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Chinese DĂŠjĂ Vu

China Based Companies Look Again to U.S. Capital Markets


hina based companies created a bit of a frenzy in the U.S. capital markets during the period from 2005 through 2011.




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According to Law360, by late 2011 over 150 Chinese companies had gone public in the U.S. through reverse merger transactions with public shell companies. U.S. hedge funds, family offices and other investors were clamoring to buy securities of these companies in private placement, or PIPE, transactions that closed simultaneously with the closing of the reverse merger. Many of these hedge funds and family offices enjoyed significant returns on their investments while others who came to the party later did not do so well. In 2010 short sellers began putting out short reports on some of the China based public companies. These short sellers would first sell the company’s stock short and then issue an investigative report that identified various irregularities from fraud to undisclosed related party transactions. As the stock of many China based companies began to tank the short sellers would reap significant rewards. As a result of these short reports, announced audit committee investigations and SEC enforcement actions involving China based public companies, investors lost interest and many of the companies that remained listed on an exchange in the U.S. or quoted on the over-the-counter market began to go private or go dark. From 2011 until today it remains very difficult for China based public companies to raise capital in the U.S. from U.S. investors. Only the biggest China based companies like Alibaba ($25 billion) or ZTO Express ($1.4 billion) are able to raise any significant amount of capital from U.S. investors. Even

though the U.S. capital markets seem closed to China based companies, it seems that these companies have continued to go public in the U.S., however, they are now doing so through the front door in the form of a traditional IPO instead of the back door through a reverse merger with a public shell company. In 2014 and 2015, more than 20 China based companies listed in the U.S. through IPOs and they raised a total of approximately $29.5 billion. This year there have been six Chinese companies that either completed or are in the process of completing IPOs in the U.S., raising a total of approximately $2 billion. Unlike during the reverse merger heyday, where most companies were in the manufacturing sector, these companies are mainly operating in the e-commerce, TMT (technology, media, and telecom) and logistics industries. Chinese technology companies in particular are interested in listing in the U.S. as the U.S. markets represent not only a securities market but a potentially significant commercial market. More and more Chinese intellectual property is being exported to the U.S. Of note is the fact that the Shenzhen market only recently opened up to Hong Kong investors (and by extension U.S. investors with accounts at Hong Kong investment banks) on December 5, 2016. Hong Kong investors are now able to trade the securities listed on the tech heavy Shenzhen Stock Exchange through an equity trading link between the mainland and Hong Kong. It will be interesting to watch the level of demand for Shenzhen traded securities and

MicroCap Review Winter/Spring 2017  

MicroCap Review, The Official Magazine for the MicroCap Stock Market, is pleased to bring to you the Winter/Spring 2017 edition of the Micro...

MicroCap Review Winter/Spring 2017  

MicroCap Review, The Official Magazine for the MicroCap Stock Market, is pleased to bring to you the Winter/Spring 2017 edition of the Micro...