China Plans to Ban U.S. IPOs for Data-Heavy Tech Firms

China’s stock regulator plans to propose new rules that could thwart internet companies’ plans to list in the U.S.

A trader works June 30 during the IPO for Chinese ride-hailing firm Didi Global Inc on the floor of the New York Stock Exchange in New York City. Beijing plans to propose new rules that would ban Chinese firms with large amounts of sensitive consumer data from going public in the U.S.

China plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S., people familiar with the matter said, a move that is likely to thwart the ambitions of the country’s tech firms to list abroad.

In recent weeks, officials from China’s stock regulator have told some companies and international investors that the new rules would prohibit internet firms holding a swath of user-related data from listing abroad, the people said. The regulators said that the rules target companies seeking foreign initial public offerings via units incorporated outside the country, according to the people.

China Securities Regulatory Commission officials said that companies with less sensitive data, such as those in the pharmaceutical industry, are still likely to receive Chinese regulatory approval for foreign listings, according to the people.

The new rules are likely to help Beijing exert more control over the complex corporate structure that China’s biggest tech companies use to sidestep restrictions on foreign investment. Chinese leaders consider sectors such as the internet, telecommunications and education sensitive because of political or national-security concerns.

Chinese technology giants including Alibaba Group Holding Ltd., Didi Global Inc. and Tencent Holdings Ltd. have used such a corporate structure known as a Variable Interest Entity to attract foreign capital and list offshore.

The CSRC didn’t immediately respond to a request for comment.

Under the new rules, China would also establish a mechanism that requires companies to obtain formal approval for overseas IPOs from a cross-ministry committee that would be set up in the coming months, they said.

Currently, private Chinese companies under the VIE structure aren’t explicitly required to seek approval from the CSRC for U.S. listings, though they would often do so if asked by Chinese officials.

The new rules have yet to be finalized. The CSRC plans to implement them around the fourth quarter, and have asked some companies to hold off on overseas IPOs until then, the people said.

The VIE structure has been vital for the past two decades for Chinese companies to have access to foreign capital, allowing them to register offshore and go public in the U.S. or Hong Kong.

It allows international investors to obtain stakes in Chinese companies’ offshore holding units, which are often registered in places like the Cayman Islands. Those units rely on contracts to control–but not own–the Chinese entities that actually operate the businesses.

The new cross-ministry committee would include members from the CSRC, China’s internet watchdog and other ministries, they said. The Cyberspace Administration of China didn’t immediately respond to a request for comment.

In July, the internet watchdog drafted a revision of a cybersecurity review and clarified that companies holding personal data from at least one million users must apply for such a review ahead of foreign listings. That followed Beijing’s announcement of cybersecurity reviews into Chinese companies that had recently listed overseas, including ride-hailing giant Didi.

In some of the recent meetings with companies and international investors, CSRC officials complained about the U.S. Securities and Exchange Commission’s plan to increase scrutiny of Chinese companies selling shares in the U.S., calling their approach heavy-handed, according to people familiar with the matter. The Chinese officials said some of the SEC actions have deepened the distrust between the two countries.

Chinese officials also complained in the meetings that the SEC didn’t reply to some of their proposals regarding the use of audit documents, the people said. The audit documents have been a centerpiece of the discussion between the two regulators and triggered Didi’s recent data security investigation.

The SEC didn’t immediately respond to a request for comment.

Last month, SEC Chairman Gary Gensler said he had asked agency staff to seek specific disclosures from Chinese firms before signing off on regulatory filings that precede an IPO. He also called for additional reviews of filings for companies with significant China-based operations.

It isn’t clear whether the new rules would affect companies that are already listed on a foreign market under the VIE structure. In recent years, some New York-listed Chinese companies like search-engine operator Baidu Inc. have done secondary listings in Hong Kong amid rising tensions between Beijing and Washington.

In late July, the Communist Party’s Politburo said in a meeting chaired by President Xi Jinping that the system for approving overseas listings by companies will be improved to “prevent and resolve related risks,” state media reported. The report didn’t offer further details.