Nasdaq halts IPOs of small Chinese companies while investigating stock rally

NEW YORK (Reuters) – Nasdaq has halted preparations for the initial public offering (IPO) of at least four small Chinese companies as it investigates these companies’ short-term equity rallies after their debut. According to the lawyers and bankers working on launching such shares.

The exchange operator’s actions come amid a surge in shares of Chinese companies raising small sums, usually $50 million or less, in an IPO. These stocks rise as much as 2,000% in their prime, only to fall in the following days, upsetting investors who are bold enough to speculate on small stocks.

Douglas Ellenoff, corporate and securities attorney at Ellenoff Grossman & Schole LLP, said he was told by Nasdaq that some IPOs would not be allowed to proceed “until anomalous trading activity in some Chinese issuers is identified earlier this year.”

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“These were last minute phone calls, just as we thought we were going to go somewhere with the deals,” Ilinov said.

Nasdaq began asking questions of Chinese advisors nominated for the initial public offering in mid-September. The questions were about who the existing shareholders were, where they reside, how much they invested and whether they were offered interest-free debt so they could participate, according to one of the bankers, Dan McClury, head of capital markets. In Busted Securities.

The lawyers and bankers spoke to Reuters on condition of anonymity for the names of the four companies that halted their IPOs.

It is not clear what action the Nasdaq will take once it completes its investigation and whether all or some of the stalled IPOs will be allowed. A Nasdaq spokesman declined to comment.

Seven sources working on initial public offerings of small Chinese companies spoke to Reuters on condition of anonymity or their clients. These sources said the ephemeral stock rally was caused by a few foreign investors who hid their identities and grabbed most of the shares in the offerings, creating the perception that debuts are in demand.

As a result, Chinese IPOs in the US this year have returned an average of a staggering 426% on the first trading day, compared to 68% for all other IPOs, according to data from Dealogic.

The Securities and Exchange Commission (SEC) and other US financial regulators have not yet announced a successful prosecution of these dumping schemes because Chinese companies and their offshore bankers have so far been instrumental in carrying them out covertly, according to the seven sources said.

A spokesman for the Securities and Exchange Commission did not immediately respond to a request for comment.

loopholes

Nasdaq’s intervention underscores how the liquidity standards it has adopted in the past three years to prevent stock manipulation in small IPOs have loopholes that Chinese companies exploit. Rules dictate that a company going public must have at least 300 investors who own at least 100 shares each, totaling a minimum of $2,500.

However, these requirements were not sufficient to prevent the manipulation of trading in some cash stocks. Smaller Chinese companies have been drawn to the Nasdaq rather than the New York Stock Exchange because the former has traditionally been a home for tech startups — an image these companies often try to project.

Almost all of these small-cap IPOs are ‘story’ stocks, as promoters try to convince inexperienced retail investors that this could be our next ‘Moderna’ or this could be our next ‘Moderna,’ said Jay Ritter, a University of Florida professor who studies IPOs. It’s the next Facebook.” .

57 small Chinese companies were listed in the past five years, up from 17 in the previous five years, according to Dealogic. So far this year, there have been nine such listings even though the US IPO market is facing its worst drought in nearly two decades due to market volatility fueled by the Federal Reserve raising interest rates to combat inflation.

McClury said the trend highlights looser regulatory requirements for a listing in the United States than in China. “It’s almost impossible for these companies to list in China, and now the Hong Kong market has shut down completely as well,” he said.

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(Reporting by Echo Wang in New York Editing by Greg Rumiliotis and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.

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