China tightens rules on foreign IPOs in fresh blow to tech firms

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China has proposed new rules that would require nearly all companies seeking listing in foreign countries to undergo a cybersecurity review, a move that would significantly tighten oversight of its internet giants.

Companies that hold data on more than one million users must now apply for cybersecurity approval when searching for listings in other countries due to the risk of “such data and personal information being affected, controlled and maliciously exploited by foreign governments,” according to the Cyberspace Administration at China said in a statement on Saturday. She said the cybersecurity review would also look at potential national security risks from IPOs abroad.

The move announced on Saturday, which confirms an earlier report by Bloomberg, is one of the most concrete steps taken so far to restrict tech companies’ ability to raise capital in the United States through the so-called Alibaba-like variable interest entity model they have adopted. Baidu Group Limited Holdings and Didi Global Corporation. Regulators are also considering asking VIEs such as Alibaba that have already been rolled out to the public to get approval for additional share offerings in the overseas market, people familiar with the matter said.

The regulator is seeking feedback on the proposed rules, which specifically apply to listings in foreign countries, prior to implementation. So far this year, 37 Chinese companies have been listed in the United States, outpacing last year’s number, and raised $12.9 billion, according to data compiled by Bloomberg.

“These rules will push more Chinese internet companies to list in Hong Kong rather than another country, to bypass such a review,” said Feng Chucheng, partner at research firm Plenum in Beijing. “The million-user threshold is very low and will apply essentially to every internet company that aspires to go public.”

Authorities have accelerated a crackdown on the overseas listing after Didi was said to be going ahead with its debut in June, despite being asked to delay plans as early as three months ago. The State Council said Tuesday that rules for offshore listings will be reviewed while publicly traded companies will be held accountable for keeping their data safe.

Even before the rules were announced, some companies that were planning to list in New York withdrew their IPOS. On Thursday, LinkDoc Technology Ltd. The Beijing-based company is the first well-known company to suspend an IPO in the wake of the newly proposed changes. Since then, it has been reported that Chinese fitness app Keep and vegetarian startup Meicai have canceled plans to list in the United States.

The new rules could affect Chinese technology companies such as TikTok owner ByteDance and on-demand logistics and delivery company Lalamove, which are considering initial public offerings.

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