Several years ago, US investors rushed to invest in Chinese Reverse Merger Companies, that is Chinese companies going public in the US, primarily through reverse mergers with public shells rather than in a GoPublicDirect transaction fully reviewed by the SEC. A great many of these investors have lost a lot of money. Will they ever recover any of their losses? It’s not likely.
As readers of this blog and site know, our firm believes any company, foreign or domestic, considering going public in the US go through the full SEC registration and review process rather than trying to back door into a US listing with a reverse merger with a public shell.
According to ChinaRealtimeReport, Cornerstone Research, which tracks class actions suits in the U.S., has reported there were more than 45 class action motions launched against Chinese reverse merger companies listed in the U.S. between the begining of 2010 and mid-2012. Reverse mergers allow a company to obtain a stock market listing by taking over the shell of listed company that no longer has any operations. The process is a lot less transparent that a traditional initial public offering, and most of the Chinese companies that have run into trouble used this method to list.
The problem for US investors in attempting to recover their losses is providing evidence that the company they invested in did, in fact, lie to them. All the relevant documents about most of these companies are physically located in China and written in Chinese. The U.S. courts have been unable to compel Chinese companies to hand over necessary documents. Even the SEC has had difficulties in obtaining relevant documents, not just from the companies but also from their foreign auditors. Many of these companies have completely shut down communication with investors and are not even engaged in the legal process launched against them.
Recently, Lewis Ferguson, a board member of the Public Company Accounting Oversight Board, the U.S. audit-industry’s regulator, said that 126 Chinese companies have either been delisted from U.S. exchanges, or “gone dark” — meaning that they are no longer filing current reports with the SEC — since the troubles started in late 2010.
So before you hop onto that next great deal, check and see if the company has done what we recommend our clients do: Go through a full SEC review process.