Chinese companies embracing transparency to build US investor trust

Two weeks ago, coincidently with the enthusiasm and optimism surrounding the Alibaba IPO, a select audience of Chinese senior management (within public and pre-IPO companies) assembled in Beijing to learn about the latest compliance and communications issues for publicly traded companies in the US.

MarcumBP ChinaBest Ideas Investment Conference, Beijing, topics included:

  • Governance Matters: Issues Investors Care About Most
  • Accounting Update: New Rules and Key Concerns
  • SEC Hot Buttons: Critical Disclosure Issues

Trevor Loe, VP at Vintage, was invited to add his expertise alongside executives from HC Wainwright, Loeb & Loeb and The Cathay Funds.

The audience was measurably different from the Chinese corporations that eroded investors’ confidence in US-listed Chinese companies three years ago. They are smarter and have learned from their peers’ past mistakes – especially those that listed by reverse merger.


Above ~ Jim Wang, HC Wainwright: Trevor Loe, Vintage: Mitch Nussbaum, Loeb & Loeb: David Selvia, The Cathay Funds

The 2010 – 2011 boom in Chinese reverse mergers, in which privately-held Chinese companies went public on a US-exchange by merging with US publicly-traded shell companies, was initially driven by the difficulties of going public in China. But that boom abruptly became a bust via a series of financial scandals – the result of the lighter regulatory scrutiny during the listing process.

One interesting point that has come out in a Stanford Graduate School of Business study, is that since “the bust,” the Chinese reverse mergers that have remained US-listed performed much better as a group than other publicly traded companies that were of similar size, in the same industry and traded over the same US-exchange.

Long before the 2010 surge of Chinese companies, reverse mergers existed. Most were US-based penny stocks, which trade through over-the-counter “pink sheets. Many are pump-and-dump with poor survival rates.

However, Chinese reverse mergers are different, says study leader, Charles Lee, professor of accounting at Stanford Graduate School of Business. Because China’s IPO market is so highly restricted, many Chinese companies that are qualified to go public in the US, cannot get approval in their own county of China. As a result, remarkably, “many of the Chinese companies that came to the United States through reverse mergers are more mature, better capitalized and show more promise than their American counterparts.” Certainly, no matter where an equity calls home, there can be fraud.

“Contrary to popular media perception, we find no evidence that Chinese reverse mergers are systematically more problematic than similar firms already trading on the same exchange,” Lee and his colleagues wrote.

We appreciate the opportunity to help these innovative and ethical Chinese corporations navigate through the S-1 process, (whitepaper – click here), communicate clearly to meet the expectations of US-based investors (whitepaper – click here) and demonstrate great governance.

Have a great day

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