Comment Letter on Nasdaq’s Proposed Additional Initial Listing Criteria for Companies Primarily Operating in China

I write on behalf of the Council of Institutional Investors (CII), a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $5.2 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families, including public pension funds with more than fifteen million participants – true “Main Street” investors through their pension funds. Our associate members include non-U.S. asset owners with about $5.8 trillion in assets, and a range of asset managers with more than $74 trillion in assets under management.[1]

CII values the opportunity to respond to the SEC’s notice dated December 23, 2025, that it is instituting proceedings on whether to approve or disapprove Nasdaq’s proposed rule regarding the adoption of additional initial listing criteria for companies primarily operating in China.[2] Nasdaq submitted this proposal dated September 3, 2025, in which it seeks a minimum $25 million in proceeds from newly listed companies, along with two other changes concerning Chinese companies, for review by the Securities and Exchange Commission (SEC).

In this letter, we wish to build on our previous correspondence with the SEC in October 2025, in which we affirmed our general support for Nasdaq’s proposed additional initial listing criteria for companies primarily operating in China, in response to growing incidences of abnormal trading patterns among the smallest microcap Chinese companies.[3]

We also seek to generally affirm the views expressed by Jeffrey Starr of Charles Schwab & Co. on Nasdaq’s proposed rule change, particularly concerning its sole focus on Chinese companies. [4] While the provisions of the proposed rule take meaningful steps to preserve market integrity and protect U.S. investors from potential losses associated with the smallest microcap Chinese companies, we recommend expanding the application of the proposed rule to the smallest microcap companies generally, including those companies incorporated in the Cayman Islands.

Background

CII shares Nasdaq’s stated goal of “…fostering a resilient and transparent marketplace that supports appropriate listing standards for issuers and safeguards investor interests.”[5]

CII believes that the expansion of the proposed rule to small microcap companies incorporated in the Cayman Islands—or other countries of greatest concern for fraudulent activity—is generally consistent with CII member-approved policy, which recommends that companies should not incorporate or reincorporate in jurisdictions that diminish shareholder rights.[6]

In September 2025, we sent a letter to the SEC in response to the Concept Release on Foreign Private Issuer (FPI) Eligibility.[7] Here, we underscored the risks that Chinese companies listed on U.S. exchanges may pose to investors and expressed support for revising the existing requirements for FPIs to reflect the fact that many FPIs today are headquartered in China and domiciled in the Cayman Islands.

As noted in our October 2025 letter, CII has long expressed concerns about the risks that investors may be exposed to when investing in Chinese companies. In an August 2025 report, Behind the Veil: Risks of Chinese Companies and the VIE Structure, CII explains how nearly 160 Chinese companies use the Variable Interest Entity (VIE) Structure to circumvent restrictions on foreign investment in strategically sensitive sectors. By listing on U.S. exchanges through a Cayman Islands-domiciled proxy, such China-based operating companies avoid having to comply with US rules requiring them to provide investors with meaningful transparency into their financials. This is compounded by these companies being beyond the reach of enforcement actions by U.S. authorities. Many Chinese VIE companies have also been associated with widely reported controversies that resulted in delistings and/or losses in shareholder value.[8]

Some commentators have expressed concern with the weaker corporate law requirements that exist in Cayman Islands. For example, Professor William J. Moon notes that shareholders face significant barriers in seeking accountability for wrongdoing by directors and officers of Cayman Islands-registered companies.[9] Professor John Coates ranked the Cayman Islands as the weakest corporate law jurisdiction for investor protections when compared to Delaware, Nevada, and Texas.[10] Other commentary by Better Markets raises concerns about the weaker protections for investors in Caymans Islands-incorporated companies relative to U.S.-incorporated companies.[11]

Other perspectives

In a December 2025 comment letter, Charles Schwab & Co. indicated their general support for the adoption of the proposed rule changes while expressing concern that they do not go far enough to address fraudulent trading activity. They note that many microcap companies at risk of delisting will initiate reverse stock splits to bring their stock price in line with exchange requirements. Such reverse splits have resulted in significant losses for the firm and its clients and “tend to be clear indicators of fraud” such as pump-and-dump scams. Many of the companies involved in this fraudulent behavior are incorporated in the Cayman Islands. [12]

Others have highlighted the role of firms incorporated in the Cayman Islands in losses of billions of dollars from U.S. investors. In an August 2025 op-ed, Jesse M. Fried and Matthew Schoenfeld argue that fraud amongst Chinese companies is prolific and difficult to prosecute, doubly so for those incorporated in the Cayman Islands. They point to the take-private of Chinese e-commerce firm Dada Nexus, whose U.S. investors were squeezed out by majority investor JD.com and only offered $2 per share, a 96% reduction from the $50 share price at IPO.[13]

For the reasons above, while we continue to support Nasdaq’s proposed rule targeting Chinese microcap companies, we recommend amending the proposed rule to address the smallest microcap companies more broadly, including those incorporated in the Cayman Islands and other jurisdictions posing heightened risks for U.S. investors.

1 For more information about the Council of Institutional Investors (“CII”), including its board and members, please visit CII’s website at http://www.cii.org.(go back)

2 “Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Additional Initial Listing Criteria for Companies Primarily Operating in China,” Release No. 34-104456; File No. SR-NASDAQ-2025-069, https://www.federalregister.gov/documents/2025/12/23/2025-23660/self-regulatoryorganizations-the-nasdaq-stock-market-llc-order-instituting-proceedings-to-determine.(go back)

3 See Letter from Emmanuel Tamrat, Senior Research Analyst, Council of Institutional Investors to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, October 10, 2025, https://www.cii.org//Files/issues_and_advocacy/correspondence/2025/10-10-2025 Letter to SEC on Nasdaq Proposed Rule Change.pdf (go back)

4 In response to Nasdaq’s initial proposed rulemaking, Jeffrey Starr of Charles Schwab expressed general support for the proposal while noting Schwab’s view that the minimum listing requirements should not necessarily apply exclusively to Chinese companies. “With respect to SR-NASDAQ-2025-069 regarding new listing requirements for companies based in China, Schwab recommends the increased standards should apply to companies based in additional foreign jurisdictions where it is determined there are elevated levels of fraud, not just to Chinese securities. Otherwise, fraudsters will simply move to other jurisdictions where it’s even easier to commit fraud.” See Comment Letter by Jeffrey Starr, Managing Director, Head of Operations, Charles Schwab & Co., December 16, 2025, p. 4, https://www.sec.gov/comments/SR-NASDAQ-2025-069/srnasdaq2025069-685127-2121835.pdf.(go back)

5 “Nasdaq Proposes Changes to its Listing Standards,” Nasdaq (September 3, 2025), https://ir.nasdaq.com/newsreleases/news-release-details/nasdaq-proposes-changes-its-listing-standards.(go back)

6 §1.8 Incorporation and Reincorporation, CII Policies on Corporate Governance, last updated March 10, 2025, https://www.cii.org/corp_gov_policies (“Companies should incorporate in jurisdictions with strong investor rights and protections. Companies should not reincorporate in jurisdictions where corporate governance structures are less robust than their current jurisdiction of incorporation. Additionally, companies should not adopt new articles of incorporation or bylaws which diminish investor rights and protections in conjunction with reincorporation.”).(go back)

7 See Letter from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, September 4, 2025, https://www.cii.org/files/issues_and_advocacy/correspondence/2025/09-04-2025 Comment Letter to SEC re Foreign Private Issuers (JPM) BM (Final).pdf.(go back)

8 Emmanuel Tamrat, “Behind the Veil: Risks of Chinese Companies and the VIE Structure,” Council of Institutional Investors (Aug. 2025) (Attachment), https://www.cii.org/Files/publications/Behind-the-Veil-Risks-of-ChineseCompanies-and-the-VIE-Structure-Aug-2025.pdf; see William J. Moon, “Havens for Corporate Lawbreaking,” Washington University Law Review (forthcoming) (2025): 32-35, https://dx.doi.org/10.2139/ssrn.5148347 (“[T]he Cayman Islands has deliberately chosen to differentiate its corporate law from that of Delaware. While directors and officers of Cayman Islands-incorporated corporations are required to act in good faith in what they consider is the best interests of the company, they have no specific obligations to exercise oversight over corporate lawbreaking. Even if they did, such suits are matters that can largely be exculpated, rendering these claims dead on arrival. Cayman Islands law has no statutory limitations regarding indemnification or limitation of liability for directors and officers. Rather, the limits have been imposed by common law, which allows corporations to exculpate all types of liability of a director and officer ‘except willful default or neglect, or fraud.’ As a result, directors and officers are exculpable from liability arising from ‘all but the narrowest of circumstances.”); see also Professor Moon’s podcast with CII General Counsel Jeff Mahoney at https://podcasts.apple.com/in/podcast/havens-for-corporate-lawbreakingwith-william_moon/id1433954314?i=1000713469480.(go back)

9 Id., p. 23.(go back)

10 In a webinar entitled “Delaware vs. Texas: Implications for Investors,”, Professor John Coates discussed incorporation trends among U.S.-listed companies and raised concerns regarding the corporate governance implications of Cayman Islands incorporation. “I would put Texas below Nevada and only slightly above the Caymans,” he remarked, characterizing the Cayman Islands as a “law free” environment where companies “don’t even have to have an annual meeting.” Concerns regarding the corporate governance quality of Cayman Islandsincorporated companies—whether or not the operating company is Chinese—may provide a basis for considering whether the scope of the proposed listing standard should be broadened beyond Chinese companies exclusively. See Jeff Mahoney, John Coates, Marc Goldstein, Robert J. Jackson, and Courtney Tygesson, “Delaware vs. Texas: Implications for Investors,” CFA Society New York, October 30, 2025, https://cfany.org/event/delaware-vs-texasimplications-for-investors/ (on file with CII).(go back)

11 See Letter from Benjamin L. Schiffrin, Director of Securities Policy Better Markets to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, September 8, 2025, https://www.sec.gov/comments/s7-2025- 01/s7202501-651547-1950554.pdf (“Similarly, investors in issuers domiciled in the Cayman Islands are less protected than investors in issuers domiciled in the United States, both substantively and procedurally. With respect to substantive protections, the scope of the fiduciary duty is narrower in the Caymans. With respect to procedural rules, ‘Cayman Islands law is less protective of shareholders than Delaware law’—the procedural rules ‘are so defendant friendly that public shareholders have never brought a lawsuit in the Cayman Islands against a listed Cayman firm or its insiders.’”).(go back)

12 Starr, Dec. 16, 2025, p. 2 (“Large reverse splits tend to be clear indicators of potential fraud, yet Nasdaq has not been vigilant in policing this type of behavior. The reverse splits, which have significantly increased in frequency in recent years, have resulted in financial losses for both investors and broker dealers. Many of these microcap securities are nexuses for major fraud – pump and dump schemes often orchestrated by company insiders. Many of the microcap securities in question are for shell companies from the Cayman Islands and British Virgin Islands orchestrated by fraudsters often, but not always, located in China.”)(go back)

13 Jesse M. Fried and Matthew Schoenfeld, “Beijing’s ‘Legal Great Wall’ Helps Fleece U.S. Investors,” Wall Street Journal (August 27, 2025), https://www.wsj.com/opinion/beijings-legal-great-wall-helps-fleece-u-s-investors-china7dfaa247 (“[Most Chinese companies listed in the U.S.] are typically incorporated in the Cayman Islands and listed only in the U.S. They’re thus subject only to weak Cayman corporate law and a watered-down version of American securities law.”)(go back)