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Nasdaq stops IPOs of small Chinese businesses as it investigates stock rallies by Stocksak


© Stocksak. FILE PHOTO – The Nasdaq logo is displayed on the Nasdaq Market site, New York, September 2, 2015. REUTERS/Brendan McDermid/File Photo/File Photo

By Echo Wang

NEW YORK – According to lawyers and bankers involved in stock launches, Nasdaq Inc has halted preparations for the initial public offer (IPO) of at least four small Chinese businesses. Instead, it is investigating short-lived stock rallies following such debuts.

The stock exchange operator’s actions are in response to a surge of shares in Chinese companies that raise modest amounts (typically $50m or less) during their IPO. These stocks rise up to 2,000% during their debuts, but then plummet in days that follow, bruising those investors who dare to speculate on penny stocks.

Douglas Ellenoff, a corporate and securities attorney at Ellenoff Grossman & Schole LLP, said he was informed by the Nasdaq that certain IPOs will not be allowed to proceed “until they determined what has been the aberrational trading activity in certain Chinese issuers earlier this year.”

Ellenoff stated that these were last-minute phone conversations, just as Ellenoff thought they were going to go someplace with the deals.

In September, Nasdaq began asking small-scale Chinese IPO candidates’ advisers questions. According to Dan McClory, head of equity capital markets at Boustead Securities, the questions asked about the identity of existing shareholders, their location, how much they invest, and if they were offered interest free debt so they could participate.

Stocksak was contacted by the bankers and lawyers on condition that the names the four companies whose IPOs were halted be kept secret.

It is unclear what Nasdaq will do once it has completed its probe. Also, it is not clear if any of the halted IPOs can be continued. A Nasdaq spokesperson declined to comment.

Stocksak was contacted by seven people who work on IPOs for small Chinese companies. These sources stated that the ephemeral stock rally was caused by a few foreign investors who concealed their identities and took most of the shares offered. This created an impression that the debuts were highly sought-after.

According to Dealogic data, Chinese IPOs have returned an astonishing 426% in the United States this year, compared to 68% for all other IPOs.

According to seven sources, the Securities and Exchange Commission and other U.S. regulators have yet not announced any case of successfully prosecuting these pump-and-dump scheme cases because Chinese companies and their overseas banksers have so far been successful at concealing them.

A spokesperson for SEC did not immediately reply to a request for comment.

LOOPHOLES

Nasdaq’s intervention highlights how the liquidity standards it adopted in three years to stop stock manipulation in small IPOs still have loopholes that Chinese firms are exploiting. A company should have at most 300 investors with at least 100 shares each. This is a requirement to go public. The total amount must not exceed $2,500.

However, these requirements have not been sufficient in order to prevent trading manipulations in penny stocks. Because the Nasdaq is more popular than the New York Stock Exchange for small Chinese companies, the latter has historically been the home of hot technology startups. This is an image these companies often try and project.

“Almost all of these microcap-IPOs are’story stocks’, where promoters try convincing unsophisticated retail investors this could be the next. Moderna (NASDAQ:) Or this could be the next Facebook (NASDAQ :),” Jay Ritter, a University of Florida professor that studies IPOs, said Jay Ritter.

According to Dealogic there have been 57 listings by small Chinese companies in five years. This is an increase from the 17 listings in five years prior. Despite the U.S. IPO Market facing its worst drought since nearly two decades, nine such listings have been made this year. This was despite market volatility fueled in part by the Federal Reserve raising interest rate to combat inflation.

McClory stated that the trend highlights the looser regulatory requirements in the United States for listing than in China. McClory stated that listing onshore in China is almost impossible for these companies and that the Hong Kong markets are now completely closed.

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Stocksak Editorial

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