China Confidential -- U.S. SEC Ending Easy Reverse Mergers

Just minutes ago, The China Confidential Blog posted that the U.S. Securities and Exchange Commission (SEC) is essentially ending the "reverse merger shell game."  China Confidential does an excellent job describing this change and how it affects China so I am carrying the entire post below: 

US SEC Ending Reverse Merger Shell Game

It's over.

The reverse merger shell game--an alternative, or back-door, method of going public in the United States--used by many Chinese and other foreign companies in recent years--has apparently come to an abrupt end. China Confidential has learned that a new ruling by the US Securities Exchange Commission--an agency assigned to protect the rights and interests of US investors--states that if a (domestic or foreign) company is going to do a reverse merger with a public shell the company will need to file audited financial statements and the equivalent of a full-blown Initial Public Offering registration statement within four days of the merger.

The SEC ruling would seem to make publicly traded shells--companies with no real business or meaningful assets, except, in some cases, cash--utterly useless.

To understand the traditional appeal of a reverse merger transaction, think of a minnow swallowing a whale. The public shell (similar to a so-called zombie company in Japan) acquires an operating private company by issuing so many shares for its stock that the private company effectively becomes the public company without having to go through a costly and time-consuming SEC registration.

Reverse mergers--or shell deals---have historically been controversial because of their inherent potential for abuse. Top-tier investment houses have almost always avoided them, as have leading venture capital firms. But the popularity--and price--of public shells increased as more and more Chinese companies rushed to go public over the past 18-24 months.

Good riddance.  Just this past week we declined such a representation involving Chinese companies because of our jaundiced view of such transactions. 

China Confidential, whose writer(s) maintains his or her (or their) confidentiality is an excellent source for up to the minute and very well written China information.