Groucho Marx: China Reverse Mergers and Public Shells

Considerations for a Reverse Merger Attorney and Others involved in Taking Private Companies Public

Chinese Reverse MergersAs an SEC Going Public Attorney, I monitor the web for interesting input of others on taking private companies public.  Chinese Reverse Mergers have been much in the news lately.

I came across an interesting post related to this topic written by a fellow attorney named William Gamble.  He noted:

The American comedian Groucho Marx once said, “I don’t want to belong to any club that will accept me as a member.” He understood that there was an economic advantage to maintaining the quality of an exclusive brand. It is a lesson that stock markets in the developed world would be encouraged to emulate, but the economic incentives are pushing the other way.

…  In the US, the markets have recently been plagued by a spate of scandals involving reverse mergers. Normally, to sell securities to investors it is necessary to go through a lengthy and expensive registration process. The process requires extensive disclosures and certifications. Providing false information can subject the promoters, lawyers and accountants involved in the listing to both civil and criminal penalties. Reverse mergers involve none of these hurdles.

If only US companies used this device, which has been around for years, there might not be any problems. But markets in developed countries are under pressure to remain competitive and global. Or to put it another way, the investment banks that thrive on these deals don’t want the regulators to scare away business. The result is that many firms from emerging markets, especially from China, have been able to raise capital with a premium granted to firms that list in developed markets.

…  Of course there are demands to tighten up the regulations of emerging market companies on developed markets, but it is hardly surprising that these are met with resistance. Additional rules in the West often result in howls of protests as the new rules are supposed to be responsible for “driving” listings to Asia. The finance industry should understand, though, that it is the honesty inherent in the brand that makes them money, and that every bad apple that they keep out will mean more money that comes in.

I liked this insight on the going public process in the U.S. and wanted to share it with you.

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