The April 2011 issue of China Briefing focuses on sound financial management, particularly addressing issues surrounding financial fraud in the U.S. Initial Public Offerings (IPOs) of Chinese companies. This issue includes articles discussing the use of reverse mergers as a financial technique popular among Chinese companies, which has been misused for fraudulent purposes. The article also mentions the increasing trend of Chinese companies listing in the U.S., estimating that there could be a 50% increase in listings compared to 2010.
Key points from the article:
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Financial Fraud in U.S. IPOs of Chinese Companies: This section highlights the misuse of reverse mergers as a cover for financial fraud, particularly within the context of Chinese companies listing in the U.S. Deloitte, one of the Big Four accounting firms, resigned as the auditor of China MediaExpress Holdings (CMEC), a NASDAQ-listed Chinese advertising company that listed via a reverse merger in 2009. CMEC's stock was suspended after experiencing a significant drop in value following a series of negative analyst reports and an investigative report by Seeking Alpha.
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Reverse Mergers: These are transactions used for various strategic reasons, such as expanding business scope, raising capital, or taking private companies public. They enable private companies to list publicly without the costs and delays associated with traditional IPOs. In the U.S., this involves establishing "shell" companies in the U.S. and performing a reverse merger to acquire them.
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Trends in Chinese Companies Listing in the U.S.: There is a prediction of a significant increase in the number of Chinese companies listing in the U.S., potentially up to 60 companies in 2011 compared to 41 in 2010. This increase is attributed to factors such as China's projected economic growth, yuan appreciation, and successful previous IPOs.
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Potential Misleading Nature of Chinese IPOs: Despite the high number of Chinese companies listing for IPOs, this may be misleading due to the prevalence of reverse mergers. These transactions might not accurately reflect the true number of companies seeking to list in the U.S.
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Protection for Investors: The article emphasizes the importance of due diligence for investors considering Chinese companies for IPOs in the U.S. The misuse of reverse mergers for fraudulent purposes underscores the need for thorough vetting of financial information and adherence to proper corporate governance practices.
The article concludes by suggesting that better financial due diligence is crucial for protecting investors from potential fraud and misinformation in the context of Chinese companies listing in the U.S.
