Barron's Article Serves as Good Reminder
An article in this week's Barron's magazine raises a number of concerns about a Chinese company that went public through a reverse merger. The article points primarily to the company's Chinese auditors and a question about their true independence and the extent to which that potential problem was disclosed. As a result, it appears the company's financial statements may not be as reliable as hoped.
The article briefly (and negatively) mentions reverse mergers of Chinese companies, essentially warning investors to adopt a "buyer beware" approach to these transactions.
What is a shame, in talking to friends who are familiar with the Chinese company in question, is that most people who know anything about this company know it to be successful, profitable and growing. It does not appear that the new disclosures change that. But the article seems to imply that, as a result of the questions about the auditors, nothing can be relied upon with regard to this company.
Thankfully, the number of negative articles about reverse mergers has gone down dramatically in the last 3-5 years. The Wall Street Journal declared "reverse mergers move into fashion" back in 2005. US News had a positive article on SPACs this year, referring to "formerly shady reverse mergers." Even the New York Times has come around.
In truth, a number of the few recent negative articles (there was another one not too long ago in Forbes) have centered around problems with Chinese companies. This is sort of unfair given that out of the several hundred Chinese businesses that completed reverse mergers, only a few have faced these kind of difficulties and scrutiny. But unfortunately it's all perception, especially following recent scandals involving dangerous toys and other products being exported from the PRC.
All that said, the article does point out something real and important to pay attention to. That is, placing a high priority on choosing the right auditors in a reverse merger or self-filing, especially when dealing with a foreign enterprise. It is important to check the accountants' references carefully, talk with CEOs of other public companies they have audited, do online research to determine if they have ever faced regulatory scrutiny, and the like.
This goes both ways. If you are an auditing firm, look at yourself in the mirror and make sure you can handle that difficult client who is going to try to get you to help the company "make its numbers" even if that means fudging the information a bit. In the wake of the Sarbanes-Oxley Act and the added burden placed on auditors, one would think that all auditors have learned the importance of taking a relatively conservative approach in such matters. Sadly, as the article points out, this does not appear to be the case 100% of the time.
As with all things Wall Street, the RM world has yet to rid itself of every unsavory character. But there has been a dramatic positive change as the vast majority in our industry have joined the march to the high road to ensure that RM's "shady past" is indeed almost entirely in the past.
Thankfully, more and more articles, TV coverage and conferences highlight these positive developments leading to greater reliability, transparency and legitimacy of the IPO alternatives that help bring so many exciting entrepreneurial ventures to the next level. But as we go three steps forward, as the article indicates, we will occassionally go one step back. We must remain vigilant to ensure that we each do our best to minimize the backwards steps even as the growing popularity of these techniques does draw some players who we would humbly suggest take their marbles elsewhere.
P.S. I have a number of thoughts and comments about the fine print in the final Rule 144 release, including the codification of aspects of the Worm/Wulff letters, but I would like to do a bit more consultation before posting on them. Might be over the holidays or shortly thereafter.
P.P.S. To my faithful blogees (as one put it my "avid readers"), thanks for a wonderful year of sharing our thoughts on this most dynamic and exciting industry. I wish you all a happy and healthy New Year.
The article briefly (and negatively) mentions reverse mergers of Chinese companies, essentially warning investors to adopt a "buyer beware" approach to these transactions.
What is a shame, in talking to friends who are familiar with the Chinese company in question, is that most people who know anything about this company know it to be successful, profitable and growing. It does not appear that the new disclosures change that. But the article seems to imply that, as a result of the questions about the auditors, nothing can be relied upon with regard to this company.
Thankfully, the number of negative articles about reverse mergers has gone down dramatically in the last 3-5 years. The Wall Street Journal declared "reverse mergers move into fashion" back in 2005. US News had a positive article on SPACs this year, referring to "formerly shady reverse mergers." Even the New York Times has come around.
In truth, a number of the few recent negative articles (there was another one not too long ago in Forbes) have centered around problems with Chinese companies. This is sort of unfair given that out of the several hundred Chinese businesses that completed reverse mergers, only a few have faced these kind of difficulties and scrutiny. But unfortunately it's all perception, especially following recent scandals involving dangerous toys and other products being exported from the PRC.
All that said, the article does point out something real and important to pay attention to. That is, placing a high priority on choosing the right auditors in a reverse merger or self-filing, especially when dealing with a foreign enterprise. It is important to check the accountants' references carefully, talk with CEOs of other public companies they have audited, do online research to determine if they have ever faced regulatory scrutiny, and the like.
This goes both ways. If you are an auditing firm, look at yourself in the mirror and make sure you can handle that difficult client who is going to try to get you to help the company "make its numbers" even if that means fudging the information a bit. In the wake of the Sarbanes-Oxley Act and the added burden placed on auditors, one would think that all auditors have learned the importance of taking a relatively conservative approach in such matters. Sadly, as the article points out, this does not appear to be the case 100% of the time.
As with all things Wall Street, the RM world has yet to rid itself of every unsavory character. But there has been a dramatic positive change as the vast majority in our industry have joined the march to the high road to ensure that RM's "shady past" is indeed almost entirely in the past.
Thankfully, more and more articles, TV coverage and conferences highlight these positive developments leading to greater reliability, transparency and legitimacy of the IPO alternatives that help bring so many exciting entrepreneurial ventures to the next level. But as we go three steps forward, as the article indicates, we will occassionally go one step back. We must remain vigilant to ensure that we each do our best to minimize the backwards steps even as the growing popularity of these techniques does draw some players who we would humbly suggest take their marbles elsewhere.
P.S. I have a number of thoughts and comments about the fine print in the final Rule 144 release, including the codification of aspects of the Worm/Wulff letters, but I would like to do a bit more consultation before posting on them. Might be over the holidays or shortly thereafter.
P.P.S. To my faithful blogees (as one put it my "avid readers"), thanks for a wonderful year of sharing our thoughts on this most dynamic and exciting industry. I wish you all a happy and healthy New Year.
Labels: China
posted by David N. Feldman at
12/17/2007 06:36:00 PM
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