The Public Company Accounting Oversight Board (the "PCAOB") has raised concerns about the financial statements of companies formed as a result of reverse mergers between Chinese operating companies and shell companies, whose securities are registered in the United States. A reverse merger allows Chinese operating companies to gain a U.S. market listing and access to the U.S. capital markets, while avoiding the scrutiny of the initial public offering process. In a study issued earlier this year, the PCAOB highlighted the increasing number of Chinese reverse mergers, with approximately 159 such mergers occurring between January 1, 2007, and March 31, 2010. The PCAOB also expressed concerns about the auditing of Chinese reverse merger companies' financial statements and listed factors that may have a negative impact on these audits, including (i) the need to understand the local language, (ii) reliance on local audit firms to conduct a portion of the work, (iii) additional travel time and expenses, and (iv) the need to understand the company's local business environment.
Similarly, the SEC has voiced concerns about Chinese reverse merger companies. The SEC recently suspended the U.S. listing of several Chinese reverse merger companies and also issued a warning to investors about investing in such companies. The SEC echoed the findings of the PCAOB, noting the risk of an ineffective audit of a Chinese reverse merger company's financial statements. More specifically, the SEC advised investors to be especially careful when investing in a reverse merger company and to thoroughly research the company – including ensuring there is accurate and up-to-date information – before deciding to invest.
In light of these concerns, the NYSE is proposing to require a series of "seasoning requirements" that would effectively delay the listing of reverse merger companies. The proposed rules require reverse merger companies to trade for at least one year in the U.S. over-the-counter market, or on another U.S. exchange or regulated foreign exchange, prior to listing on the NYSE. Reverse merger companies would also be required to maintain a minimum share price of $4 for an extended period, and to file audited financial statements and an annual report with the SEC. Under the proposed rules, the NYSE would be empowered to selectively impose additional requirements on a particular reverse merger company in the NYSE's discretion, based on particular concerns like a weakness in the reverse merger company's internal controls. These rules are designed to address the concerns raised by the PCAOB and SEC by allowing time to adequately ensure the reliability of a company's operations and financial reporting.
NYSE Amex Equities (formerly known as the American Stock Exchange), which lists more reverse merger companies than the NYSE, has proposed similar rules. Both proposals were filed with the SEC in August and are subject to SEC approval before going into effect. The Nasdaq Stock Market submitted a similar rule proposal to the SEC in April, which is still pending.