The Chinese IPO wall

February 12, 2013: 10:43 AM ET

AdChinaRegulatory dispute stops Chinese companies from completing U.S. IPOs.

FORTUNE -- Chinese online advertising platform AdChina last year filed to go public on the Nasdaq, after having raised more than $30 million in venture capital funding. Yesterday, however, the company acknowledged that it won't have an IPO celebration at Nasdaq or any other U.S. exchange. Not because of investor interest or company scandal, but rather because of an ongoing battle between American and Chinese financial regulators.

Here's the situation in a nutshell: The Securities and Exchange Commission currently will not recognize work done by the Chinese affiliates of Big 4 auditing firms, due to concerns over possible fraud. The SEC has said it would accept the audits if it could review the underlying work product, but Chinese regulators say that their laws prohibit the dissemination of such documents. The impasse supposedly is being negotiated behind the scenes, although the SEC also sued the Big 4's Chinese affiliates last December for allegedly violating U.S. securities laws.

In the meantime, companies like Shanghai-based AdChina are becoming collateral damage. It uses a Chinese affiliate of PricewaterhouseCoopers for its accounting, which means that it cannot get its registration statement made effective by the SEC – thus legally preventing it from completing a stateside IPO.

"This is a problem for any Chinese company that wants to list in the United States," explains Richard Lim, co-founder of GSR Ventures and an AdChina board member.

Lim declined to say what AdChina plans to do next, but did seem to hint at a listing elsewhere in Asia.

"A secondary issue is that many of the decision-makers on Chinese companies for the global investment funds have moved to Hong Kong, and I've heard feedback that some of them have an easier time committing to Hong Kong listings," he explains.

The peak for VC-backed Chinese IPOs in the U.S. was 2010, when there were 28 such offerings. The figure dipped to less than half of that in 2011, and just two in 2012. Until this conflict gets resolved, don't expect any in 2013.

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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