CHINESE COMPANIES REVERSE MERGER IN THE UNITED STATES STOCK
MARKET
A Thesis
Presented to the faculty of the College of Business Administration
California State University, Sacramento
Submitted in partial satisfaction of
the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION
in
(Finance)
by
Mei Lin
SPRING
2013
CHINESE COMPANIES REVERSE MERGER IN THE UNITED STATES STOCK
MARKET
A Thesis
by
Mei Lin
Approved by:
__________________________________, Committee Chair
Hao Lin, Ph.D., CFA
__________________________________, Second Reader
Lan Liu, Ph.D., CFA
____________________________
Date
ii
Student: Mei Lin
I certify that this student has met the requirements for format contained in the University
format manual, and that this Thesis is suitable for shelving in the Library and credit is to
be awarded for the Thesis.
_____________________________________________
Monica Lam, Ph.D.
Associate Dean for Graduate and External Programs
College of Business Administration
iii
_____________________
Date
Abstract
of
CHINESE COMPANIES REVERSE MERGER IN THE UNITED STATES STOCK
MARKET
by
Mei Lin
Statement of Problem
The economy in China is rapidly developing and the Chinese financial market
could not satisfy some of the private Chinese companies’ growth and needs. These
companies are seeking ways to expand their development into the global market. The
market of choice was the United States financial market—one of the most developed
markets that are fully protected with a full-fledged legal system and its strong
enforcement organizations. However, due to the culture differences between the United
States and Chinese financial markets, there would be problems uncovered during the
progress of reverse mergers in regards to financial reports and accounting frauds.
Sources of Data
The sources of data applied in this thesis are mainly the secondary data from SEC
filing reports, Bloomberg news reports, World Federation of Exchanges 2007 annual
report, and Chinese media reports.
iv
Conclusions Reached
After two decades of Chinese reverse mergers in the United States stock market,
private Chinese companies broke the rules with accounting frauds and caused the
negative influences in the industry. It is certainly a warning for potential companies
seeking reverse merger in the United States to follow rules and standards of the financial
market in the future. It also led to consequences that the United States Securities and
Exchange Commission had to make stronger standards for the reverse mergers, which
significantly increased the difficulty of future reverse mergers.
_______________________, Committee Chair
Hao Lin, Ph.D., CFA
_______________________
Date
v
TABLE OF CONTENTS
Page
List of Tables ............................................................................................................ viii
List of Figures ............................................................................................................. ix
Chapter
1. INTRODUCTION……………………………………………………………….. 1
Study Focus ....................................................................................................... 1
2. MOTIVATIONS FOR PRIVATE CHINESE COMPANIES TO GO PUBLIC IN
THE UNITED STATES STOCK MARKET .......................................................... 3
Theoretical Motivations……………………………………………………….3
Practical Motivations………………………………………………………….5
3. REVERSE MERGERS ........................................................................................... 8
Reverse Mergers SWOT Analysis…. ................................................................9
4. A CHINESE COMPANY REVERSE MERGER EXAMPLE………....………..12
5. ACCOUNTING FRAUD INFLUENCES ON OTHER REVERSE
MERGERS ….......................................................................................................14
6.
PUBLIC OPINIONS ON REVERSE MERGER ACCOUNTING
FRAUDS………………………………….…………………..……………...… 17
7.
REVERSE MERGER’S PROSPECTS AND EXPERTISE’S
SUGGESTIONS…………………………………………………………………20
Appendix A. Private Chinese Companies Reverse Merger in NASDAQ 1995-2011. 22
vi
Appendix B. Private Chinese Companies Reverse Merger in NYSE 2001-2011 ...... 24
References ................................................................................................................... 25
vii
LIST OF TABLES
Tables
1.
Page
Table 1: Top 5 Global Security Exchanges in Terms of Market Capitalization
in 2007………………………..………… .…………………………. 6
2.
Table 2: Security Exchange Turnover-Market Capitalization
Ratio………………………….………………………………………. 7
viii
LIST OF FIGURES
Figures
1.
Page
Figure 1: Number of Chinese Reverse Mergers in US Stock Market from Year
1995-2011 ………………………….………………………………. 2
ix
1
Chapter 1
INTRODUCTION
In the early 1990s, the Chinese economy was growing in an exponential rate
where the business laws were struggling to keep up with growing companies. To
maintain a strong company and have it flourish, rules are needed to keep the company
balanced and controlled. However, the business laws did not improve and that led to
options that would force Chinese companies to search for a solution outside of China.
One of the solutions they chose was to start reverse mergers in the United States stock
market. As of 2011, 59 out of 82 Chinese reverse merger companies were listed on
National Association of Securities Dealers Automated Quotation (Appendix A) and 23
were listed on New York Stock Exchange (Appendix B) through reverse mergers. Figure
1 indicates the number of private Chinese companies that did reverse mergers in the
United States of each year from 1995 to 2011. Each year there was a significant increase
of reverse mergers until 2007. The number of reverse mergers started falling since 2008
when accounting frauds were discovered and finally reached zero when the frauds were
confirmed and announced by SEC in December of 2011.
Study Focus
The purpose of this thesis is to study private Chinese companies reverse mergers
in the United States stock market, including what are the motivations for these private
companies to list their stocks in United States stock markets and what are the benefits to
choose reverse merger. This thesis also takes in a case study on a failed Chinese reverse
2
merger company. The case study will be associated with analysis on the factors that led to
the failure of the reverse merger; how these factors affect other reverse merger
companies; what are the Chinese public media’s opinions; and how it affects reverse
mergers to private Chinese companies in the United States stock market in the future.
Figure 1. Number of Chinese Reverse Mergers in US Stock Market from Year 1995-2011
China Reverse Mergers in US
20
18
16
14
12
10
8
6
4
2
0
Source of data: Bloomberg news reports
3
Chapter 2
MOTIVATIONS FOR PRIVATE CHINESE COMPANIES TO GO PUBLIC IN THE
UNITED STATES STOCK MARKET
The many benefits and motivations that drive the private Chinese companies to go
public in the United States stock market will be the focus from both motivations in
theoretical perspectives and practical perspectives in this chapter.
Theoretical Motivations
According to Market segmentation hypothesis, or risk premium hypothesis,
spreading the risks among multiple markets will decrease the capital cost and increase the
company’s market value. It was proved by Alexander Eun & Janakiramanan (1998),
Foerster & Karolyi (1999) that when foreign companies announce that their companies
will be listed in the United States market, the stock prices in their home countries would
be increased substantially.1 Therefore, listing in a foreign market would make the
company stronger and more marketable for future growth.
Amihud and Mendelson (1986) believe that, in accordance with Liquidity
hypothesis, a strong liquid stock market will effectively lower risk compensations and
transaction costs by executing trading immediately so that the trading transactions will
not affect market price.2 Liquidity is the ease of trading a security. Going public in a
Alexander, G.J., C.S. Eun and S. Janakiramanan, “International listings and stock returns: Some empirical
evidence,” Journal of Financial and Quantitative Analysis 23, (1988) 135-151.
2
Yakov Amihud, Haim Mendelson, and Lasse Heje Pedersen. “Liquidity and Asset Prices.” Foundations
and Trends in Finance, 2005, vol.1, no. 4, pp. 269-364.
1
4
liquid stock market will increase the chance to produce capital for the company and can
further reinforce its presence in the market.
Listing in foreign markets creates more recognition from investors and according
to the Investor Bulletin: Reverse Mergers on SEC that “being public may give a company
increased value in the eyes of potential acquirers.” Consistent with Investor recognition
hypothesis by Merton (1987), different investors may have different recognitions on
different securities and investors will only invest in the securities they are familiar with;
when everything else is equal, the more recognition it creates, the lower the investors
earnings will be, and the higher the security’s market value. 3 More investors or
shareholders will share the risks of the company and therefore decrease the cost of capital
(Foerster and Karolyi, 1999).
Investor protect hypothesis indicates that highly disclosed financial information
and well-established legal system will effectively protect investors benefits by providing
full access and decrease the cost for investors to get the financial information, and
therefore increase the company’s market value indirectly (Reese and Weisbach, 2002).4
The more financial information a company provides to the public, the less risky it appears
to its potential investors.
Signaling effect states that if a company comes from a country with weak laws
and weak institutions could successfully go public in a strong foreign financial market, it
3
4
Lehavy, Reuven and Richard G. Sloan, 2008. “Investor recognition and stock returns.” p.2-4
Reese , William A. and Michael S. Weisbach, 2002. “Protection of Minority Shareholder Interests,
Cross-listings in the United States, and Subsequent Equity Offerings.”
5
will create a positive signaling effect because it proves such company is reliable and
therefore increase the company’s market value (Cantale, Fuerst, and Moel, 1996-1999).5
When the market value is increased, local investors of the foreign financial market would
view the company as a potential investment if it continues to stay a resilient company.
Practical Motivations
The United States holds the largest and most stable stock market in the world. As
it is shown in Table 1, New York Stock Exchange (NYSE) is the largest security
exchange that holds $12,650,883 million market capitalization, which is three times the
size of the second largest security exchange—Tokyo Stock Exchange ($4,330,922
million market capitalization). In addition, another $4,013,650 million market
capitalization in National Association of Securities Dealers Automated Quotation
(NASDAQ) makes United States the largest stock market with a strong total of $16.66
trillion market value. This provides those who are listed in United States stock market
abundant corporate financing recourses.
5
Cantale, S., Arturo Bris, and George Nishiotis, 2005. “A Breakdown of the Valuation Effects of
International Cross-Listing.” Tulane University, IMD Yale School of Management and ECGI, and
University of Cyprus.
6
Table 1. Top 5 Global Security Exchanges in Terms of Market Capitalization in 2007
Ranking
Security Exchange
Market Capitalization (in millions)
1
New York Stock Exchange
$
12,650,883.00
2
Tokyo Stock Exchange
$
4,330,922.00
3
Pan-European Stock Exchange
National Association of Securities Dealers
Automated Quotation
London Stock Exchange
$
4,222,680.00
$
4,013,650.00
$
3,851,706.00
4
5
Source of date: World Federation of Exchanges 2007 Annual Report
China domestic capital market is still growing and is not yet fully developed, from
both regulation and operations point of view, is another main reason why Chinese
companies prefer to go public in foreign stock markets rather than in Chinese market
(Wei Wang, 2003). In that case, United States stock market certainly becomes one of the
best choices as it has been highly regulated and enforced by SEC6 and the business law.
According to SEC enforcement policies, all foreign applicants have to reconcile and
consolidate their financial statements to the United States Generally Accepted
Accounting Principles (GAAP) and disclose their financial statements for the past three
years. To a certain degree, it would successfully force the Chinese companies to
consummate their financial reporting system and standardize the company’s business
operations and administrations.
United States stock market is liquid and high liquidity will effectively lower risk
compensations and transaction costs by executing trading immediately so that the trading
transactions will not affect market price. One of the most effective methods to evaluate
6
The U.S. Securities and Exchange Commission (SEC) is a federal agency that holds primary
responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's
stock and options exchanges, and other electronic securities markets in the United States.
7
market liquidity is to calculate security exchange turnover-market capitalization ratio.
The higher the ratio, the more liquid the market is. Take the Year 2007 as an example in
Table 2, the most liquid security exchange is NASDAQ with a security exchange
turnover-market capitalization ratio of 3.8, followed by London Stock Exchange (2.7),
NYSE (1.9), Hong Kong Stock Exchange (0.8) and Singapore Stock Exchange (0.7). In
that case, NASDAQ in the United States will be the best choice for companies to list and
investors to invest.
Table 2. Security Exchange Turnover-Market Capitalization Ratio
Security Exchange
National Association of Securities
Dealers Automated Quotation
London Stock Exchange
Turnover
Market Capitalization
Ratio
$
15,320,133.40
$
4,013,650.30
3.8
$
10,324,334.60
$
3,851,705.90
2.7
New York Stock Exchange
$
29,209,971.20
$
15,650,832.50
1.9
Hong Kong Stock Exchange
$
2,138,698.50
$
2,654,416.10
0.8
Singapore Stock Exchange
$
381,622.30
$
539,176.60
0.7
Source of date: World Federation of Exchanges 2007 Annual Report
Going public in a foreign stock market helps companies create recognition,
expand businesses internationally, and generate more financing opportunities, such as
equities, convertible debts, and cheaper bank loans especially in those highly developed
and active capital markets (Yuan Sen Cui, 2004).
8
Chapter 3
REVERSE MERGERS
Reverse merger, also known as reverse takeover, is an existing public “shell
company7,” which is a public reporting company with few or no operations, acquires a
private operating company—usually one that is seeking access to funding in the U.S.
capital markets. A specific reverse merger example of a private Chinese company in the
United States market would be: A Chinese company is growing and decided that their
best opportunity for development and future growth would be to enter the United States
market. They could register a public company in the United States or find an existing
public shell company to purchase. Once the board members or shareholders of the
Chinese company purchase control of the public shell company, the board members or
shareholders of the private company will receive majority of the shares of the public
company, become part of the board, control the shell company, and make the shell
company acquire the private company in China. Then, the Chinese company would be
eligible to trade publicly in the stock exchange and issue secondary public offerings 8.
This whole transaction process is called reverse merger.
7
A shell company in a reverse merger refers to a publicly traded company has failed to achieve their
original business objectives and terminated their operations, but still maintains the publicly traded status.
The public company has to have no debts or net assets to be qualified to be a shell in a reverse merger
transaction. The shell company will be remaining the same original structure during the reverse merger
process. However, shell companies could also be registered solely for entering into a reverse merger
transaction.
8
A secondary public offering (SPO) is for a publicly traded company to issue more shares after initial
public offering. The difference between SPOs and IPOs is that SPOs do not need to go through the time
and money-consuming process as IPOs do. Usually, these kinds of public offerings are made by companies
wishing to refinance, or raise capital for growth. Money raised from these kinds of secondary offerings
goes to the company, through the investment bank that underwrites the offering.
9
Different from Initial Public Offering9, in a reverse merger transaction, the private
company does not need to go through an expensive and time-consuming examination
with state or federal regulators. However, a comprehensive disclosure document
containing audited financial statements and significant legal disclosures is required by the
Securities and Exchange Commission for reporting issuers. The disclosure is filed when
the reverse merger transaction is completed, on Form 8-K in SEC filing reports.
Reverse Mergers SWOT Analysis
A reverse merger often is perceived to be a quicker and cheaper method of going
public than an initial public offering.
Strengths compared to IPO:
A reverse merger substantially reduces listing process from one year to three
months on average (Huang, Qin, 2005) as disclosure documentations are not generally
reviewed by SEC. Senior management has more control of the transaction process and
less reply on the market conditions since the publicity process is not heavily regulated by
SEC or the stock market. A reverse merger could also bring down the legal and
accounting fees from one million US dollars to less than $500,000 (Huang, Qin, 2005)
partially because it does not require private Chinese companies to consolidate its
financial reports to US accounting standards. In the meanwhile, a reverse merger is less
9
Initial Public Offering (IPO) is the most legit way to list a private company in a foreign stock market and
it is also known as stock market launch. Other than merging with a public shell company, IPO is a private
company submits a listing application to the overseas securities commissions, which is Security and
Exchange Commission (SEC) in the United States. Once the application is approved, the company can
issue and list stocks or derivatives at the local security exchange organizations. However, the application
review process could last for years and it involves with huge amount of fees and costs.
10
risky compared to an IPO. According to China BAK Battery, Inc. Reverse Merger
Strategies in the US Stock Market, once the application of listing is denied; all the legal
and accounting fees become sunk costs. A reverse merger creates lower fees and a lower
chance to be rejected compared to an IPO. In addition, while the public shell company is
required to report the reverse merger in a Form 8-K in SEC filing reports, there are no
registration requirements under the Securities Act of 1933 as there would be for an IPO.
Requirement standards for a reverse merger are also much lower than IPO: any legitimate
operating business can become publicly traded through a reverse merger regardless of
their financial size or conditions.
Weaknesses:
A reverse merger market that lacks the SEC’s regulations on the listing process
and financial reports enforcement will make it hard for Chinese companies to find shell
companies that will match them perfectly for a reverse merger.
Opportunities:
More future financing opportunities will be available to these Chinese companies
as they get more exposures from the SEC official channel and the public Medias, such as
issuance of additional stock in a secondary public offering and the exercise of warrants10.
What’s more, listing a company in a stock market with high liquidity could easily raise
the company’s capital by issuing more shares.
10
Exercise of warrants: stockholders have the right to purchase additional shares in a company at
predetermined prices. When many shareholders with warrants exercise their option to purchase additional
shares, the company receives an infusion of capital.
11
Threats:
Those Chinese companies who do not fully understand US laws or accounting
standards could unintentionally violate US laws. Lack of law enforcement and SEC
regulations could potentially make the law violation worse and cause accounting frauds.
In addition, the Chinese companies may face double taxation problems and reduce their
profits.
12
Chapter 4
A CHINESE COMPANY REVERSE MERGER EXAMPLE
From the early 1990s until 2013, there are more than 300 private Chinese
companies listed in the American security exchange marketplaces through reverse
mergers. Some of them significantly increased their stock prices and successfully
advanced from Over-The-Counter Bulletin Board (OTCBB, small capital market) to
NASDAQ or NYSE (large capital markets), while a large number of others failed in
reverse mergers and were delisted because of accounting frauds. The following is a failed
reverse merger example of China Energy Savings Technology, Inc.
China Energy Savings Technology, Inc. (China Energy) is a Nevada shell
corporation formed by merging with Shenzhen Dicken Industrial Development, Ltd.
(“Dicken Industrial”), a Chinese private company that manufactures and sells energy
savings equipment. They were listed on the NASDAQ stock market between April 2005
and February 2006 (SEC, 2010). Moore Stephens Wurth Frazer & Torbet, LLP, a public
accounting firm registered with the Public Company Accounting Oversight Board
(PCAOB) located in Orange County, California, conducted annual audits and quarterly
reviews of the financial statements for China Energy in 2004 and 2005. However, the
auditor, Kerry Dean Yamagata who was in charge of this auditing case, was later
determined of failing to conduct the relevant audits and reviews in accordance with the
standards and rules of PCAOB (SEC, 2010).
13
According to a SEC report released on December 20, 2010, China Energy has
substantially overstated its Earnings per Share in its fiscal year’s 2004 annual report, and
revenues and net income in its fiscal year’s 2005 annual report and two quarterly reports.
SEC’s report also indicates that even though Yamagata determined that the China Energy
engagement involved high risks, instead of exercising professional skepticism and due
professional care, she issued unqualified audit opinions in China Energy’s fiscal year
2004 and 2005 annual reports and issued interim review reports with no reservations in
China Energy’s quarterly reports in fiscal year 2005.
As a result, “SEC filed a civil injunctive action against China Energy and certain
other entities and individuals, alleging violations of the antifraud and registration
provisions of the federal securities laws on December 4, 2006. In March 2009, the U.S.
District Court for the Eastern District of New York entered a final judgment in that
litigation that permanently ordered China Energy and the other liability defendants from
violations of the antifraud and registrations provisions. This ordered the fee of various
penalties and approximately $35 million in disgorgement and interest, and certain other
ancillary relief.” (SEC, 2010) In addition, Moore Stephens Wurth Frazer & Torbet, LLP
was eventually charged with $129,500 fine by SEC. China Energy Savings Technology
Inc. was suspended from stock trading and was later delisted from NASDAQ National
Market System later in 2006.
14
Chapter 5
ACCOUNTING FRAUD INFLUENCES ON OTHER REVERSE MERGERS
After the accounting fraud was discovered between Moore Stephens Wurth Frazer
& Torbet, LLP and China Energy Savings Technology Inc., a lot of American accounting
firms and Chinese reverse mergers companies were accused with similar accounting
frauds one after another. SEC’s statistics shows that from 2007 to 2010, 159 out of 600
reverse mergers in the United States stock market were private Chinese companies. SEC
started intensively investigating these Chinese reverse mergers from December 2010 and
issued an investor bulletin cautioning investors about investing in reverse mergers, stating
that they may be prone to fraud and other abuses on June 9, 2011. As expected, the stock
prices and market values of these companies who were involved with investigations,
significantly dropped during the investigation period. As a result, more than 50% Chinese
reverse merger companies were eventually suspended or delisted from US security
exchange by 2011.
In order to prevent accounting frauds from further exacerbating, SEC
promulgated a series of new decrees in regards to reverse merger policies on November
9, 2011. According to an article SEC Approves New Rules to Toughen Listing Standards
for Reverse Merger Companies released on SEC official website, the new rules are as
follows:
“Under the new rules, Nasdaq, NYSE, and NYSE Amex will impose more
stringent listing requirements for companies that become public through a
15
reverse merger. Specifically, the new rules would prohibit a reverse
merger company from applying to list until:


The company has completed a one-year “seasoning period” by
trading in the U.S. over-the-counter market or on another
regulated U.S. or foreign exchange following the reverse merger,
and filed all required reports with the Commission, including
audited financial statements.
The company maintains the requisite minimum share price for a
sustained period, and for at least 30 of the 60 trading days,
immediately prior to its listing application and the exchange’s
decision to list.
Under the rules, the reverse merger company generally would be exempt
from these special requirements if it is listing in connection with a
substantial firm commitment underwritten public offering, or the reverse
merger occurred long ago so that at least four annual reports with audited
financial information have been filed with the SEC.”
In general, there are three main points in the new rules: (1) reverse merger
companies have to start with the small capital market, over-the-counter market;
(2) financial reports auditing and disclosure requirements are stricter and clearer;
and (3) companies’ stock price performances become one of the most important
criteria for reverse merger standards. The purposes of these new rules are (1) to
raise the threshold of reverse merger market by the size of companies’
capitalization, (2) to protect investors’ benefits and prevent companies from
overstating financial statements, and (3) to screen out bad performing stocks from
cheating the system and investors through counterfeiting financial reports.
NASDAQ China ex-Chief Representative Xu Guangxun indicates that the new
decrees that SEC has promulgated on one side is intended to further regulate the reverse
16
merger market by prompting American professional organizations, such as American
security traders, law firms, accounting firms and so on, to carry out the standard codes
and ethics in their businesses. On the other side, the new decrees also appeal to the
potential reverse merger companies to strictly follow and satisfy all the listing
instructions and requirements of NASDAQ OMX, NYSE Euronext and NYSE AMEX
during the reverse merger process.
17
Chapter 6
PUBLIC OPIONIONS ON REVERSE MERGER ACCOUNTING FRAUDS
The Chinese public media and financial experts believe that negligence caused the
accounting fraud and they are mainly from these following three parties.
First of all, the Chinese Government lacked in formulating a strong market
regulating system toward Small and Medium-sized Companies (SMEs) and China
Securities Regulatory Commission (CSRC) failed in regulation and monitoring of its
stock market for SMEs as well. This made it difficult for SMEs to be controlled when
their growth exploded and by not having a steady growth of the company, their desire to
grow without structure affected the growth and increased the risk of the company. As it is
mentioned in the beginning of the thesis, the development of the Chinese stock market
could not keep up with the growth of the economy and the businesses that developed.
Lacking policymaking and regulation of stock market gave the SMEs a chance to cheat
the system by creating three different versions of accounting reports. One version is for
China's National Industrial and Commercial Bureau for tax purposes, another version is
SEC filing reports for reverse merger application purposes, and the last version is called
internal accounting record, which is also the most truthful version for the companies to
keep track of the actual revenues and expenditures.
Secondly, SEC did not efficiently supervise reverse merger market by reviewing
each of their reverse merger applications as how they did for initial public offering in
large capital markets, such as NASDAQ and NYS. SEC was not prepared for China’s
18
growth and their emergence in the United States stock market. One of the reasons that
SEC does not have enough resources to handle the SMES reverse merger is the statistics
in the article Why United States Lack of Regulation in Reverse Mergers Market, “it will
take 800 investigators at least two years to review all the SMEs reverse merger
applications and dig out all the frauds in the financial reports.” What makes the review
procedure more difficult is the investigators will have to travel overseas constantly for
on-the-spot investigations. This will be an expensive, time-consuming, and unachievable
procedure. SEC would not have the work force, time or the money to do something of
that magnitude of an investigation. This coupled with China’s growth into the United
States financial market created a dent in the armor for frauds in the financial reports.
Lastly, even though there are problems that exist in the Chinese accounting
system, there are also some external factors involved in this incident as well. Accounting
frauds may not be serious enough to make a company go bankrupt in China, but it is
treated as one of the most significant problems in the United States. In other words, due
to the cultural differences between the United States and China, the SMEs are not so
knowledgeable about United States business law and stock market rules. Not being
knowledgeable about the business law is a huge detriment to the company because minor
mistakes are compounded by other mistakes where being knowledgeable of the business
law would have prevented it. When certain broker-dealers fail to inform Chinese SMEs
about the United States market rules and the business law and cooperate with SMEs in
counterfeiting the financial reports, it makes the situation even worse. Technically, you
19
cannot lay all the faults to the Chinese SMEs; some American broker-dealers have to take
partial responsibility as well.11
Baidu Library. “Why Chinese Companies List in United States Stock Market.”
<http://wenku.baidu.com/view/a0ed61670b1c59eef8c7b4c0.html>
11
20
Chapter 7
REVERSE MERGER’S PROSPECTS AND EXPERTISE’S SUGGESTIONS
Ronald Wan, the CEO of Softbank Investment Group with more than 15 years of
investment experiences, indicates that in the past decade, Chinese companies swarmed in
the United States stock market through reverse mergers and the accounting fraudulent
incidents obviously created negative influences to the public in terms of reverse mergers.
The negative influences not only affected the Chinese companies, but affected the
strength of the United States financial market as well. The new SEC rules have certainly
made reverse mergers more difficult for not only Chinese companies, but also companies
from all other nations. Thus, less foreign companies would have the chance to go public
in the United States stock market. This reduced the chance of investors to be involved in
trading activities and therefore, decreased the liquidity of the United States stock market.
The number of reverse mergers decreased exponentially since SEC published the new
rules for reverse mergers. On one hand reverse merger requirements are now a lot higher
than before the accounting frauds; on the other hand, it is also because the United States
reverse mergers market is a lot more heavily regulated through controlling reverse merger
company’s capital size, auditing and disclosing financial reports, and monitoring stock
price performance.
Some anonymous Chinese financial specialist warns the potential reverse merger
companies that lack of regulation by SEC and China Securities Regulatory Commission
provides a great breeding ground for counterfeiting financial reports. This will lead to
21
many companies taking advantage of the lack of regulation and many reverse merger
companies will get a small benefit in return. Therefore, these companies really need to
take a second to think before listing in the United States stock market because other than
China, accounting frauds in United States will cause the company to go under.
For those private companies that are planning to list in the United States stock
market, it is necessary to figure out your growth needs and development directions
beforehand. Take a moment to think if listing in a foreign stock market is important to
these companies. It is also necessary to find out what the alternatives are in terms of stock
marketplaces and listing methods for the companies. Some of the stock marketplaces may
have low standard requirements or simple procedures. However, it is all based on trust
and credibility. When you gain the rights to be listed in a foreign market, do not forget to
fulfill your obligations by following the rules and the business laws.
22
APPENDIX A
Private Chinese Companies Reverse Merger in NASDAQ 1995-2011
Name of Chinese Companies
Ticker
Exchange Location
Cogo Group
COGO
Nasdaq
7/17/1995
ChinaNet Online Holdings
CNET
Nasdaq
5/12/1998
China Valves Technology
CVVT
Nasdaq
3/17/2000
Winner Medical Group
WWIN
Nasdaq
3/31/2001
Jiangbo Pharmaceuticals
JGBO
Nasdaq
4/6/2001
China Natural Gas
CHNG
Nasdaq
8/20/2001
Telestone Technologies
TSTC
Nasdaq
1/3/2002
Zoom Technologies
ZOOM
Nasdaq
2/28/2002
SPU
Nasdaq
1/21/2004
SORL Auto Parts
SORL
Nasdaq
5/10/2004
China Recycling Energy
CREG
Nasdaq
6/23/2004
China Automotive Systems
CAAS
Nasdaq
10/23/2004
Harbin Electric
HRBN
Nasdaq
1/11/2005
China BAK Battery
CBAK
Nasdaq
1/20/2005
Zhongpin
HOGS
Nasdaq
1/30/2005
Skystar Bio-Pharmaceutical
SKBI
Nasdaq
9/20/2005
Origin Agritech
SEED
Nasdaq
9/27/2005
HPJ
Nasdaq
1/3/2006
China-Biotics
CHBT
Nasdaq
3/22/2006
China Housing & Land Development
CHLN
Nasdaq
4/21/2006
China HGS Real Estate
HGSH
Nasdaq
5/1/2006
China Sky One Medical
CSKI
Nasdaq
5/11/2006
Wonder Auto Technology
WATG
Nasdaq
6/22/2006
China Fire & Security Group
CFSG
Nasdaq
10/27/2006
AgFeed Industries
FEED
Nasdaq
10/31/2006
Yucheng Technologies
YTEC
Nasdaq
11/3/2006
NF Energy Saving
NFEC
Nasdaq
11/15/2006
Gulf Resources
GFRE
Nasdaq
12/10/2006
Sutor Technology Group
SUTR
Nasdaq
2/1/2007
Wuhan General Group China
WUHN
Nasdaq
2/7/2007
CRTP
Nasdaq
2/16/2007
SkyPeople Fruit Juice
Highpower International
China Ritar Power
Reverse Merger Date
23
China TransInfo Technology
CTFO
Nasdaq
5/14/2007
Jingwei International
JNGW
Nasdaq
5/16/2007
Kandi Technologies
KNDI
Nasdaq
6/29/2007
Shiner International
BEST
Nasdaq
7/23/2007
Hollysys Automation Technologies
HOLI
Nasdaq
9/20/2007
Cleantech Solutions International
CLNT
Nasdaq
11/13/2007
China Yida Holdings
CNYD
Nasdaq
11/19/2007
A-Power Energy Generation Systems
APWR
Nasdaq
1/18/2008
China Infrastructure Investment
CIIC
Nasdaq
2/8/2008
Yuhe International
YUII
Nasdaq
3/12/2008
QKL Stores
QKLS
Nasdaq
3/28/2008
China Cablecom Holdings
CABL
Nasdaq
4/9/2008
SmartHeat
HEAT
Nasdaq
4/14/2008
Yongye International
YONG
Nasdaq
4/17/2008
Shengkai Innovations
VALV
Nasdaq
6/9/2008
Deer Consumer Products
DEER
Nasdaq
9/3/2008
China Information Technology
CNIT
Nasdaq
10/31/2008
China Auto Logistics
CALI
Nasdaq
11/10/2008
China XD Plastics
CXDC
Nasdaq
12/24/2008
AutoChina International
AUTC
Nasdaq
2/4/2009
THT Heat Transfer Technology
THTI
Nasdaq
6/30/2009
China Jo-Jo Drugstores
CJJD
Nasdaq
9/17/2009
Guanwei Recycling
GPRC
Nasdaq
11/5/2009
Kingold Jewelry
KGJI
Nasdaq
12/23/2009
China Shengda Packaging Group
CPGI
Nasdaq
4/8/2010
Keyuan Petrochemicals
KEYP
Nasdaq
4/22/2010
China Biologic Products
CBPO
Nasdaq
before 2007
China Ceramics
CCCL
Nasdaq
complicated before 2010
Source of date: Bloomberg news reports and SEC filing reports
24
APPENDIX B
Private Chinese Companies Reverse Merger in NYSE 2001-2011
Name of Chinese Companies
Ticker
Exchange Location
China Pharma Holdings
CPHI
NYSE Amex
7/24/2001
Tiens Biotech Group
TBV
NYSE Amex
2/11/2002
General Steel Holdings
GSI
NYSE Amex
10/14/2004
Orsus Xelent Technologies
ORS
NYSE Amex
3/31/2005
PUDA
NYSE Amex
7/15/2005
Ever-Glory International Group
EVK
NYSE Amex
8/22/2005
Aoxing Pharmaceutical
AXN
NYSE Amex
7/6/2006
China Shenghuo Pharmaceutical Holdings
KUN
NYSE Amex
8/31/2006
China Shen Zhou Mining & Resources
SHZ
NYSE Amex
9/15/2006
New Energy Systems Group
NEWN
NYSE Amex
4/24/2007
China GengSheng Minerals
CHGS
NYSE Amex
4/25/2007
American Lorain
ALN
NYSE Amex
5/3/2007
Longwei Petroleum Investment Holding
LPH
NYSE Amex
10/16/2007
Orient Paper
ONP
NYSE Amex
10/29/2007
Tianyin Pharmaceutical
TPI
NYSE Amex
10/30/2007
CMFO
NYSE Amex
11/17/2007
SIHI
NYSE Amex
5/12/2008
CNAM
NYSE Amex
6/27/2008
NIV
NYSE Amex
7/25/2008
China Nutrifruit Group
CNGL
NYSE Amex
8/14/2008
Feihe International
ADY
NYSE Amex
10/12/2010
China North East Petroleum Holdings
NEP
NYSE Amex
4/21/2011
China Botanic Pharmaceutical
CBP
NYSE Amex
early 2006
Puda Coal
China Marine Food Group
Sinohub
China Armco Metals
NIVS IntelliMedia Technology Group
Source of date: Bloomberg news reports and SEC filing reports
Reverse Merger Date
25
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