Attacking Chinese Firms May Come to an End

The year of 2011 was a disaster for Chinese public companies listed in the U.S, as dozens of Chinese firms – were delisted from major U.S exchanges amid investigations for accounting irregularities. However, experts expect that this storm may come to an end soon. Companies that are prepping for U.S. IPOs should hold on and wait for the upcoming bright future.

Dozens of Chinese companies, especially those that went public via reverse mergers, have had their stocks halted from trading or were investigated for tax issues, regulatory deficiencies or lack of transparency.  As a result, The Securities and Exchange Commission (SEC) warned investors to watch out for possible risks of investing in reverse merger companies and Nasdaq set new rules to tighten reverse merger standards. Meanwhile, The Public Company Accounting Oversight Board (PCAOB) also approved more stringent rules to regulate OTCBB listed firms, and the “big four” auditing firms have shut down their auditing service for reverse merger companies. The wave of accounting scandals has also tarnished the reputation of many good Chinese companies with outstanding performance and no accounting issues, as their stocks have also seen significant declines.

Drew Bernstein, co-managing partner of Marcum Bernstein and Pinchuk (Marcum BP), a firm specialized in providing auditing services for Chinese public companies, said that many Chinese firms are considering delisting or going private during this wave. In addition, some companies that planned to do an IPO in the U.S. began to adjust their strategies to consider going public on the Hong Kong exchange. However, according to Mr. Bernstein, the Hong Kong exchange is not necessarily the best substitute venue for an IPO in the U.S.

Bernstein said it is comparably easier to initially get listed on the U.S stock exchanges, but the regulatory scrutiny is more intense once a company is listed..  “When listing in Hong Kong the situation is just the opposite, where the pre-IPO process is much more stringent. Additionally, listing on the U.S exchanges is unparalleled in terms of the time it takes, which normally requires only three months.”  

He also pointed out that most institutional investors have a global presence. If they have concerns about investing in Chinese companies in the U.S. market, they would likely have the same concerns in the Hong Kong market.

One of the major services that Marcum Bernstein & Pinchuk provides is to help Chinese public companies deal with crises. Mr.  Bernstein serves as director and chairman of the audit committee of U.S.–listed companies, including  his role as an independent director of Orient Paper, Inc., which was one of the first major targets of the wave of short attacks on Chinese companies. Last summer, Orient Paper was attacked by short seller firm, Muddy Waters, with the accusation of accounting fraud. However, Orient Paper launched an independent investigation and proved the allegations false.

Looking ahead, Mr. Bernstein believes that there are two positive aspects for Chinese firms. First, after weathering this storm, most Chinese companies will take measures to increase their transparency and capabilities in dealing with such crises, so hopefully similar issues will happen less frequently in the future . Secondly, the investigation of problematic companies is approaching an end. For some of the falsely accused Chinese companies, the truth will come out very soon.

Mr. Bernstein said that right now the most important thing for Chinese firms is to do is to “hang in there”. “Investors will also eventually grow tired of unfounded short seller attacks and will reconsider investing in great Chinese companies again, and those stocks will rebound to an appropriate level,” he said.