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

NEW YORK, October 22 (Reuters) – Nasdaq Inc. (NDAQ.O) has stalled preparations for the initial public offering (IPO) of at least four small Chinese companies as it investigates the short-lived stock market rallies of these companies after their debut, according to lawyers and bankers who work on these stock launches.

The stock trader’s actions come amid a surge in shares of Chinese companies that raise small amounts, typically $50 million or less, in their IPOs. These stocks rise as high as 2,000% in their debut, only to plunge in the days that follow, bruising investors bold enough to speculate on penny stocks.

Douglas Ellenoff, a corporate and securities attorney at Ellenoff Grossman & Schole LLP, said he was told by Nasdaq that certain IPOs would not be permitted “until they determine what the aberrant trading activity by some Chinese issuers earlier this year.”

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

The Nasdaq began asking advisers of smaller Chinese IPO candidates questions in mid-September. The questions revolved around who their existing shareholders are, where they reside, how much they invest and whether they were being offered interest-free debt so they could participate, according to one of the bankers, Dan McClory, head of equity capital markets. . at Boustead Securities.

Lawyers and bankers have spoken to Reuters on the condition that the names of the four companies whose IPOs have been halted will not be released.

It’s unclear what action the Nasdaq will take once it completes its investigation and whether any or all of the halted IPOs will be allowed to continue. A Nasdaq spokesperson declined to comment.

Seven sources who work on Chinese small business IPOs spoke to Reuters on the condition that neither they nor their clients be identified. These sources said the short-lived stock rallies were caused by a few foreign investors who concealed their identities and grabbed most of the shares from the bids, creating the perception that the debut was in demand.

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

The Securities and Exchange Commission (SEC) and other U.S. financial regulators have yet to announce any cases of successful prosecution of such pump-and-dump schemes, as Chinese companies and their foreign bankers have so far managed to execute them secretly, the seven sources said.

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

FAULTS

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 Chinese companies are exploiting. The rules state that a company that goes public must have at least 300 investors holding at least 100 shares each, totaling a minimum of $2,500.

Yet these requirements have not been sufficient to prevent manipulation of transactions in some penny stocks. Smaller Chinese companies have been drawn to the Nasdaq stock exchange rather than the New York Stock Exchange, as the former has traditionally been the place for hot tech startups — an image these companies often try to project.

“Nearly all of these microcap IPOs are ‘dummy’ stocks, where promoters try to convince unsophisticated retail investors that this could be the next Moderna or this could be the next Facebook,” said Jay Ritter, professor at the University of Florida studying IPOs. .

There have been 57 listings of Chinese smaller companies in the past five years, compared to 17 listings in the previous five years, according to Dealogic. There have been nine such listings so far this year despite the U.S. IPO market facing its worst drought in nearly two decades due to market volatility fueled by rising prices. Federal Reserve interest rate to fight inflation.

McClory said the trend highlights the looser regulatory requirements for registrations in the United States compared to China. “It’s virtually impossible for these companies to register in China, and now the Hong Kong market is completely closed as well,” 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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