A Chinese Reverse Merger With Public Shell Alternative: New Concerns

Chinese reverse merger companies that used a reverse IPO also known as reverse merger with public shell to go public have come under severe attack by both U.S.regulators and investors.  Now it appears that an alterantive structure to a Chinese Reverse Merger or Reverse IPO is also coming under attack. Chinese Reverse Merger Reverse IPO Public Shell

We have long advocated a direct route to going public for all companies, Chinese or U.S.  We call our transaction structure Go Public Direct.  It does not involve a reverse IPO also known as reverse merger with public shell.  In addition to the Reverse IPO process, China companies going public used another alternative structure called variable interest entity, or VIE.

In a VIE structure, a complicated set of contractual arrangements are set up so that it is not the actual Chinese company that goes public but a mirror management company which “manages” the Chinese company.  Under the contractual arrangements, revenues and expenses that would have been incurred by the Chinese company directly are indirectly recognized by the VIE company.

Securities lawyers in theU.S.have reported in the media that the SEC is now questioning this structure as well.  Although Judith Burns, an SEC spokeswoman, declined to comment, the SEC has been reported to have sent comment letters to six companies since December.

The Public Company Accounting Oversight Board which oversees auditors ofU.S. public companies has apparently also begun to express concerns about this structure.  “China has blocked our inspections of firms in their region, but we think VIEs are a risk area,” St. Denis said. “We can’t know, without going to inspect, how much risk they represent.”

I continue to advocate Go Public Direct transactions as the preferred option for private companies desiring to go public in most situations, for simple reasons such as lower cost as well as additional transparency and credibility by becoming an SEC reporting company and additional comfort and security by going through the SEC review process.

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