The U.S. Securities and Exchange Commission has weighed in on reverse takeover companies, warning investors that they should "proceed with caution."
"Many companies either fail or struggle to remain viable following a reverse merger," the SEC said in an investor bulletin issued on Thursday. "Also, as with other kinds of investments, there have been instances of fraud and other abuses involving reverse merger companies."
The release comes amid increased scrutiny of reverse mergers, where a private company merges with an existing public shell company to gain instant access to markets and investors without the usual regulatory legwork. The bulletin noted that the SEC and U.S. markets suspended trading in more than a dozen reverse merger companies because of a lack of current and accurate information about the companies.
As the Wall Street Journal pointed out, the bulletin doesn't target Chinese companies explicitly - but there is an implicit targeting based on the list of companies that have recently seen trading suspended. These include Heli Electronics Corp., China Changjiang Mining & New Energy Co., RINO International Corporation, Advanced Refractive Technologies, Inc., HiEnergy Technologies, Inc. and Digital Youth Network Corp.
While auditing firms should help investors separate the scams from the fine investments, the SEC noted that many reverse takeover companies employ small auditing firms that might lack the resources to do the right job.
"As a result, such auditing firms might not identify circumstances where these companies may not be complying with the relevant accounting standards," the SEC said. "This can result in increased risks for investors."
Sino-Forest Corp. , accused by a U.S. short-seller of fraud, was also created in 1994 through a reverse takeover on the Alberta Stock Exchange. No allegations against the forestry firm have been proven and the stock continues to trade.