SEC warns investors on reverse merger companies

NEW YORK Thu Jun 9, 2011 2:02pm EDT

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NEW YORK (Reuters) - The Securities and Exchange Commission warned investors about the risk of fraud, accounting problems and other abuses at companies that obtain stock listings through so-called reverse mergers.

The warning on Thursday comes amid a rash of accounting scandals involving China-based companies listed on U.S. exchanges through reverse mergers, or mergers with U.S. shell companies.

"Many companies either fail or struggle to remain viable following a reverse merger," the SEC said in an investor bulletin.

Investors should be especially wary of reverse merger operating companies that are "nonreporting," meaning they are not required to file reports with the SEC, the agency said.

"Keep in mind that information from online blogs, social networking sites and even a company's own website may be inaccurate and sometimes intentionally misleading," the SEC said.

Reverse mergers allow companies to trade on U.S. exchanges even though their operations may be overseas. The listing process is quicker than a traditional initial public offering but involves less scrutiny of a company's books.

In some cases, the reverse merger companies are audited by small U.S. accounting firms. Such firms may not have the resources to audit a company whose operations are in another country, the SEC said.

The SEC has launched a broad investigation into accounting irregularities and audits of Chinese and other foreign companies.

Since March, more than two dozen China-based companies have disclosed auditor resignations or accounting problems, according to SEC officials.

(Reporting by Dena Aubin; Editing by Steve Orlofsky and Lisa Von Ahn)

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