Nasdaq Inc (NDAQ.O) has put the brakes on initial public offering (IPO) preparations of at least four small Chinese companies while it investigates short-lived stock rallies of such firms following their debuts, according to lawyers and bankers who work on such stock launches.
The stock exchange operator's actions come amid a surge in the shares of Chinese companies that raise small amounts, typically $50 million or less, in their IPO. These stocks rise as much as 2,000% in their debuts, only to nosedive in the days that follow, bruising investors who are bold enough to speculate on penny stocks. Douglas Ellenoff, a corporate and securities attorney at Ellenoff Grossman & Schole LLP, said he was informed by the Nasdaq that certain IPOs will not be allowed to proceed "until they determined what has been the aberrational trading activity in certain Chinese issuers earlier this year."
"These were last-minute phone calls, just as we thought we were going to go somewhere with the deals," Ellenoff said. Nasdaq started asking the advisers of small Chinese IPO candidates questions in mid-September. The questions concerned the identity of their existing shareholders, where they reside, how much they are investing and if they were offered interest-free debt so they can participate, according to one of the bankers, Dan McClory, who is head of equity capital markets at Boustead Securities.
The lawyers and bankers spoke to Reuters on condition that the names of the four companies whose IPOs were halted not be disclosed.
It is not clear what action the Nasdaq will take once it completes its probe and whether all or some of the halted IPOs will be allowed to continue. A Nasdaq spokesman declined to comment.
Seven sources who work on IPOs of small Chinese companies spoke to Reuters on the condition that neither they nor their clients be identified. These sources said that the ephemeral stock rallies were caused by a few overseas investors who concealed their identities and snapped up most of the shares in the offerings, creating the perception that the debuts were in demand.
