The U.S. Wants More IPOs. A Chinese Exchange Bid Will Test How Badly.

Updated on
  • SEC faces deadline to approve sale of Chicago Stock Exchange
  • Some U.S. lawmakers oppose buyout by Chinese conglomerate

One Financial Place, which houses the Chicago Stock Exchange, in Chicago, Ill.

Photograher: Raymond Boyd/Getty Images

As a former Wall Street deals lawyer, Jay Clayton has been clear that he wants to make it easier for companies to raise money through stock sales now that he runs the U.S. Securities and Exchange Commission.

But he may have hoped his first test of that effort wasn’t so politically fraught: It involves a Chinese conglomerate with little experience in the financial industry leading a group of investors who are vying to buy the Chicago Stock Exchange. 

While the bidders’ goal is to transform the sleepy exchange into a destination for small companies to list their shares, a bipartisan group of lawmakers urged Clayton, the SEC’s chairman, to reject the offer last month. And even President Donald Trump criticized the planned acquisition on the campaign trail, citing it as an example of America losing its competitive edge.

The SEC, which oversees the nation’s exchanges, faces a Wednesday deadline on whether to approve the takeover. The main buyer is China’s Chongqing Casin Enterprise Group Co., a company that invests in real estate and operates sewage treatment plants. A key objective is to help Chinese-based companies list their shares in the U.S.  

Read More: Chicago Wants to Be a Hub for China Stock Trading

The acquisition’s backers, including the Chicago Stock Exchange, say the new owners will provide a much-needed venue for initial public offerings, which have been falling in the U.S. for two decades. Opponents argue that regulators will have limited visibility into how a foreign entity is running the business, and that the Chicago exchange could become a destination where Chinese companies with questionable financials take advantage of U.S. investors.

“There are a number of concerns about the deal,” said Spencer Mindlin, an analyst who focuses on capital markets at the research and consulting firm Aite Group. “It might end up being more about the optics.”

Clayton and the Chicago Stock Exchange declined to comment through spokesmen. When asked whether the Trump administration has a view on Casin’s bid, the White House also declined to comment.

The buyout could remake the Chicago Stock Exchange, where daily trading volumes for years have represented less than 0.5 percent of total U.S. transactions, according to data compiled by Bloomberg. 

In December, it passed muster with the Committee on Foreign Investment in the U.S., which evaluates the security risk of takeovers by foreign companies. The SEC has delayed making a decision, using the maximum amount of time legally permitted to review Casin’s proposal.

‘Serious Issue’

Clayton, who became SEC chairman in May, hasn’t weighed in on the deal publicly. However, he has said that the reduction in the number of public U.S. companies is “a serious issue for our markets and the country.” As an attorney working in private practice, his career highlights included working on Alibaba Group Holding Ltd.’s record U.S. IPO.

The SEC’s deadline to make a decision on the Chicago Stock Exchange comes as political and economic tensions between Washington and Beijing rise. 

In a July 10 letter, a group of 11 House lawmakers led by Representative Robert Pittenger raised concerns that the SEC won’t be able to monitor any relationship between Casin and the Chinese government, including conflicts of interest. As a result, a foreign power may be able to exert undue influence over a major U.S. exchange, the lawmakers wrote to Clayton and other SEC commissioners.

“It’s very naive for anyone to say the Chinese would not have influence” if the buyout is approved, Pittenger, a North Carolina Republican, said in a Monday interview. “I’m trying to protect American interests, particularly related to our security concerns.”

Fear-Mongering

The Chicago Stock Exchange has repeatedly dismissed similar arguments as fear-mongering, adding that any national security issues would have been flagged by CFIUS. The exchange has also said there is no connection between Casin and the Chinese government.

Still, establishing a new pathway for Chinese companies to sell shares in the U.S. could pose other risks. In June 2011, the SEC issued a bulletin alerting investors to the dangers of Chinese companies buying firms already listed in the U.S. to get around the costs and regulatory burdens of an IPO. The agency took action after hundreds of companies raised money this way, despite the fact that some were frauds and others weren’t adhering to U.S. accounting requirements.

Cromwell Coulson, the chief executive offer of OTC Markets Group, isn’t very concerned because he doesn’t believe the SEC would allow any buyer of the Chicago Stock Exchange to damage the integrity of U.S. markets.

“The listing process on national security exchanges, while expensive and painful for companies, is also a gold standard across the world,” Coulson said. “Regulators are not going to be looking for regulated national exchanges to diminish the quality of that product.”

— With assistance by Charlotte Chilton, and Toluse Olorunnipa

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