US Regulators Crack Down on Some Chinese Companies

A listed company in the U.S. with the word ‘China’ in it can usually expect to excite investor interest, but this may change, at least when it comes to small Chinese entities that got listed in America through a reverse merger. This backdoor listing route has been taken by more than 150 Chinese companies since 2007, out of a total of 600 or so reverse mergers during the same period.

In a speech to the Council of Institutional Investors Spring Meeting on April 4, SEC Commissioner Luis Aguilar highlighted the “increasing problems” in these backdoor registration companies.
“While the vast majority of these Chinese companies may be legitimate businesses,” Aguilar said, “a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud.”
Seven of these Chinese companies, including China Agritech, China MediaExpress Holdings, China Century Dragon Media and China Intelligent Lighting and Electronics, had trading in their shares halted by U.S. stock markets in March. Chinese jewelry maker Fuqi was delisted from Nasdaq on March 29.
On April 1, the SEC ordered a trading suspension on China Changjiang Mining & New Energy, following similar action on Heli Electronics on March 21.
The SEC has set up an internal task force to investigate fraud by Chinese and other foreign companies that have listed in the U.S., “with particular emphasis on companies engaging in these [reverse] mergers to achieve backdoor SEC registration,” said Aguilar.
But he admits that “there are limitations on the ability to enforce the securities laws, and for investors to recover their losses when disclosures are found to be untrue, or even fraudulent.”
Aguilar said that the SEC will be redouble efforts to enforce securities laws. “Capital formation is strengthened when investors have confidence that the laws will be obeyed and that, when they’re not, that the fraudsters will be made to pay,” he said.
“Moreover, strong enforcement – by providing deterrence – helps to ensure the disclosure is truthful and complete in the first place,” Aguilar added. “My hope is that potential fraudsters are scared into telling the truth to avoid the consequences.”

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