Over the years, the U.S. Securities and Exchange Commission (SEC) has exempted foreign private issuers (FPIs)—foreign companies traded on U.S. exchanges—from certain U.S. securities laws in order to attract high-quality companies from companies with robust listing standards. Today, the largest number of FPIs are headquartered in China, many of which are incorporated in the Cayman Islands. We review evidence demonstrating the extremely poor financial performance and high-risk characteristics of these firms. We also review evidence demonstrating elevated levels of insider abuse.
We ask:
- Why are FPIs subject to substantially lower disclosure requirements than U.S. companies?
- How should the SEC distinguish between countries whose listing standards can be relied upon to offer fair protection and those that cannot?
- How can listing exchanges screen out companies likely to violate securities law before they are allowed to list?
- Should exchanges bear responsibilities for market manipulation in cases where they ignore obvious red flags prior to listing a security?