While large IPOs in Shanghai, Hong Kong and New York for Chinese companies make for great headlines, small and medium-sized Chinese companies quietly acquire coveted North American listings through reverse takeovers (“RTO”). This is partially due to smaller companies having fewer options at their disposal, but the RTO process can also be much faster and less onerous than an IPO. The process can be completed from several weeks to a few months. Compare this to taking (usually) upwards of a year to complete an IPO here in North America, or the two-to-five-year wait for a listing on the booming Shanghai or Shenzhen stock exchanges.
Generally, here's how the RTO process works. A private Chinese business buys enough shares to control a publicly traded shell company. The board of the shell company is replaced with one appointed by the Chinese business, which changes the name of the shell company (usually to that of the Chinese business, or something closely related). The Chinese business’ shareholders then use their shares in the private business to exchange for shares in the public shell company. Through this process, the Chinese business has effectively become a publicly traded company.
In the U.S., these transactions often result in an over the counter listing and are typically shunned by the professional investment community. A much better fit is here in Canada, where we have an excellent junior exchange for these types of companies to flourish on – the TSX Venture. In fact, some well-known Chinese companies, such as Hanfeng Evergreen Inc. (HF) and Migao Corporation (MGO), have graduated from the TSX Venture to the TSX main board.
Recommend reading:
