18 Sep Alibaba #IPO: Senator Bob Casey is Presumptuous
I just picked up piece from Senator Bob Casey (D) of Pennsylvania from NY Times DealBook. He’s claiming the deal structure of the Alibaba IPO should cause the regulators to have more scrutiny for other similarly structured deals that are either reverse mergers or some type of Variable Interest Entity (or VIE). His claim is that foreign (and in particular Chinese) -based entities have been responsible for over $18 billion in losses to American investors over a decade.
He’s right about picking out the bad apples, but unfortunately citing a decade’s worth of reverse mergers and claiming past performance will be completely indicative of future results is flat wrong. The SEC has been providing disease chasing to do-badders for years. They’ve also attacked the symptoms of the disease by rooting out fraudulent play in initial and on-going filings with Sarbanes-Oxley. Here are some sides to the story that are not cited.
First, studies have shown that even Chinese based RM outperformed their U.S. peers. These type of studies rarely get mentioned. It’s much easier to point out fraud issues to make a political point or try to gain credibility with constituents that “hey, I’m protecting you from potential losses.” Reality is that over the last seven years and even more so since the inception of SOX, such fraud issues have decreased. That’s not been cited. Only one side of the story is told here.
Secondly, we need to elevate the reverse merger market into a legitimate playing field. It’s been too tainted in the United States for far too long. Other countries like Australia have figured out the cost and speed saving alternative in reverse mergers and are doing very well at it. Fraud has unfortunately tainted the process in the United States. There are areas where we won’t go. My belief is that every advisor should have a lower moral bound. That would at least help to clean things up a bit. I would love it if we could get to the point that Australia is where reverse mergers are highly legit.
Third, Mr. Casey is also bringing up his concerns at a time that is completely inappropriate. Citing potential issues with IPO alternatives when a fantastic company like Alibaba is going public by such an alternative is ridiculous. Here we have a legit company going public and we have a Senator raising issues with other similar transactions that ended in securities and accounting fraud. Instead we should be praising Alibaba for attempting to use legitimate means for going public and using this opportunity to send a message to others considering doing the same, “see folks this is how it’s done.”
We certainly need to have good scrutiny over such deals and it’s unfortunate that unscrupulous American (and foreign players) have tainted the market for reverse mergers for far too long. I want to sound my voice out there that yes these are legitimate methods for going public and no, not all Chinese firms are frauds.
Of course, the risk of the VIE structure due to Chinese regulation is still there.