Special Report: Inside Chinese stocks craze in U.S.
Chinese firms' mischiefs also come from the difference between China and U.S. regulations.
According to lawyer H, who declined to disclose his full name because his firm has been overseeing many Chinese IPOs in the United States, SEC regulations are comparatively simple. Unlike China's substantive verification, SEC applies the so-called desk-top process, whose core value lies in full information disclosure. That means SEC only makes sure all information in an IPO filing is true, comprehensive and accurate without serious mistakes, intentional frauds or misleading statements. Examining performance or assessing stock value falls beyond its jurisdiction. SEC assumes investors will take full responsibilities for their own judgement and choices.
That forms a stark contrast to China. In China, if a company posts losses for three years on end, it will be disqualified from an IPO. While in the United States., investors are more concerned about a firm's potentials and creativity. Only by this way, can firms like Youku, which has registered losses over 15 million so far this year, have an IPO.
Just as Wey put it, U.S. capital market is certainly the deepest in the world. There are many levels of investors and different portfolio managers, which are very attractive for those Chinese firms that stand little chance to go public in China any time soon. The process of going public in the United States is much easier, and much more predictable.
This easiness and predictability reflects SEC's trust for credibility. Unfortunately some Chinese firms have misused this trust.
"Creative accounting" is one of the most widely used means to give a company's filings a face-lift. It involves techniques like a delay of loss report, or a move-up of advance payment when filing accounting sheets. If well applied, it can work without really breaching on laws. But due to different accounting and auditing systems, those practices accepted in China may turn out to be serious misconduct to be severely punished in the United States.
To address this issue, U.S. regulators have tightened rules. James Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), said it will make deals with China to promote accounting transparency of the U.S.-traded Chinese firms later this year. Nasdaq is also mulling new measures against reverse mergers, often used by Chinese firms bent on going public with lower fees and less filing demands.
