Daily Management Review

Nasdaq Suspends IPOs Of Small Chinese Firms As It Investigates Stock Market Rallies


Nasdaq Suspends IPOs Of Small Chinese Firms As It Investigates Stock Market Rallies
The preparations for at least four small Chinese companies' initial public offerings (IPOs) have been halted by Nasdaq Inc while it investigates short-lived stock rallies of such firms following their debuts, said reports quoting lawyers and bankers who work on such stock launches.
The actions of the stock exchange operator come amid a surge in the shares of Chinese companies that raise small amounts, typically $50 million or less, in their initial public offering (IPO). These stocks can rise by up to 2,000% in their initial public offering, only to plummet in the days that follow, bruising investors who are brave enough to speculate on penny stocks.
According to Douglas Ellenoff, a corporate and securities attorney at Ellenoff Grossman & Schole LLP, the Nasdaq informed him that certain IPOs will be delayed "until they determine what was the aberrational trading activity in certain Chinese issuers earlier this year."
"These were last-minute phone calls, just as we thought we were going to go somewhere with the deals," Ellenoff said.
In mid-September, Nasdaq began questioning the advisers of small Chinese IPO candidates. According to one of the bankers, Dan McClory, head of equity capital markets at Boustead Securities, the questions concerned the identity of their existing shareholders, where they reside, how much they are investing, and if they were offered interest-free debt so they could participate.
The lawyers and bankers spoke to Reuters on the condition that the names of the four companies whose initial public offerings were halted not be revealed.
It is unclear what action the Nasdaq will take once its investigation is completed, or whether all or some of the halted IPOs will be allowed to resume. A spokesman for the Nasdaq declined to comment.
According to reports quoting sources who work on small Chinese company IPOs on the condition that neither they nor their clients be identified, the ephemeral stock rallies were caused by a few overseas investors who concealed their identities and purchased the majority of the shares in the offerings, giving the impression that the debuts were in high demand.
As a consequence, Chinese IPOs in the United States have returned an astounding 426 per cent on their first day of trading this year, where as it was 68 per cent for all other IPOs, according to Dealogic data.
According to the seven sources, the Securities and Exchange Commission (SEC) and other U.S. financial regulators have yet to announce a successful prosecution of such pump-and-dump schemes because Chinese companies and their overseas bankers have so far been effective in carrying out them out secretly.
Nasdaq's intervention highlights how the liquidity standards it implemented in the last three years to prevent stock manipulation in small IPOs have loopholes that Chinese firms are exploiting. The rules require that a company going public have at least 300 investors each holding at least 100 shares worth at least $2,500.
These requirements, however, have not been enough to prevent trading manipulation in some penny stocks.
Small Chinese firms have been drawn to Nasdaq's exchange instead of the New York Stock Exchange since the former has historically been the location for red-hot technology startups - an image these firms frequently try to project.
"Almost all of these microcap IPOs are 'story' stocks, where the promoters try to convince unsophisticated retail investors that this could be the next Moderna or this could be the next Facebook," said Jay Ritter, a University of Florida professor who studies IPOs.
According to Dealogic, there have been 57 listings of small Chinese companies in the last five years, up from 17 listings in the previous five years. So far this year, nine such listings have occurred, despite the fact that the U.S. IPO market is experiencing its worst drought in nearly two decades as a result of market volatility caused by the Federal Reserve raising interest rates to combat inflation.
According to McClory, the trend highlights the United States' laxer regulatory requirements for listing compared to China. "It is virtually impossible for these companies to list onshore in China, and the Hong Kong market has now completely shut down," he explained.