Although the JOBS Act was passed just over a year ago to facilitate capital raising in the United States, allegations of accounting fraud, diminished investor confidence and a regulatory impasse over audit work papers have caused many Chinese companies to exit the U.S. capital markets in the past two years. A large number of Chinese companies went public in the United States in 2010 through IPOs or reverse mergers, but in 2011, the trend began to reverse. In 2012, only two Chinese companies went public in the United States; so far in 2013, only one Chinese company has filed an IPO registration statement.

In addition to the relatively weak demand for stocks of Chinese companies listed in the United States, SEC investigations of numerous U.S.-listed Chinese companies in respect of possible accounting wrongdoing have caused further difficulties. The Dodd-Frank Act authorizes U.S. regulators to obtain the relevant audit work papers, but Chinese audit firms have refused to provide these papers to the U.S. Public Company Accounting Oversight Board (PCAOB), which oversees the public company auditing profession, on the basis that doing so would violate Chinese state secrecy laws. Late last year, the SEC charged the Chinese affiliates of each of the Big Four accounting firms with violating U.S. securities laws. The audit firms’ failure to provide their work papers threatens their registration with the PCAOB, which in turn means that the financial statements of the Chinese companies that they audit could not legally be filed with the SEC. Without SEC-compliant financial statements, these companies ultimately cannot remain listed on U.S. stock exchanges. The PCAOB had originally set December 31, 2012 as the deadline for deregistering all the delinquent audit firms; so far, that extreme step has not been taken. The U.S. and Chinese regulators recently signed a Memorandum of Understanding that establishes a framework for the exchange of audit documents, which the PCAOB calls an “important step toward cross-border enforcement cooperation.” The ultimate effectiveness of the non-binding MOU will depend partly on the parties’ good faith in adhering to its terms as individual cases arise. In the meantime, according to the PCAOB, since 2010 approximately 126 Chinese issuers have been delisted from U.S. stock exchanges or “gone dark” – that is, stopped filing reports with the SEC.

There is some measure of irony in this situation occurring simultaneously with the implementation of the JOBS Act, since the express purpose of that legislation is to facilitate capital formation in the United States by smaller emerging companies, both U.S. and foreign. Three Chinese companies that have gone public in the United States since the JOBS Act was enacted qualified as “emerging growth companies” (EGCs) and were eligible to take advantage of less onerous SEC rules with respect to disclosure and corporate governance for up to five years post-IPO; it is likely that other Chinese companies would also qualify as EGCs but may no longer see the U.S. markets as appealing.