Welcome to the FCPA: Chinese Companies and Reverse Mergers

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In a Wall Street Journal article on January 27, 2011 entitled “What’s Behind China’s Reverse IPOs?”, reporter Joseph Sternberg wrote that several Chinese companies were under investigation by the Securities and Exchange Commission (SEC) for “accounting irregularities”. The basis for this SEC jurisdiction over these Chinese companies is their reverse merger into a publicly traded US company. The article notes that while the goal in a traditional IPO is to extract cash, a reverse merger requires the expending of cash to purchase a shell company. From their new position in the US market, a Chinese company may then turn to the US securities market for cash through secondary offerings. The article notes that the key element of these reverse mergers is the desire by Chinese companies to obtain capital.

However when entering into such a financing arrangement if a Chinese company purchases a US listed company to utilize as a shell, it will fall under the jurisdiction of the SEC. The Chinese company will now also be subject to the Foreign Corrupt Practices Act (FCPA). In addition to investigating “accounting irregularities” the SEC also has jurisdiction of the books and records component of the FCPA. This article stirred out thinking about some of the ways a Chinese company might find itself under a FCPA investigation.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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