Comment Letter on Nasdaq’s Proposed Additional Initial Listing Criteria for Companies Primarily Operating in China

Key Takeaways

• CII backs Nasdaq's $25 M minimum for Chinese micro‑caps
• Calls for rule to cover Cayman‑incorporated micro‑caps too
• Highlights VIE structures enabling opaque Chinese listings
• Cites reverse splits as fraud indicator in tiny stocks
• Aims to protect $5 trillion of institutional assets

Summary

The Council of Institutional Investors (CII) submitted a comment letter backing Nasdaq’s proposed rule that adds initial listing criteria for Chinese micro‑cap companies, including a $25 million minimum proceeds requirement. CII applauds the effort to curb abnormal trading in the smallest Chinese stocks but urges the rule’s scope be broadened to cover micro‑caps incorporated in the Cayman Islands and other high‑risk jurisdictions. The letter cites the opaque VIE structures and weak Cayman corporate‑law protections that have facilitated fraud and investor losses. By expanding the criteria, CII aims to safeguard the roughly $5 trillion of assets its members manage.

Pulse Analysis

Nasdaq’s September 2025 proposal to impose a $25 million proceeds floor for newly listed Chinese micro‑cap firms reflects mounting concerns over price manipulation and thin‑trade volumes. By targeting the smallest issuers, the exchange hopes to deter pump‑and‑dump schemes that have eroded confidence among retail and institutional investors alike. The Council of Institutional Investors, representing trillions in pension and endowment assets, endorsed the move but argued that the rule’s narrow focus on China overlooks similar risks posed by companies incorporated in offshore havens such as the Cayman Islands.

The Cayman Islands have become a favored domicile for Chinese firms employing Variable Interest Entity (VIE) structures to sidestep U.S. disclosure requirements. Weak corporate‑law safeguards in that jurisdiction limit shareholder recourse, making reverse stock splits and sudden delistings common tools for fraudsters. CII’s letter highlights recent cases where micro‑caps used reverse splits as a red flag for pump‑and‑dump activity, resulting in steep losses for U.S. investors. By expanding the listing criteria to include these offshore‑incorporated entities, regulators could close a loophole that currently enables opaque financial reporting and limited enforcement.

If the SEC adopts CII’s recommendation, the market could see a more uniform standard for all micro‑caps, regardless of jurisdiction, enhancing transparency and investor protection. Such a shift would likely prompt issuers to reassess their incorporation strategies, potentially reducing the prevalence of VIE‑based listings on U.S. exchanges. For institutional investors, tighter standards translate into lower exposure to high‑risk securities, aligning with fiduciary duties to preserve retirement savings. Ultimately, the decision will shape the future of foreign private issuers in the U.S. capital markets, balancing access to capital with the need for robust oversight.