SEC Warns Investors On Reverse Merger Companies

Summary: Having recently suspended trading in more than a dozen reverse merger companies, on June 9, 2011, the U.S. Securities and Exchange Commission (“SEC”) issued an Investor Bulletin cautioning investors about purchasing shares in companies that enter U.S. markets through so-called reverse mergers or back-door listings. The attached Newsletter examines the SEC’s Investor Bulletin, discusses some of the recent enforcement actions that the SEC has brought against a number of listed reverse merger companies, including many companies based in the People’s Republic of China and relates some of the various secondary market reversals that have beset reverse merger companies, particularly those based in the PRC. The Newsletter concludes that potential non-U.S. issuers may well be advised to list their own shares in a traditional IPO, rather than engage in a back-door listing, in the United States.