NASDAQ digs into investor identities as due diligence requirements for underwriters expand

All eyes are on NASDAQ as they increase scrutiny on companies filing to list on the ubiquitous exchange, the most active stock trading venue by volume in the U.S. NASDAQ has tightened its vetting process and approach when it comes to small to midsize Chinese companies wanting to join the ranks. While these measures bring delays and increased paperwork, this could be a step in the right direction for NASDAQ, with heightened due diligence ultimately resulting in a less volatile market and preventing so-called pump and dump stocks from entering the exchange. 

According to Nikkei Asia, “the tech-focused Nasdaq has questioned the identity and background of investors before the companies' planned IPOs, a move that has extended the listing process by weeks or months.” In addition to conducting background checks on the company and its executives and directors, it looks as though NASDAQ might start asking underwriters to confirm the identity of major investors. The new requirements would mandate Chinese companies to provide proof of citizenship for IPO buyers to confirm the majority are in fact U.S. citizens. Currently about 80% of the buyers are U.S. citizens. 

The exchange is also expanding its due diligence by implementing a rule that all principal underwriters must be a member of the NASDAQ, which operates under its own set of regulations. NASDAQ members are subject to net income and bid price minimums, fee caps, and requirements around shareholder meetings, board of directors, and code of conduct.  

Why target China specifically? While the new safeguards and scrutiny measures apply globally, Chinese companies have come into question based on recent price movements and suspicious deals that have caught regulators’ attention. For example, a Hong Kong based financial company, AMTD Digital, initially listed on the New York Stock Exchange at an IPO price of $7.80 in July 2022 catapulted to $2,555 weeks later only to crash in the subsequent weeks. This type of price fluctuation creates volatility regulators are determined to curtail. 

And while many Chinese companies have slowed their roll to file for NASDAQ due to COVID, new Chinese regulations put in place earlier this year, and anxiety around interest rates, others wish to accelerate their listing to get a jump on U.S. elections which could further shift and tighten regulations. On August 8th, NASDAQ requested an automatic suspension for any company whose share price stays below $1 for a year or falls below $1 after completing a reverse stock split. They are currently awaiting approval by the U.S. SEC.  An uptick in due diligence and heightened vetting standards will continue as markets move faster and smarter. Gone are the days of turning a blind eye to the backgrounds of key players in the global economy. Inefficiencies and fraud bleed billions of dollars annually. This is money that could be put back into our businesses. Have you ensured your partners and colleagues are up to standard? Schedule your free demo with Intelligo today and follow NASDAQs lead in cleaning house.