This video can be viewed at the below link.[1]

When American investors think we’re investing in a Chinese company, it’s much more likely that we’re actually investing in a company in the Cayman Islands.

This is Gary Gensler, and welcome back to Office Hours.

In certain sectors, like technology and the internet, the government of China doesn’t actually allow ownership investment in Chinese companies from people outside China.

So to get around this, China-based operating companies establish contracts with shell companies in other countries. Those shell companies then raise money on U.S. exchanges.

So when you think you’re investing in a Chinese company, you’re more than likely actually investing in a shell company in the Caymans or another part of the world.

Now, the Cayman Islands are beautiful. You can swim with the turtles, swim with the stingrays. It’s really fun.

But, on the other hand, investing in a shell company in the Caymans is different than investing directly in a company in China.

So I’ve asked staff that we take a pause, for now, on such listings of shell company issuers associated with China-based operating companies. I’ve asked the SEC staff to ensure that the companies provide full and fair disclosure that what we’re investing in is actually a shell company in the Caymans.

That means disclosing what money is flowing between the Caymans and China. That means disclosing the political and regulatory risk that the government of China could—as they’ve done a number of times recently—significantly change the rules in the middle of the game for that  operating company in China, and for you as an investor in the Caymans’ company far away.

Further, we have a concept here in the U.S., embedded in our laws, that to protect the public in investing, the company’s financials are audited.

Further, as part of this basic bargain, the company’s auditors have to be willing to be inspected. We have somebody looking out for you—in essence auditing the auditors.

But you see the government of China really hasn’t allowed that to happen for the last 17 years.

And Congress acted to address this on a bipartisan basis last year, and we at the SEC are working with the Public Company Accounting Oversight Board to implement that.  

If the auditors of Chinese operating companies don’t open up their books and records in the next three years, the companies — Cayman or Chinese — won’t be able to be listed here in the U.S.

This is important, because without being able to look at the books and records and audit the auditors, so to speak, you’re more at risk.

I think companies should have to disclose this important information to American investors so that we can make informed decisions about where to put our hard-earned money.