International Investment, Legal Regulation, Reverse Merger

Since the blank check company acquisition in the 80s of last century till the emergence of Special Purpose Acquisition Companies ("SPAC"), reverse merger has been the main way of capital financing and has also attracted great attention in global capital market. This thesis introduces the traditional Alternative Public Offering ("APO"), reverse triangular merger as well as SPAC merger, and compares the Chinese and US regulatory rules on reverse merger and how the China Securities Regulatory Commission ("CSRC") and SEC is coping with this matter.For domestic private companies, getting listed by reverse merger is faster, easier and less-highly regulated then IPO. It also does not need to go through as much as approval authorities as Special Purpose Vehicle ("SPV") merger does and therefore avoids the risk of the one-year listing time restriction imposed by the Ministry of Commerce ("MOC"). However, since the promulgation of Acquisition of Domestic Companies by Foreign Investors Provisions in 2006, reverse merger has technically been cut off by the PRC central government.Everything is a two-edged sword. While share swap is no longer available to OTCBB listed shell companies, it generates the development of SPAC merger in China. Different from the traditional shell purchase and assets transfer procedure, a SPAC will establish its own shell, gets listed and then acquire a company within its targeted industrial field. Besides, as a SPAC will get listed first and then completes the acquisition, a SPAC could use currency instead of share to facilitate its acquisition strategy.Nevertheless, both APO and SPAC merger have potential risks. With more and more NASDAQ-listed Chinese companies have been accused of auditing inconsistency and incompliance with SEC requirements, SEC has began to keep an eye on these Chinese companies, especially those got listed by reverse merger. If domestic companies cannot comply with the auditing rules made by US Public Company Accounting Oversight Board ("PCAPB") after listing, they will face the risk of being investigated or even get sued by SEC.Confronted with the existing problems in our current regulatory system, as well as the potential risks domestic companies may encounter after US listing, the writer has offered some suggestion to CSRC with the purpose of better regulating the offshore financing heat and help domestic companies to avoid possible investigations of SEC. Hope this thesis could be the reference of both the Chinese regulatory authorities as well as domestic companies who are planning on using reverse merger as a financing tool.