Risky Business: Can Faulty Country Risk Factors in the Prospectuses of U.S. Listed Chinese Companies Raise Violations of U.S. Securities Law?

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In May 2004, shareholders who bought stock in China Life’s December 2003 initial public offering filed a class action lawsuit against the company for failure to disclose financial fraud in its disclosure documents. While this suit represented the first time shareholders sued a mainland Chinese company, the expected increase in securities offerings on U.S. stock exchanges by Chinese companies ensures that there will be more shareholder suits against Chinese companies in the future. One such area of the prospectus that may be a source of liability for Chinese companies is the country risk factor section. While China has undergone great economic, social, and political changes over the past decade, the country risk factor section has remained nearly the same today as it was thirteen years ago. This Note examines the potential liability under Section 11 of the Securities Act of 1933 for Chinese companies’ failure to include detailed country risk factors in their prospectuses. First, this Note will analyze the language of the country risk factor sections in a number of Chinese companies’ prospectuses from the past thirteen years. After proving that the language remains virtually unchanged, this Note examines how a court may go about analyzing shareholders’ claims alleging material misrepresentations or omissions in the country risk factor section and possible Section 11 liability. While Chinese companies could potentially be found liable under Section 11, the SEC should consider more stringent country risk disclosure requirements that could protect Chinese companies from possible litigation and balance investor protection while maintaining efficient and effective capital markets.