House Passes Sherman Amendment Establishing Transparency for Chinese Investment Firms Raising Capital in the U.S.

WASHINGTON, D.C. – The House voted to adopt an amendment led by Congressman Brad Sherman (D-CA), Chair of the House Financial Services Subcommittee on Investor Protection and Capital Markets, as part of the annual defense authorization bill. The amendment will require that China-based issuers of certain unregistered securities provide basic information about themselves to the U.S. Securities and Exchange Commission (SEC) when offering such securities in the United States.

"The passage of this amendment represents an important step forward in our ability to understand and manage the aggressive capital raising activity we have seen from China-based companies in U.S. markets," said Congressman Sherman. "Together, this action will ensure that, in our public markets, Chinese companies are playing by the same rules of the road as everyone else, and in our private markets regulators have a clear understanding of what is going on."

The Sherman Amendment is an essential compliment to Section 30133 of the COMPETES Act, which requires the Treasury Department, in consultation with the State Department and SEC, to submit a report to Congress about the capital raising activities of companies based in the People's Republic of China (PRC) and companies that predominantly invest in PRC-based companies, including the issuance of unregistered securities.

According to SEC data, the total value of annual securities offerings exempt from SEC registration rose from $2 trillion in 2009 to $3.3 trillion in 2021. About 60 percent of the total investment capital raised in U.S. markets in any given year is raised in the so-called "exempt" or "private" marketplace, and the SEC has almost no information regarding such issuers. Given the opaque nature of the private marketplace, not just to investors but also regulators and policymakers, the federal government has effectively no visibility into which China-based entities are raising capital from U.S. investors. This presents risks not only to U.S. markets but also potential threats to America's national security.

The Sherman Amendment builds on years of work by the House Financial Services Committee to explore ways to improve transparency regarding private securities markets to optimize such markets for investors and entrepreneurs.

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