Back again in Shenzhen, with plenty of food for thought, as well as food for the belly. I go through the same â€œimmersion programâ€ whenever I arrive back here: it involves stopping for a plate of dumplings or bowl of noodles once every 30 paces. Or anyway, it certainly seems that way.Â
The food for thought, as always, centers on ways to deliver enhanced value and service to clients and business partners. We have a set of core principles, that we build our business on, and that collectively represent our main differentiators. They are disarmingly simple â€“ to work with integrity and honesty, Â and always put the success of our clientsâ€™ first. We know that if we do this, our own success will follow.Â
Simple, but not nearly as universal as they should be in our business. A lot of investment banking, IPO and advisory work in China has bordered on the criminal. Hundreds of SME companies were damaged, if not destroyed, by advisors, lawyers and others who neglectedÂ entirelyÂ to put their clientsâ€™ interests first. Instead, they pushed for companies to take various fast routes to IPO in the US, typically reverse mergers, OTCBB Listings, Form 10, SPAC deals. The reason: the advisors, lawyers, bankers all made a pile of money, quickly, through these kinds of deals. When things turned sour, as they often did, the advisers, bankers and lawyers were generally nowhere to be found, and the Chinese companies were left in dire straits.
Obviously, the bosses of the Chinese companies were complicit, since they agreed to these kinds of schemes to achieve a fast IPO. But, in my experience, the bosses main sin was that of ignorance. They simply didnâ€™t understand all the workings of these kinds of deals, or even the fee-structure that would disproportionately reward the advisers, lawyers and bankers. In other words, the Chinese bosses didnâ€™t do their DD, didnâ€™t check the dismal track record of the many Chinese companies that already opted for OTCBB listings or reverse mergers.
I sometimes think the Chinese term for IPO, â€œä¸Šå¸‚â€ ( â€œshang shiâ€) has magical, intoxicating effect on some Chinese bosses. They hear it and suspend all their normal caution and suspicion. Soon, they end up agreeing to what are often truly disastrous transactions that donâ€™t even deserve the name IPO.
There are, by some estimates, several hundred Chinese companies now listed on the OTCBB that are somewhere between â€œon life supportâ€ and â€œclinically deadâ€. Their share prices fell steeply immediately after listing (by which time the advisers, bankers and lawyers all pocketed their fees and lined up their next victims) and are below $1. There is little to no liquidity. They often trade at PE multiples of 1-2x. The costs of retaining the OTCBB listing are bleeding the companies of badly-needed money. They have no chance to raise additional capital, nor to do much of anything (except waste money on Investor Relations firms) to lift their share price.
I get angry just thinking about this. Iâ€™m offended that people in my field of work would be involved in such self-serving, greed-ridden transactions. Secondly, itâ€™s also brought a lot of harm, and sometimes complete failure, to what were very good Chinese SME companies that once had bright futures, until they had the misfortune of putting their financial futures in the hands of these advisors.
Of course, the guiding principle behind all investment decisions must be â€œcaveat emptorâ€. Chinese bosses clearly didnâ€™t â€œcaveatâ€ enough. Thatâ€™s regrettable. But, the gains made by the advisors, lawyers and bankers were so enormous, and so ill-gotten. Thatâ€™s the heart of the matter: Chinese companies were ruined so that a bunch of ethically-challenged finance people could get rich. Â For me, this is contemptible. Â How these people sleep at night I donâ€™t know.
I do know this: we try to do everything we can to make it less likely that a good Chinese SME goes the same route, and ends up in the same sad condition. One way is through information. Weâ€™re producing Chinese-language materials meant to explain the hazards of transactions like OTCBB listings and reverse mergers. Our plan is to distribute the materials as widely as possible, both online and off. It may not put the bad guys out of business, but at least it will make it easier for Chinese SME bosses to know which questions to ask, what kind of track record to look for or, more often, Â run away from.
Iâ€™ll be sharing soon on this blog Â the English version of some of this information.
1 thought on “Ethics and Investment Banking â€“ how disreputable advisors, bankers and lawyers damaged Chinese SMEs through OTCBB listings, reverse mergers”
Hi, I’d like to tell you that your writing is very informative and insightfull, I enjoying reading your blog.
Lately, one of my friends is seriously considering going through the process to make his company public on OCTBB. I checked the website of OCTBB for him but not much info. is found there. Could you send me some links or, better still, other materials about the stories of the Chinese SME going public on OCTBB?
Thank you very much!