The Research On The Law Of Reverse Merger Regulation

There is a big chance to have problems like insider trading, related transaction and financial cheating in reverse merger, which would harm the investors’ interests. So most big capital markets of the world have it regulated to fulfill the objective of investor protection. Other than that, in China, reverse merger is also a way to go public by avoiding IPO regulation, because in China reverse merger is less regulated than IPO. The price of shell companies is very high as a result of short supply of public companies. Therefore the authority have an objective of balancing regulation between reverse merger and IPO, and reducing motives of reverse merger.The regulatory authority has made many efforts to solve the problem in reverse merger. Many administrative regulations were published to regulate the mergers and acquisitions in the market since 1998. Reverse merger was not separately regulated at that time, instead the authority applied the rules of M&A to the reverse merger. And this way is defined as "M&A pattern" in this article. Under the "M&A pattern", more and more problems appeared, so the authority had to modify the standards. So in 2011 the new rule for reverse merger is made. After that, authority carried out regulation to apply the IPO regulating rules to reverse merger, which is defined as "IPO pattern" in this article.What is a pity is that the problem remains under the new pattern, which means that it is still not effective in regulation. To be specific, the problems are listed as below. Firstly, the "IPO pattern" is only equivalent to IPO regulation in substantial standards but not in procedure, which means it is still less strict than IPO standards. And this difference propells the incentives of reverse merger transactions, which failes the original objective. Secondly, the definition of reverse merger in the law is not practical, which doesn’t express the motive of avoiding the regulation effectively. Thirdly, because of the unreasonable stock offering system, the motive of reverse merger is strong, and because of the imperfection of the supervision system of Insider Trading, related transaction, the interest of the investors is harmed. In a conclusion, the problems in regulation discussed above weaken the effectiveness of regulation under the new pattern.The problems of reverse merger still exist in other regions and they all have distinctions in regulation, so it is sensible to learn from them. So in the end, we make a conclusion in the way of solving the problem. First we need to change the system of security offerings, and then improve the concrete rules in regulating.