(Bloomberg) -- Nasdaq Inc. is once again increasing scrutiny of small initial public offerings from China and Hong Kong to avoid a repeat of the wild swings that followed a handful of deals two years ago, according to people familiar with the matter.

Several Hong Kong- and China-based IPO applicants have faced a series of questions from Nasdaq, the people said, asking not to be identified discussing private information. Questions centered on the identity and independence of the firms’ pre-IPO investors selling shares in the listings, the people said.

A growing number of small firms from China and Hong Kong are turning to the Nasdaq to raise money, even as geopolitical tensions rise ahead of the US election. China has relaxed its grip on overseas listings, offering a lifeline to firms unable to tap funding at home amid a prolonged market slump. Hong Kong’s small-cap exchange was effectively closed for years until earlier this month, making Nasdaq an attractive alternative.

The heightened grilling comes after several micro-cap stocks from China and Hong Kong, including AMTD Digital Inc. and Addentax Group Corp., surged as much as 32,000% in their 2022 trading debuts, only to crash in the ensuing weeks. That prompted a round of questioning in New York at the time. 

No IPOs have so far been halted due to the heightened queries, but the process has been lengthened by weeks, adding uncertainty and costs to what’s normally a quick review, the people said. They declined to name any of the companies facing scrutiny.

A spokesperson for the New York-based Nasdaq exchange declined to comment.

Some 20 companies from China and Hong Kong have floated shares on Nasdaq this year, raising a combined $195 million. Recent listings include Jiade Ltd., a Chinese education software firm, and personal care company Raytech Holding Ltd. NIP Group Inc., an esports company backed by a Hong Kong pop star, recently filed an IPO application.

Jiade is down 77% since listing in May and Raytech is down about 15%. 

As part of the review, Nasdaq officials have asked about the backgrounds of the selling shareholders, their ties and history with the company and to each other. In some cases, Nasdaq required documentation to support the valuation of the private shares, as well as bank documents to prove money actually changed hands in the purchase, the people said. 

These types of questions were rare in the past, despite long-standing rules governing selling shareholders, the people said. There’s been a noticeable increase in companies registering their pre-IPO investors to fulfill the minimum public-float requirements. 

Proving investor independence is essential to allay any suspicions of orchestrated pump-and-dump moves shortly after listing, the people said. The exchange is also seeking to ensure US-based investors make up the majority of these Asia-originated IPOs, the people said.

IPO hopefuls getting targeted inquiries are mostly those qualifying under the “equity standard” or “market value of listed securities standard,” the people said. The two streams — both requiring a minimum public float of $15 million — are often preferred by smaller companies that can’t meet the net income standard of $750,000 in annual profit in the past three years. 

Even so, the path is still easier than in Hong Kong. 

“Nasdaq remains a desirable choice over Hong Kong for its low listing threshold, cost, time required and certainty from the disclosure-based system, despite recent scrutiny denting the edge a bit,” said Gordon Tsang, a partner at Hong Kong-based law firm Stevenson, Wong & Co., who advised about 10 Nasdaq deals in recent years.

Momentum is slowly rising for Chinese and Hong Kong firms seeking to go public in the US after a lengthy dry spell. Last month, Zeekr Intelligent Technology Holding Ltd., a high-end electric car brand, debuted in New York after raising $441 million in the biggest US IPO by a China-based company since 2021.

Still, mid-to-large offerings by Chinese firms in the US remain scarce. Of the Chinese companies that listed since 2023, only five raised more than $50 million. 

--With assistance from Katherine Doherty.

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