In a bid to prevent the volatility that followed several deals in 2022, Nasdaq Inc. (NASDAQ:NDAQ) is reportedly increasing its scrutiny of small initial public offerings from China and Hong Kong.
What Happened: Nasdaq is putting IPO applicants from China and Hong Kong through a rigorous vetting process, Bloomberg reported on Thursday, citing people familiar with the matter.
The focus is on the identity and independence of the pre-IPO investors selling shares in the listings. This move comes after several micro-cap stocks from China and Hong Kong experienced extreme volatility in their 2022 trading debuts, followed by significant crashes.
The increased scrutiny has not resulted in any halted IPOs yet, but it has extended the process by weeks, adding uncertainty and costs to the usual quick review. This has affected around 20 companies from China and Hong Kong that have listed on Nasdaq this year, raising a combined $195 million.
As part of the review, Nasdaq officials are asking about the backgrounds of the selling shareholders, their connections and history with the company and with each other. They are also demanding documentation to support the valuation of the private shares and bank documents to prove that money actually changed hands in the purchase.
According to the report, demonstrating investor independence is crucial to dispeling any concerns of planned pump-and-dump transactions soon after listing. The exchange is also trying to guarantee that most of these Asia-originated IPOs be invested in by U.S. citizens.
Nasdaq did not immediately respond to Benzinga's request for comment.
The increased questioning follows the collapse of numerous Chinese and Hong Kong micro-cap firms, such as AMTD Digital Inc. and Addentax Group Corp., in the weeks that followed their trading debuts, which saw gains of up to 32,000%. At the time, that led to a wave of interrogations in New York.
Why It Matters: The increased scrutiny by Nasdaq comes amid a series of reforms and financial measures in China aimed at stabilizing and boosting its stock market. On Wednesday, the China Securities Regulatory Commission announced reforms to the Star Market, Shanghai’s Nasdaq-style tech board, to enhance the quality of listed companies and promote technological innovation. These reforms include changes to the primary market pricing mechanism and increased support for mergers and acquisitions.
Earlier this year, China considered a $278 billion stock market rescue package to address a significant downturn. This package aimed to stabilize the market by mobilizing funds from state-owned enterprises and local funds to purchase shares through the Hong Kong exchange link.
Moreover, global investors have shown renewed optimism towards Chinese equities. In March, international funds like Norway's Skagen AS and Boston Partners turned bullish on Chinese stocks, citing attractive valuations and improved earnings. This shift in sentiment indicated a potential recovery in investor confidence in the Chinese stock market.
Price Action: Nasdaq Inc. closed at $58.99 on Tuesday, marking a gain of 0.61% for the day. In after-hours trading, the price decreased by 0.55%. Over the past year, Nasdaq Inc. has gained 14.28%, according to data from Benzinga Pro.
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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
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