In the past decades, the reverse merger in US has become an increasingly popular means for firms in emerging economies to be publicly listed in US stock exchanges. It is an alternative choice to raise capital apart from Initial Public Offering. This report is decided into two parts to demonstrate the issues of the benefits and possible negative outcomes of reverse mergers. It will show the case study of ChinaCast Education Corporation to illustrate the possible fraudulent behaviors in the transactions in the second part of report. In fact, even after the completion of reverse merger, most firms are still conducted businesses in their own countries rather than moving the business operations to US. As a result, US government finally decides to tighten the regulatory requirements for this specific form of transactions. .
2. Regulations.
2.1 US Regulatory Requirements of Reverse Merger before 2010.
At first, the revere merger transactions are under the regulations of Sarbanes–Oxley (SOX) Act of 2002, but this Act has some flaws that give many shady dealers the chances to manipulate. Firstly, there was a 71-day vacuum of information after most deals, and some dealers would try to manipulate the share price using press releases of good news during this period. (Cosnita-Langlais & Jean-Philippe 2013, p. 34) In this case, due to information asymmetry, the information released at this time can be misleading and deceptive to investors. More specifically, when the private firms are in emergent need of funds because of financial distress, they would choose not to tell the US investors about the fact and announce that they raise capital for more projects with positive net present value. The fraudulent behavior can be detrimental to the interests of American investors. Thus, this period of vacuum of information has to be eliminated in new rules. .
Secondly, the popularity of the usage of form S-8 is another issue, which can be perceived as illegal in some cases.