Disclosure Issues Hurt China-Based Firms

By Platt, Gordon | Global Finance, July/August 2011 | Go to article overview

Disclosure Issues Hurt China-Based Firms


Platt, Gordon, Global Finance


The froth in the market for initial pubHc offerings of China-based companies listing on major stock markets around the world has been blown away by renewed concern about accounting and disclosure issues. The US Securities and Exchange Commission in June issued a caution to investors about foreign companies seeking to access the US markets by merging with existing pubHc sheU companies, which have few or no operations.

These so-caUed "reverse mergers" offer private companies a cheaper and quicker method of going pubHc than an IPO, because legal and accounting fees tend to be lower. UnHke a traditional IPO, there is no underwriter performing due dihgence.

"Given the potential risks, investors should be especiaHy careful when considering investing in the stock of reverse merger companies," says Lori Schock, director of the SECs office of investor education and advocacy. The SEC and US exchanges recently suspended trading in more than a dozen such companies, citing a lack of current, accurate information about their operations and their finances.

No Registration

While a pubHc shell company is required to report a reverse merger in a Form 8-K fiHng with the SEC, there are no registration requirements, as there would be with an IPO. The shares of reverse merger companies can be traded on exchanges or in the over-the-counter market. "Many companies either fail or struggle to remain viable following a reverse merger," the SECs Investor BuHetin issued on June 9 notes. "Also, as with other kinds of investments, there have been instances of fraud and other abuses involving reverse merger companies," it says.

Another consideration, according to the SEC, is that some of the foreign companies that access the US markets through reverse mergers have been using smaU US auditing firms that lack the resources to effectively audit companies with operations in foreign countries.

On April 11, the SEC suspended trading of RINO International, a Nevadaincorporated pollutioncontrol equipment manufacturer with operations in China. …

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