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

NEW YORK, Oct 22 (Reuters) – Nasdaq Inc (NDAQ.O) has put the brakes on preliminary public providing (IPO) preparations of no less than 4 small Chinese language corporations whereas it investigates short-lived inventory rallies of such companies following their debuts, in accordance with attorneys and bankers who work on such inventory launches.

The inventory trade operator’s actions come amid a surge within the shares of Chinese language corporations that elevate small quantities, sometimes $50 million or much less, of their IPO. These shares rise as a lot as 2,000% of their debuts, solely to nosedive within the days that comply with, bruising traders who’re daring sufficient to take a position on penny shares.

Douglas Ellenoff, a company and securities lawyer at Ellenoff Grossman & Schole LLP, mentioned he was knowledgeable by the Nasdaq that sure IPOs won’t be allowed to proceed “till they decided what has been the aberrational buying and selling exercise in sure Chinese language issuers earlier this yr.”

“These had been last-minute telephone calls, simply as we thought we had been going to go someplace with the offers,” Ellenoff mentioned.

Nasdaq began asking the advisers of small Chinese language IPO candidates questions in mid-September. The questions involved the id of their current shareholders, the place they reside, how a lot they’re investing and in the event that they had been supplied interest-free debt to allow them to take part, in accordance with one of many bankers, Dan McClory, who’s head of fairness capital markets at Boustead Securities.

The attorneys and bankers spoke to Reuters provided that the names of the 4 corporations whose IPOs had been halted not be disclosed.

It isn’t clear what motion the Nasdaq will take as soon as it completes its probe and whether or not all or a number of the halted IPOs can be allowed to proceed. A Nasdaq spokesman declined to remark.

Seven sources who work on IPOs of small Chinese language corporations spoke to Reuters on the situation that neither they nor their shoppers be recognized. These sources mentioned that the ephemeral inventory rallies had been brought on by a number of abroad traders who hid their identities and snapped up a lot of the shares within the choices, creating the notion that the debuts had been in demand.

In consequence, Chinese language IPOs in the USA have returned this yr on common a staggering 426% of their first day of buying and selling, in contrast with 68% for all different IPOs, in accordance with knowledge from Dealogic.

The Securities and Change Fee (SEC) and different U.S. monetary regulators have but to announce a case of efficiently prosecuting such pump-and-dump schemes as a result of Chinese language corporations and their abroad bankers have to this point been efficient in carrying them out secretly, the seven sources mentioned.

An SEC spokesperson didn’t instantly reply to a request for remark.

LOOPHOLES

Nasdaq’s intervention underscores how liquidity requirements it adopted within the final three years to forestall inventory manipulation in small IPOs have loopholes that Chinese language corporations are exploiting. The principles dictate that an organization going public ought to have no less than 300 traders holding no less than 100 shares every, totaling a minimal of $2,500.

But these necessities haven’t been ample to forestall buying and selling manipulation in some penny shares. Small Chinese language corporations have been interested in Nasdaq’s trade moderately than the New York Inventory Change as a result of the previous has historically been the venue of red-hot know-how startups – a picture these corporations usually attempt to mission.

“Nearly all of those microcap IPOs are ‘story’ shares, the place the promoters attempt to persuade unsophisticated retail traders that this could possibly be the subsequent Moderna or this could possibly be the subsequent Fb,” mentioned Jay Ritter, a College of Florida professor who research IPOs.

There have been 57 listings of small Chinese language corporations within the final 5 years, up from 17 listings within the prior 5 years, in accordance with Dealogic. Up to now this yr there have been 9 such listings regardless of the U.S. IPO market dealing with its worst drought in almost 20 years as a consequence of market volatility fueled by the Federal Reserve elevating rates of interest to combat inflation.

McClory mentioned the development highlights the looser regulatory necessities for listings in the USA in contrast with China. “It’s just about unimaginable for these corporations to listing onshore in China, and now the Hong Kong market has utterly shut down as effectively,” he mentioned.

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

: .