Currently, there are 250 Chinese companies that are listed in the United States. At one time, the arrangement was a win-win. Chinese companies were able to access capital in the U.S., U.S. investors were able to invest in fast-growing companies in the world's largest and fastest-growing economy, and Wall Street investment banks were able to rack up massive revenues by arranging these listings.

Of course, the reality has been messier and complicated. While there have been a few success stories especially when it comes to the largest companies, there has also been a fair share of frauds. Some of the most egregious examples include Luckin Coffee and Sino-Forest. Both companies' financials were essentially fictitious and had fooled some of the highest-profile fund managers.

Another instance was the recent IPO of Didi Global (DIDI  ) which plunged soon after going public as the Chinese government launched an investigation into its user data protocols. Obviously, there was a question of how much the company knew about this action because disclosing it would have negatively affected the IPO. Further, the crackdown in China has also led to top tech companies in the country falling by 40 to 60%. Many investors have simply given up, saying that the country is "not investable".

Given these developments, it's not surprising that SEC Chair Gary Gensler put a pause on Chinese IPOs last month and figure out how to create greater transparency. Now, he has issued new disclosure requirements for Chinese companies looking to IPO in the U.S.

The SEC is asking companies to provide more information about the offshore vehicles that are used to list in the U.S. and risks that the Chinese government could interfere with their businesses.

The rules would provide more information about the offshore vehicles that are used to list in the U.S. including that the stock may not actually hold a direct equity interest in the operating company. This has been a concern among many companies as the link between the stock and the underlying company is murky.

The SEC also want these companies to not conflate the operating company with the holding company. There also needs to be more information about potential regulatory risks. Another requirement is that companies who do not comply with the U.S. Holding Foreign Companies Accountable Act have to provide more information about their accounting practices.

This could be a contentious issue as China has prevented companies from sharing the work of their auditors with the U.S. Public Company Accounting Oversight Board. It will be interesting to see how China responds especially as their private sector has been battered by the country's recent aggression. It's not in the country's interest to totally destroy its private sector which it helped support and develop over the last 2 decades.

Interestingly, Chinese stocks put together a massive bounce on the SEC news as some see this as a positive development that will lead to increased confidence. However, stocks have given back about a third of these gains in the ensuing sessions.