The Securities and Exchange Commission has approved new rules of the three major U.S. listing markets that toughen the standards that companies going public through a reverse merger must meet to become listed on those exchanges. The move comes after a number of Chinese companies that listed in the US by going through reverse mergers were found to have fudged their accounting or engaged in outright fraud.

Currently, reverse merger companies, like other operating companies, can pay to be listed on an exchange, where investors can purchase and sell shares of the company. In some cases, regulators and auditors have greater difficulty obtaining reliable information from reverse merger companies, particularly those based overseas.

Reverse mergers permit private companies, including those located outside the U.S., to access U.S. investors and markets by merging with an existing public shell company.

In summer 2010, the SEC launched an initiative to determine whether certain companies with foreign operations – including those that were the product of reverse mergers – were accurately reporting their financial results, and to assess the quality of the audits being done by the auditors of these companies.

The SEC and U.S. exchanges have in recent months suspended or halted trading in more than 35 companies based overseas citing a lack of current and accurate information about the firms and their finances. These included a number of companies that were formed by reverse mergers. In June, the SEC issued an investor bulletin warning investors about companies that engage in reverse mergers.

“Placing heightened requirements on reverse merger companies before they can become listed on an exchange will provide greater protections for investors,” said SEC Chairman Mary L. Schapiro.