Reuters reports that Chinese reverse merger companies that were recently delisted from the US stock exchanges are more likely to go private, as opposed to re-listing on the US or other exchanges.
Woon-Wah Siu, a Corporate & Securities partner in Pillsbury’s Shanghai office, said that she thinks it’s too early to tell the fate of Chinese reverse merger companies whose shares have been suspended from trading or which have been delisted, many of which are under investigation. Investigation usually takes time. If a company is found to have done nothing wrong, the company can get back on track by filing the all the necessary SEC reports and be listed on an exchange or be quoted on the U.S. Over-the-Counter Bulletin Board again. If a company is found to have committed wrongdoings, the company and its directors and officers may have civil and even criminal liabilities. The most unfortunate case would be when a company did not commit any wrongdoing but suffered so much reputational or financial damage from the allegations that it could not recover,” she said.
Siu explained that usually Chinese companies that became public in the US via the reverse takeover process have their shares quoted on the Financial Industry Regulatory Authority-regulated OTCBB, which requires them to be 1934 Act reporting companies. In turn, being a 1934 Act reporting company is important to any company interested in raising capital because most investors would expect some level of transparency on the part of the companies in which they invest, through their public disclosures, she said.
Recently, a number of Chinese reverse merger companies have ceased to qualify for quotation on OTCBB because they had failed to comply with their 1934 Act reporting obligations, Siu said.
However, Siu believes many companies that went public via reverse merger ultimately aim for a listing on a main board of U.S. stock exchanges. “Why would a company spend the time and effort to become public in the U.S. market? It is not cheap to go public in the U.S. even if a company does so via a reverse merger. And many of these Chinese companies want to have access to capital in a liquid and deep market in the first place to finance their operations,” she said.
As for the question of applying for a re-listing on the US exchanges, Siu warned that re-listing elsewhere is not the panacea for Chinese reverse merger companies facing regulators’ probe and lawsuits as some might think. “Those companies should deal with their current issues or they could face potential challenges in their re-listing efforts,” she said, pointing out the Hong Kong and China markets, whose stock exchanges and regulators require issuers to disclose their history.
“For instance, if an issuer applying for a listing in Hong Kong were a Chinese reverse merger company that had been delisted or investigated, the Hong Stock Exchange and the Securities and Futures Commission would want the issuer to disclose the history of the reverse merger, why the issuer was investigated by U.S. regulators, the outcome of the investigation and why the issuer went dark in the US market,” she said.
Commenting on current events, Siu said: “At the moment, it is still not easy for small and medium sized Chinese private enterprises to borrow from mainland Chinese banks. Often they are able to secure only short-term bank borrowings. Chinese banks’ lending practice is often aligned with or influenced by national policy. The state-owned enterprises have no problem in securing loans from Chinese banks. If Chinese banks can be more open to providing financing to Chinese private enterprises, it may reduce the need for these enterprises to access overseas capital markets.”
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