Going Public Direct Still Best for Chinese Seeking Public Shell

Reverse MergersOn July 11-12, 2011, a US team led by PCAOB director Ferguson with the other four members in attendance from the organization’s International Affairs Office, Department of Registration and Supervision, and the International Affairs Office of the SEC and Chief Accountant Office of the SEC met with a Chinese team that consisted of members from the Accounting Division at the Ministry of Finance, and International Department and Accounting Department of China Securities Regulatory Commission to address the series of financial scandals of Chinese companies listed in America.

However, the regulatory agencies failed to agree on anything.

As reported by Business Insider: A Chinese source close to the negotiations said that the US delegation drafted a list of public companies and brokerage organizations that they seek to investigate. But the Chinese side insisted that this would breach China’s sovereignty and rejected the request. The person disclosed, “It can’t even be regarded as a negotiation. The US team asked for permission to supervise within China. China and the US did not reach any agreement whatsoever this time.”

It clearly appears that the different approaches to regulation and the issue of sovereignty stifled hopes of reaching an agreement.  The US and China lack a necessary channel for supervision cooperation.

Further, with cooperation, US auditors could potential spread throughout China. The Chinese side adopts the position that its auditing industry is not yet mature and so requires special protection from outside players.

Joe Glamichael, General Manager of Global Hunter, a US fund that focuses on Chinese business, said that many issues of borrowing a shell to go public have been exposed, causing regulators and public to question these companies’ transparency, operations and the caliber of management.  He added that since these Chinese companies could easily raise a huge amount of money and invest it in anywhere in China, and risk is only to reputation, fraud is more tempting.  In fact, the crisis of trust in US-listed Chinese companies has taught US regulators a lesson. Joe Glamichael said that reverse mergers and similar methods are now regarded with skepticism. Going forward the US government will definitely strengthen the regulatory system and, after studying the reverse merger process, set new standards.

And so I continue to recommend to all of my clients, Chinese or otherwise, that going through the entire SEC review process in a GoPublicDirect transaction brings substantial benefits compared to the reverse merger with a public shell route.

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