"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

The Required Disclosures

The information presented in this blog and its individual articles is provided for informational use only and should not be considered investment advice or an offer for a particular security. The contents reflect the views and opinions of the individual writer as of the date the article was written and do not necessarily represent the views of the individual writer on the current date. They also do not in any way, shape, or form represent the views of the Firm Never-To-Be-Named. Any such views are subject to change at any time based upon market or other conditions and The Great Redoubt and its individual writers disclaim any responsibility to update such views. These views should not be relied on as investment advice, and because investment decisions for any security are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any contributor to The Great Redoubt. Neither The Great Redoubt nor any individual author can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.

Monday, April 18, 2011

Chinese Reverse Merger Companies

These have been in the news recently,  but what the heck is a Chinese reverse merger company?
To answer that, let's start off with what a reverse merger is.  Investopedia defines a "reverse merger" as "a type of merger used by private companies to become publically traded without resorting to an initial public offering.  Initially, the private company buys enough shares to control a publicly traded company.  The private company's shareholder then uses their shares in the private company to exchange for shares in the public company.  At this point, the private company has effectively become a publicly traded one."
So, yes.  In a reverse merger, the private company buys a public company, hollows it out, and wears it around like a suit  The strategy makes the private company the emerald cockroach wasp of the business world.  A Chinese reverse merger company, then, is just a Chinese company that has gone public in the US markets by hollowing out a US company - typically something Over-The-Counter or that has one of the smaller exchanges as a home exchange[1] - and then wearing it around.
Now, why are people concerned about this?  BusinessWeek had a pretty good article on the subject back in March, but here's the reasons in a nutshell:  this reverse merger process circumvents the SEC requirements for taking a company public in the United States.  Instead of meeting minimum shareholder and asset requirements, and filing all of the appropriate regulatory forms, they just need to get the merger approved.  As a result, they manage to combine all of the risks of a penny stock and a speculative private placement.
But wait!  There's more!  In addition, most of these companies operate as shell companies.  There might be a US address, but the entire company is still in China, significantly restricting the ability of the SEC to compel them to conform to US securities laws and regulations, or to enforce fines and arbitration against them.
As a result, since December, the SEC has been investigating a number of these firms for stock fraud, and the indications are that this will expand into a widespread investigation of pretty much every Chinese reverse merger.
[1]  Although some companies, such as China BAK Battery, have managed to get onto the American Stock Exchange and the NASDAQ.

No comments:

Post a Comment