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Posted on 22 May 2011 | 6,364 views

Chinese Reverse Mergers are Being Delisted in US Markets Because of Fraud

The NASDAQ and the NYSE halted trading in almost a dozen U.S. listed stocks of Chinese businesses who have engaged in “Reverse Mergers” on the NASDAQ and NYSE to protect investors from fraud in this market niche.

A reverse merger is when a private company purchases control of a public shell company and then they do a merger with the private company. With a reverse merger the private company shareholders receive most of the shares in the public company and control of the board. A reverse merger is a very fast way to go public with the time table only being a couple of weeks. The reason a reverse merger is so quick is the public shell company already went through all the paper work and reviews in order to become public.

The benefits to reverse mergers is that you can demand a higher stock offering for the company stock, going public at a lesser cost and less dilution then an initial public offering. With the reverse merger you are less susceptible to the market. When going public the benefits are great when trying to raise capital. With the company now being public the stock is liquid and able to be uses for financing. Your company will now have the ability to acquire other companies using stock. Being public allows the company to offer stock incentive plans to keep employees.

Since March 2011 alone, more than 24 China-based companies have disclosed auditor resignations, accounting problems or both — following the auditors’ inability to confirm the amounts of cash or receivables shown on the companies’ balance sheets. The SEC has recently suspended trading in three Chinese businesses that “Reverse Merged” into U.S. traded shell companies, the back-door route to the stock market. Another eight such reverse merged companies have had their registrations revoked by the SEC and NASDAQ has proposed new strict-sounding requirements for reverse merged listings, after finding fraud in some recent applications.

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