Tim Human’s monthly M&A column
The SEC’s action against reverse mergers in the US market continued in May when the commission announced it had suspended the trading of 379 ‘dormant companies’. The micro-cap stocks have been suspended before they can be ‘hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes,’ explains the SEC in a statement .
This is the latest move taken by the financial watchdog over reverse mergers, where a company joins the market by merging with a shell company that is already listed. The action marks the biggest day of suspensions ever conducted by the commission. Previously, the most companies it had suspended in a single day was 39, back in 2005.
The SEC is able to suspend the shares of a company for up to 10 business days. The firm can only be readmitted to trading once it provides updated information including financial statements, so if the company is dormant a suspension will last indefinitely.
‘Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers: the tools by which they ply their illegal trade,’ comments Robert Khuzami, director of the SEC’s division of enforcement, in the statement. ‘This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors.’
Short-sellers have accused some Chinese companies of using reverse mergers to avoid the scrutiny of an initial public offering and hide accounting fraud. The resulting scandal has left a number of US-listed Chinese firms shunned by fund managers and languishing with low valuations.
While genuine accounting frauds have been uncovered, the campaign has hit all Chinese companies that listed through reverse mergers. Bloomberg’s Chinese reverse merger index, which tracks 82 companies that trade on US exchanges, is down 45 percent over the last 12 months.
In November last year, the SEC approved new rules proposed by NASDAQ and the NYSE that mean reverse mergers will have to meet certain criteria – spending a year trading over the counter, filing audited financial statements and meeting a minimum share price – before they are allowed to list on an exchange.
