The New York Times reported today that the SEC is
investigating Longtop Financial Technologies, a Chinese software company that
was taken public in 2007 by Goldman Sachs, with Deloitte & Touche as their
auditors. Deloitte immediately resigned and Longtop's trading has been halted.
Of course we never know how these things end and no charges or findings have
been made against the company.
I have avoided getting into specific company issues as
the China troubles have unfolded in the last year or so. I raise this one only
to clarify that, to the extent these challenges are developing, it is not
the method of going public that has increased the likelihood of a problem,
since Longtop did a traditional IPO with the top investment bank and accounting
And it sounds like much of the same sorts of problems as
encountered in companies that completed reverse mergers. Deloitte said they
resigned in part because of "recently identified falsity" in Longtop's
financial records," in addition to "deliberate interference" by the company's
executives in Deloitte's audit work. We have heard very similar allegations
made by auditors resigning from reverse merged companies.
And a number of Chinese companies facing problems that
completed reverse mergers had the same amount of investor protection as an IPO
- they did complete a reverse merger and PIPE, but before a single share
traded a fully underwritten and due diligenced public offering took place.
I hope those who are trying to blame reverse mergers for
problems in Chinese companies will focus instead on the companies themselves
and not the manner in which they began trading.
For additional insights on reverse mergers,
SPACs, other alternatives to traditional initial public offerings, the small
and microcap markets and the economy, visit the Reverse Merger and
SPAC Blog by David N. Feldman, Esq., Partner of Richardson &
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