Reverse Mergers-Chinese Co. and Shorts

[ihearyou2]

How many of you have caught on to how many Chinese companies are listing on the US stock exchanges via an interesting method? It is through the use of the reverse merger, where they buy a shell of a US company that is essentially DOA and use that company to list. This avoids substantial costs and jumping through hoops both in their country and to trying to list in the US.

The fascinating part is how it has also led to many abuses. The most common is different reporting typically downright fraud. Even though publicly listed and audited due to the geographical differences in location it becomes relatively easy for these companies to work off two sets of books. This act was caught by some noted shorts over the past three years that looked at their Chinese listings and saw some enormous discrepancies between the US and Chinese reporting. Predictably the numbers for the US were 300-500% better then what was being shown in China.

This offers both a great opportunity with some research and a pitfall for those that want to invest with these companies. The original short made over a million on his initial attack on one of these companies. He also pioneered the use of looking at the Chinese filings as a key indicator of the veracity of the reverse-merger companies numbers.