The Trump administration, Congress, the Securities and Exchange Commission (SEC) and Nasdaq have all recently announced initiatives focusing on regulatory reform for non-U.S. companies (also known as foreign private issuers) listing their shares on U.S. exchanges. While the primary focus of these reforms has been on Chinese companies, they could impact European companies, as well as companies operating in emerging markets.
The SEC announced its intention to hold a roundtable this summer to discuss regulatory oversight of emerging markets companies (including companies with significant emerging markets operations), focusing on disclosure, financial reporting, auditing standards, management oversight, regulatory compliance and enforcement, remedial actions and the obligations of professionals supporting companies selling securities to the U.S. public. The SEC is particularly focused on its ability to inspect for compliance with and enforce its rules and regulations in countries, like China, where "significant barriers to effective inspections and regulatory oversight continue to exist," but also in countries that do not have cooperation agreements with the SEC or the Public Company Accounting Oversight Board (PCAOB). Currently, neither France nor Belgium have effective PCAOB cooperation agreements, preventing PCAOB from inspecting registered audit firms in those countries. PCAOB maintains a list of public companies whose PCAOB-registered auditor is located in a jurisdiction where obstacles to PCAOB inspections exist. Presently, companies on PCAOB's list are not penalized; however, the reform proposals discussed below or any new legislation could result in further measures that could affect the companies on PCAOB's list.
Companies listing their shares on U.S. exchanges must produce financial statements audited by independent public accounting firms registered with PCAOB. Gaining and maintaining PCAOB registration requires that PCAOB have an ability to inspect registered auditors to assess their compliance with U.S. legal requirements and PCAOB professional standards. While many countries have cooperative bilateral relationships between their national audit regulators and PCAOB, many emerging market countries and the following European countries currently do not: Belgium and France. If a country's auditor regulating body ceases cooperating with PCAOB in the future, companies providing audit reports from auditors in those countries may be similarly impacted by the new regulatory reforms.
Nasdaq has responded with three rule proposals for enhanced listing standards for companies from 'Restrictive Market' countries, which Nasdaq defines as a company established or primarily operating in "a jurisdiction that has secrecy laws, blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S.-listed companies". While it appears these rule proposals are directed at Chinese companies, Belgian and French companies could be impacted by the proposals, if adopted as proposed.
Nasdaq's first proposal is a new listing standard requiring companies in Restrictive Markets to either (i) have and maintain a senior management member or director with previous experience at a U.S.-listed public company, or other experience, training or background establishing the person's general familiarity with the U.S. public company regulatory and reporting requirements, or (ii) retain on an ongoing basis an acceptable advisor providing equivalent guidance. The rule will apply prospectively to newly listed Nasdaq companies but will not be applied to companies in Restrictive Markets already listed on Nasdaq.
Nasdaq's second proposal addresses companies in Restrictive Markets with low market caps, thinly traded securities or an illiquid Nasdaq secondary trading market as compared with its primary market, resulting in higher volatility as compared with its peers. To address Nasdaq's concern that a small IPO offering size may not ensure sufficient liquidity to support primary or secondary market trading, Nasdaq proposes to require Restrictive Market companies listing shares in a primary Nasdaq market offering to do so pursuant to an underwritten firm commitment offering to U.S. investors that will generate gross proceeds of at least $25 million or represent at least 25% of the value of the company's post-IPO global public float, whichever is lower. The rule proposal applies the requirement to certain direct listings, SPACs, reverse mergers and business combinations that do not involve offerings but result in a Nasdaq-listed Restrictive Market company.
Nasdaq's third proposal addresses the SEC's and PCAOB's concern that certain companies impose legal barriers over the SEC's and PCAOB's access to information that they believe impedes effective regulatory oversight of U.S.-listed companies by preventing PCAOB from inspecting the audit work and audit practices of auditors operating in Restrictive Market jurisdictions. The proposed rule changes, which would apply to all listed and newly-listed Restrictive Market companies, set out discretionary factors that Nasdaq may consider when determining whether to apply more stringent criteria when assessing whether a company's auditor satisfies Nasdaq's listing criteria. These factors include whether the auditor has been inspected by PCAOB and cooperated with PCAOB's inspection requests; whether PCAOB identified significant deficiencies in the auditor's conduct, training program or quality controls that have not been remediated; whether the auditor can demonstrate that it has adequate personnel and resources experienced with U.S. listed companies in the company's industry and geography; and whether a non-U.S. auditor is part of a global network or other affiliation of auditors sharing resources and experience.
The Nasdaq rule proposals, if adopted, will primarily impact smaller company listings and thinly traded secondary market listings from emerging market countries. It remains to be seen how these changes will impact market participants, but they could result in fewer non-U.S. growth companies accessing the U.S. markets and greater focus on other markets for capital raising.
 SEC Statement Regarding Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (April 21, 2020), available at: https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting; see also Trump eyes crackdown of NYSE-listed Chinese companies (May 14, 2020), available at: https://www.foxbusiness.com/markets/trump-eyes-crackdown-of-nyse-listed-chinese-companies; and Senate Bill 945, the Holding Foreign Companies Accountable Act (May 20, 2020), available at https://www.congress.gov/bill/116th-congress/senate-bill/945.
 See our recent note on this subject: S. 945 Introduces New Disclosure Requirements for U.S.-Listed Chinese Companies and Possible Delisting for Non-Compliance (May 28, 2020), available at: https://www.orrick.com/Insights/2020/05/S945-Introduces-New-Disclosure-Requirements-for-US-Listed-Chinese-Companies.
 SEC Statement Announcing SEC Staff Roundtable on Emerging Markets (May 4, 2020), available at: https://www.sec.gov/news/public-statement/statement-clayton-roundtable-emerging-markets.
 See note 3.
 For a list of these listed companies and audit firms, see https://pcaobus.org/International/Inspections/Pages/IssuerClientsWithoutAccess.aspx.
 Nasdaq proposal to adopt a new requirement related to the qualification of management for certain companies. SR-NASDAQ-2020-026 (May 18, 2020), available at: https://listingcenter.nasdaq.com/assets/rulebook/nasdaq/filings/SR-NASDAQ-2020-026.pdf.
 Nasdaq proposal to apply additional initial listing criteria for companies primarily operating in a jurisdiction that has secrecy laws, blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S.-listed companies. SR-NASDAQ-2020-027 (May 18, 2020), available at: https://listingcenter.nasdaq.com/assets/rulebook/nasdaq/filings/SR-NASDAQ-2020-027.pdf.
 Nasdaq proposal to apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company's auditor. SR-NASDAQ-2020-028 (May 18, 2020), available at: https://listingcenter.nasdaq.com/assets/rulebook/nasdaq/filings/SR-NASDAQ-2020-028.pdf.