This is no fear-mongering. Shares of Nio (NIO 0.25%) surged Friday morning as investors took note of the company's 20F annual report filed today and some good news coming in from China, Nio's domestic market.
Yet, when I dug deeper into the annual report, one line buried under the several risk factors that Nio listed made me sit up and take note. It's the kind of thing that could send shares plunging if it becomes a reality.
Investors might know that foreign stocks, particularly Chinese stocks, face the threat of being delisted from U.S. stock exchanges if the underlying companies fail to comply with the audit rules as outlined by the U.S. Securities and Exchange Commission (SEC) under the Holding Foreign Companies Accountable Act (HFCAA).
Under the law, foreign companies whose audit reports haven't been accessible for the Public Company Accounting Oversight Board (PCAOB) to inspect for three years at a stretch will be asked to delist their shares in the U.S. The SEC recently started identifying and naming such companies publicly. As one might guess, every time such a list of commission-identified businesses (or issuers) has come out, share prices of companies mentioned in it have plummeted.
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Coming back to Nio, here's the line from its annual report that made me nervous: "Therefore, we expect to be identified as a 'Commission Identified Issuer' shortly after the filing of this annual report on Form 20F."
Yes, you read that right.
Nio revealed that on Dec. 16, 2021, its auditor was identified as one of the registered public accounting firms that the PCAOB was unable to inspect. Nio therefore expects to find its name on one of SEC's infamous lists soon.
If this happens, it could deal a huge blow to investor sentiment in Nio as the SEC is wary that foreign companies not allowing inspection of their financial reports could be potentially hiding important information and misleading investors in the U.S.
But even if Nio makes it to the list, it'll have sufficient time to dispute its inclusion and eventually comply with the HFCAA. Also, just being named by the SEC in no way means Nio stock will get delisted.
Yet you might already want to brace for more volatility in Nio stock going by what the company just revealed in its annual report.
