Nasdaq halts IPOs of small Chinese companies as it probes stock rallies

NEW YORK, Oct. 22 (Reuters) – Nasdaq Inc (NDAQ.O) has slowed down preparations for the initial public offering (IPO) of at least four small Chinese companies as it investigates short-lived stock rallies of such companies after their debut, lawyers say and bankers working on such stock launches.

The stock operator’s moves come amid a surge in shares of Chinese companies raising small sums, typically $50 million or less, from their IPO. These stocks rose a whopping 2,000% on their debut, only to take a nosedive in the days that follow, hurting investors audacious enough 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 should not proceed “until they determine what aberrational trading activity has been in certain Chinese issuers earlier this year.”

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“These were last minute phone calls just when we thought we were going somewhere with the deals,” Ellenoff said.

Nasdaq began asking the advisers of minor Chinese IPO candidates questions in mid-September. The questions related to the identities of their existing shareholders, where they live, how much they invest, and whether they were given interest-free debt so they could participate, said one of the bankers, Dan McClory, head of equity capital markets. at Boustead Securities.

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The lawyers and bankers spoke to Reuters on the condition that the names of the four companies whose IPOs were halted would not be disclosed.

It is not clear what action the Nasdaq will take once it has completed its investigation and whether all or some of the halted IPOs will be allowed to continue. A Nasdaq spokesperson declined to comment.

Seven sources working on IPOs of small Chinese companies spoke to Reuters on the condition that neither they nor their customers are identified. These sources said the short-lived stock rallies were caused by a few foreign investors who hid their identities and picked up most of the stock in the supply, giving the impression that the debuts were in high demand.

As a result, Chinese IPOs in the United States have returned an average of a whopping 426% on their first day of trading this year, compared to 68% for all other IPOs, according to data from Dealogic.

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The Securities and Exchange Commission (SEC) and other U.S. financial regulators have yet to announce a case in which such pump-and-dump schemes are successfully prosecuted, as Chinese companies and their foreign bankers have so far been effective in secret. carry it out, the seven sources said.

An SEC spokesperson did not immediately respond to a request for comment.

LOOPS

Nasdaq’s intervention underscores how the liquidity standards it has adopted over the past three years to prevent stock manipulation in small IPOs have loopholes that exploit Chinese companies. The rules dictate that a company going public must have at least 300 investors who each own at least 100 shares, for a total of at least $2,500.

Still, these requirements were not enough to prevent trading manipulation in some penny stocks. Small Chinese companies have been drawn to Nasdaq’s exchange rather than the New York Stock Exchange, as the former has historically been the site of red-hot technology startups — an image these companies often try to convey.

“Almost all of these microcap IPOs are ‘story’ stocks, with the promoters trying to convince inept retail investors that this could be the next Moderna or that this could be the next Facebook,” said Jay Ritter, a university professor. of Florida studying IPOs. .

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According to Dealogic, there have been 57 listings of small Chinese businesses in the past five years, up from 17 in the previous five years. There have been nine such listings so far this year, despite the US IPO market experiencing its worst drought in nearly two decades due to market volatility fueled by the Federal Reserve raising interest rates to curb inflation. to fight.

McClory said the trend highlights the looser legal requirements for listings in the United States compared to China. “It is virtually impossible for these companies to list onshore in China, and now the Hong Kong market has also been completely shut down,” he said.

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Reporting by Echo Wang in New York Editing by Greg Roumeliotis and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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