U.S. regulators rejected a bid by a Chinese-linked consortium to take over the Chicago Stock Exchange, extinguishing an ambitious dream of starting an international listing venue from a minuscule market.
[Annie Massa | February 15, 2018 | Bloomberg]
The Securities and Exchange Commission’s decision ends a process that lasted two years and took place in the crucible of a presidential campaign and a new administration that’s expressed skepticism over China’s policy motives. Now that it’s over, the exchange founded in 1882 is left handling less than 1 percent of daily U.S. stock trading, missing out on an audacious project to court smaller companies, particularly those based in China.
In a document posted on the SEC’s website Thursday, the regulator said the deal didn’t comply with U.S. rules governing stock exchanges. The SEC said it couldn’t resolve concerns about the proposed ownership structure, which would’ve given 29 percent of the company to a China-based shareholder. The Chicago Stock Exchange couldn’t supply documents the regulator requested about relationships among the proposed buyers, according to the SEC.
Will Ruben, a spokesman for the Chicago Stock Exchange, declined to comment.
Though the transaction was relatively small, it drew outsize attention because of the country of origin of the lead investor, Chongqing Casin Enterprise Group Co. SEC Chairman Jay Clayton, who joined the agency this year following a career as a deals lawyer, has publicly fretted that it’s too hard for companies to go public in the U.S. The exchange had hoped to address that situation by selling itself, while also creating a conduit to China.
But opponents of the takeover, including a number of U.S. lawmakers, said letting a Chinese firm invest in a U.S. exchange was a bad idea. On the campaign trail, Donald Trump blasted the transaction after it was announced in early 2016. A year ago, the sale was cleared by a panel that reviews foreign takeovers for national security threats.
The deal hit a roadbump in August, when the SEC said its commissioners would review the sale, a surprise announcement that overrode the recommendation by the regulator’s staff that it should be approved.
After the process stalled, several investors dropped out. Two Chinese entities, Chongqing Jintian Industrial Co. and Chongqing Longshang Decoration Co., left the consortium along with U.S.-based Xian Tong Enterprises Inc. Together, they’d planned to buy 36.44 percent of the exchange. Other investors in the buyers’ group had agreed to purchase those stakes. In rejecting the takeover Thursday, the SEC said those three firms dropped out after the regulator asked for more information on their financial ties.
Chongqing Casin wanted to serve as a conduit to bring Chinese companies to the U.S. to raise capital. Hundreds of enterprises are waiting for IPO approval on exchanges in China, according to the China Securities Regulatory Commission. The Chicago Stock Exchange planned to leverage the Jumpstart Our Business Startups Act, a 2012 law Congress passed to make it easier for smaller companies to go public.
“I’m not too surprised,” Richard Johnson, an analyst at Greenwich Associates, said of the rejection. “I thought this deal would always get additional scrutiny,” he said. Johnson added that the exchange’s plan to help Chinese companies go public in the U.S. didn’t require owning an exchange. “They didn’t need to buy a stock exchange to do that necessarily, so that motivation was a little unclear.”