Rita Cao


With the implementation of the Holding Foreign Companies Accountable Act (HFCAA) in 2021, Congress finally took action and drove home its concern over foreign public companies.[1] Aiming to protect investors from these businesses, the HFCAA imposes a higher standard of disclosure on foreign businesses which—when failing to abide the disclosure requirements—would be delisted from the U.S. exchanges.[2] The HFCAA amends the Sarbanes-Oxley Act to add language that requires 2 main components (1) a stricter scrutiny on the disclosure of the company’s financial data and (2) the potential penalty of being delisted from U.S. stock markets.[3] If a company fails to submit auditing documents to the U.S. Public Company Accounting Oversight Board (PCAOB) in three consecutive years from the passage of the HFCAA, the SEC has the ability to prohibit the company from being traded on major U.S. securities exchanges or any other method within the jurisdiction of the SEC.[4] Additionally, the HFCAA requires the covered foreign issuer to prove that the company is not owned or controlled by any foreign governmental entity.[5]

I. The Becoming of the HFCAA

The HFCAA is a relatively new Act, amending the Sarbanes-Oxley Act of 2002 to add extra disclosure requirements upon foreign public companies and penalties of delisting from the U.S. Exchanges.[6] The Sarbanes-Oxley Act (SOX Act), in reacting to major accounting scandals in the United States, lays out the responsibilities of the board of directors of all public corporations, requires the SEC to regulate public corporations and creates the Public Company Accounting Oversight Board (PCAOB) to oversee and discipline public accounting firms.[7]

However, the old SOX Act has a disclosure regime which was significantly less onerous on foreign private issuers than U.S. issuers since the SOX Act only applies to corporations that are registered and operating in the United States.[8]Other countries, such as China, France and Belgium, which reject to conform to the SOX Act or refrain local auditing firms from sharing information with foreign entities, are not subject to the regulations and requirements in SOX Act. Such freedom essentially allows foreign issuers to withhold problems in financial statements from the scrutiny of PCAOB. While the SOX Act attracted foreign companies to seek public listings in the U.S. market, the freedom gave rise to the financial scandal, such as that of the Chinese coffee brand, Luckin Coffee, in 2020. As a public company traded on NASDAQ, Luckin Coffee’s stock price plunged after it admitted to committing an accounting fraud by overstating its annual sale by $300 million in its 2019 annual report, dramatically hurting investors in the U.S. stock market.[9]  In mid-2020, the Exchange delisted Luckin Coffee from NASDAQ. After this incidence, the public sentiment agreed more strongly that investors would have avoided billions of losses were the newly-passed HFCAA already been signed into law by the time of the scandal.[10] The bluff in the financial reports seems to be the type of accounting misconduct that the HFCAA intends to deter and the financial loss of the stock investors seems to be what the regulators were trying to avoid.

II. The Expected Effect of the HFCAA

18 years after the original SOX Act, the passing of the HFCAA is expected to fill in the gap by forcing all foreign issuers to abide the same regulatory oversight as domestic issuers. At this point, the HFCAA is perceived to be beneficial and protective to U.S. markets and investors, preventing low-quality foreign companies from being traded on the domestic market.[11] SEC is simultaneously taking other steps to address the lack of PCAOB access to the auditors of US-listed foreign companies, including the measures discussed within President’s Working Group to address concerns about the risks to investors. The Office of Foreign Assets Control (“OFAC”) also imposes sanctions on foreign companies based on national security agenda.[12] Doubled with such other measures, the HFCAA will pose a demanding and serious image in front of foreign listing companies, preventing activities of frauds.

III. Dissenting Voices

Despite the massive support from the public and the government officials, critics doubt the efficiency and the purpose of the HFCAA. Some think that the rare cases of accounting fraud do not justify the risk of losing the “market-beating returns that many U.S.-listed Chinese firms offer investors.”[13] Additionally, it may bring about unexpected financial turbulence as the delisted stocks could be traded on OTC or the pink sheet exchange which lack regulation at all, may leave no option to funds whose investment plans are to invest in relatively charming foreign companies, may weaken the global competitiveness of the U.S. securities market.[14] However, since the HFCAA became law in December 2020 and, given the potential transition period, the first delisting may not start until 2025, its practical impact on foreign companies is yet to be discovered. Before any actual listing happens and brings uncertain effects to the U.S. stock market, it may be reasonable to conjecture an ex-ante regulation for the protection of the public market and investors from irresponsible foreign companies without hurting the markets.



[1] Holding Foreign Companies Accountable Act S.945 of the 116th Congress, https://www.congress.gov/bill/116th-congress/senate-bill/945. Signed by President and became Public Law on December 18, 2020.

[2] Id.

[3] 15 U.S.C. §7214(i)

[4] Id.

[5] Id.

[6] See Securities and Exchange Commission, Holding Foreign Companies Accountable Act Disclosure, Release No. 34-91364, available at https://www.sec.gov/rules/interim/2021/34-91364.pdf.

[7] Stephen Wagner et al., The Unexpected Benefits of Sarbanes-Oxley, Harv. Bus. Rev. (April 2006), https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley.

[8] Jeff Petters, What is SOX Compliance? Everything You Need to Know in 2019, Varonis (September 23, 2020), https://www.varonis.com/blog/sox-compliance/.

[9] See Luckin Coffee Fraud: Behind Starbucks Competitor’s Scandal, Bloomberg (July 29, 2020), https://www.bloomberg.com/news/features/2020-07-29/luckin-coffee-fraud-behind-starbucks-competitor-s-scandal.

[10] Id.

[11] Shang-Jin Wei, America’s threat to delist Chinese companies could make everybody better off, Market Watch (May 27, 2020), https://www.marketwatch.com/story/americas-threat-to-delist-chinese-companies-could-make-everybody-better-off-2020-05-26.

[12] What Audit Committees Should Consider at the End of 2020 and Beyond, EY Center for Board Matters at 17 https://assets.ey.com/content/dam/ey-sites/ey-com/en_us/topics/board-matters/ey-what-audit-committees-should-consider-at-the-end-of-2020-and-beyond.pdf.

[13] Id.

[14] Georges Ugeux, The Backlash Against Chinese-Company Listings on U.S. Exchanges Has a Long History, The CLS Blue Lion logo Sky Blog (Jan. 25, 2021), https://clsbluesky.law.columbia.edu/2021/01/25/the-backlash-against-chinese-company-listings-on-u-s-exchanges-has-a-long-history/