controlled by the company, not its shareholders. And a shareholder isn't permitted to bring a derivative action on behalf of the company, unless there is fraud on the minority.


  46. Thinking.


  47. PETER (V.O.) (Cont'd): The barrier applies in London as well as in Hong Kong.


  48. Researching.


  49. PETER (V.O.) (Cont'd): Some Mainland-China-based firms that conduct IPOs in US also list their shares in the Hong Kong Stock Exchange, complying its listing rules and the enforcement of the Hong Kong Securities and Future's Commission.


  50. Researching.


  51. PETER (V.O.) (Cont'd): US and Hong Kong had an Agreement on the Surrender of Fugitive Offenders in 1996. But it was suspended by US in August 2020 due to the President's Executive Order on Hong Kong Normalization.


  52. Thinking.


  53. PETER (V.O.) (Cont'd): The result: Investors in US aren't that well protected. And US Government has something in the pipeline.


  54. Act 3


  55. INT. STUDY - CONTINOUS


  56. The TV is carrying a story: ...strong possibility of a no-deal Brexit...Australian-style of trade arrangement...


  57. PETER (V.O.): That's the price tag for British politics. Britain is diluting its brand. It isn't friendly to China too.


  58. Pausing.


  59. PETER (V.O.)(Cont'd): If the Mainland-Chinese based FPIs have to flee US, Hong Kong should become the safe haven outside of Mainland China.


  60. Thinking.


  61. PETER (V.O.)(Cont'd): For Mainland Chinese firms contemplating to conduct their listing outside of Mainland China, they will come to Hong Kong direct.


  62. Pausing.


  63. PETER (V.O.): In terms of their international financing, Hong Kong will have a leading edge.


  64. INT. SLEEPING ROOM - NIGHT


  65. Lying in bed, Peter is listening to music.


  66. PETER (V.O.): For IP securitization, Hong Kong should be the value centre. All the resources will gravitate towards it, I believe.


  67. FADE OUT.


  68. THE END


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