China proposed new rules that would require nearly all companies seeking to list in foreign countries to undergo a cybersecurity review, a move that would significantly tighten oversight over its internet giants.
Companies holding data on more than 1 million users must now apply for cybersecurity approval when seeking listings in other nations because of the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments,” the Cyberspace Administration of China said in a statement on Saturday. The cybersecurity review will also look into the potential national security risks from overseas IPOs, it said.
The move announced on Saturday, which confirms a previous report by Bloomberg, is one of the most concrete steps taken yet to restrain the ability of technology firms to raise capital in the U.S. through a so-called Variable Interest Entity model that the likes of Alibaba Group Holding Ltd. to Baidu Inc. and Didi Global Inc. have adopted. Regulators are also considering requiring VIEs like Alibaba that have already gone public to seek approval for additional share offerings in the offshore market, people with knowledge of the matter have said.
The regulator is seeking feedback on the proposed rules, which apply to listings in foreign countries specifically, before implementation. So far this year, 37 Chinese companies have listed in the U.S., surpassing last year’s count, and raised a combined $12.9 billion, according to data compiled by Bloomberg.
“These rules will push more Chinese internet firms to list in Hong Kong instead of in another country, to bypass such a review,” said Feng Chucheng, a partner at research firm Plenum in Beijing. “The one million-user threshold is very low and would basically apply to every internet company aspiring for an IPO.”
Authorities have accelerated a crackdown against overseas listings after Didi was said to push ahead with its debut in June, despite being asked to delay the plans as early as three months ago. The State Council said Tuesday that rules for overseas listings will be revised while publicly traded firms will be held accountable for keeping their data secure.
Even before the rules were announced, some companies that had planned to list in New York pulled their IPOS. On Thursday, Beijing-based LinkDoc Technology Ltd. became the first known company to shelve an IPO in the wake of the newly proposed changes. Since then, it’s been reported that Chinese fitness app Keep and vegetable startup Meicai have both scrapped plans for U.S. listing.
The new rules could impact Chinese tech firms such as TikTok owner ByteDance Ltd. and on-demand logistics and delivery firm Lalamove, which are considering IPOs.
— With assistance by John Liu, Claire Che, and Lucille Liu
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