Chairman Jay Clayton during an open meeting of the U.S. Securities and Exchange Commission, on June 5, 2019. Photo: Diego M. Radzinschi/ALM

In late April, U.S. Securities and Exchange Commission chair Jay Clayton and William Duhnke, chair of the Public Company Accounting Oversight Board, issued a joint statement warning investors of the risks of investing in companies from emerging markets. Although the document wasn't specific, it's clear that the duo are really concerned about one particular emerging market: China.

The day after releasing the statement, Clayton, who before being appointed by President Donald Trump to run the SEC was a longtime Sullivan & Cromwell partner and advised on the largest-ever U.S. initial public offering from China, Alibaba's 2014 listing, went on Fox Business to reiterate the warning, stressing in particular that the oversight board's inability to monitor Chinese companies' books compounds the risk.

China is currently the only jurisdiction refusing to subject its companies' accounting records to the board's oversight. Last year, a bipartisan bill dubbed the Equitable Act, sponsored by Republican senator and longtime China hawk Marco Rubio, was put before Congress. It would delist companies that refuse to let the board review their financial statements. China currently says Chinese companies' financial records are state secrets and are prohibited from leaving the country.

All this went from a rather abstract threat—Chinese companies have gained significant momentum from U.S. investors since Alibaba's blockbuster IPO—to a tangible risk in April when NASDAQ-listed Luckin Coffee admitted to fabricating $310 million worth of sales in 2019. The fraud couldn't have come at a worse time. Not only are U.S.-China relations facing challenges in trade, technology and other economic realms, but the coronavirus pandemic that initially broke out in China is further straining what is already a deteriorating relationship.

It is unclear now how soon U.S.-listed Chinese companies will facing the threat of being delisted. There are currently over 150 Chinese companies listed on U.S. exchanges; many of them went public with the help of major U.S. banks. But the immediate impact of the Luckin fraud and the administration's distrust of Chinese entities is likely to be destructive to U.S. listings from China.

U.S. listings work is one of the few areas where U.S. law firms still have something close to a monopoly when it comes to Chinese clients. Naturally, the work is more lucrative than Hong Kong listings, which are much more competitive and for which firms are subject to a capped fee. The five years since 2014, when Alibaba listed on the New York Stock Exchange, saw a surge of Chinese listings in the U.S.—more than two-thirds of U.S.-listed Chinese companies went public during that period. Each of 2018 and 2019 had more than 30 Chinese issuers listed on U.S. exchanges.

And the legal work of these listings was carried out by an incredible concentration of elite firms. Seven firms—Simpson Thacher & Bartlett; Latham & Watkins; Skadden, Arps, Slate, Meagher & Flom; Kirkland & Ellis; Davis Polk & Wardwell; Cleary Gottlieb Steen & Hamilton; and Wilson Sonsini Goodrich & Rosati—held 83% of U.S. counsel roles for the 32 Chinese listings in 2018. Last year, that group plus O'Melveny & Myers landed 58% of U.S. counsel roles for all listings from China. Skadden alone worked on 25 such listings in 2018 and 2019, followed by Davis Polk at 17 and Simpson Thacher at 15.

Lawyers and investors alike share a gloomy outlook for Chinese IPOs in the U.S. this year, especially after Clayton's television warning. Alibaba's secondary listing in Hong Kong last year gave some hope; more companies are expected to follow suit. But that group is small. Fewer than two dozen companies currently qualify for a secondary Hong Kong listing.

There are still Chinese companies seeking to list in the U.S.—two filed applications as recently as April, and Kirkland, Wilson Sonsini and Davis Polk are advising. Individual listings may still be successful, but for those firms and others like them, the next wave may be a long way off.

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