A reverse merger is a business transaction in which small or medium sized private companies merge or exchange shares with a public shell. The process helps a private company to obtain market listing without undergoing the expensive and complex process of a traditional IPO. The resulting public currency then allows the firm to use its stock for raising growth capital, acquisitions and attracting key personnel with stock incentives. The reverse merger is considered a faster and more cost-effective means of going public.
Over the past few years, more than 200 Chinese companies have adopted the reverse merger technique to access the U.S. capital markets. Any form of a transaction that can result in significant capital appreciation will attract is share of good people and its share of bad. The issue is the separation of the good from the bad, the culling out of the Enrons, Worldcoms, Boston Markets and the like. As a result, the Securities Exchange and the Public Accounting Board have initiated extensive probe into the underwriters, accounting irregularities, audits of both Chinese and other foreign companies listed on the U.S. stock exchanges. Unfortunately, when the regulatory pendulum swings and casts a net to catch the bad, it inevitably catches some of the good. The scrutiny, allegations of fraud and media attention has led to price depreciation for China traded companies as a whole.
In the recent months, about 24 Chinese-listed stocks have been suspended or delisted from all leading exchanges in the United States following broad investigations and auditor resignations. This in turn has created a substantial impact on the market size of the companies. Some the popular Chinese firms that have been subject to allegations and lawsuits filed by investors include Media Express, Electric Motor, Biotics, Education Alliance, Century Dragon, Green Agriculture, Agritech, Auto China, Heli Electronics, Changjang Energy & Mining, China Valves etc.
As the mess shakes out over the next twelve to twenty four months it will create some remarkable buying opportunities for investors that can find the good companies caught in the net.
It will also create opportunity for reverse merger firms that are willing to go through extensive due diligence to find the gems that remain in China. It is paramount to work with knowledgeable, experienced shell providers, counsel and accountants who are familiar with Chinese reverse mergers.