As the first Chinese stock in 2022, Meihua International(stock code MHUA) has a rough and tumble on its way to listing in the United States: first affected by Sino-US regulatory frictions, suspended by the US Securities and Exchange Commission (SEC), difficult to log on to the NASDAQ in February this year, and less than half a year was accused of accounting fraud. The "icebreaker who went to the United States to list" with high hopes from the market plummeted nearly 2/3 of its stock price for a time, and its stock price is still less than half of the issue price.
Figure 1: NASDAQ Announcement on Alleged Accounting Fraud[1]
At the end of July this year, Meihua International announced that it had not defrauded investors, but had been defrauded by a Hong Kong company. In Meihua International's announcement, here's what happened: During the roadshow before the IPO, Shengang Securities, a co-underwriter of Meihua International, introduced a Hong Kong company called Taihe Group Co., Ltd. to Meihua International, which, through negotiations with Shengang Securities, claimed to invest $35 million in Meihua International's IPO on nasdaq, but only if Meihua International first had to pay a $7 million refundable deposit to Taihe deposit) and a $3 million service fee.
Based on its trust in Shengang Securities and its objective lack of experience and resource verification, Meihua International relied on the underwriter's advice and hurriedly signed a contract with Taihe Company. After signing the contract, Meihua International remitted 10 million US dollars (equivalent to nearly 70 million yuan) to Taihe Company according to the contract. But after being listed on the NASDAQ for a period of time, Meihua International found out with hindsight that this Taihe company did not seem to have made any investment in their company at all, and then wanted to contact Taihe Company again, and sure enough, it was impossible to contact.
Figure 2: Excerpt from the original text of the U.S.-China International Announcement[2]
In May this year, Meihua International was urged by the SEC to submit an annual report, and this fraud case can be regarded as a paper package that cannot be stopped and cannot be hidden. At the end of July, Meihua International finally issued an announcement that "Taihe Company and Shengang Securities have committed fraud against the Company using asymmetric information, including the Company's lack of understanding of the US market, IPO rules and procedures, and the Company's trust in Shengang Securities." The Company acknowledges that it improperly relied on the advice and instructions of Shengang Securities in entering into the Agreement. The Company is now actively terminating the relevant agreement and recovering the amounts already paid to Taihe Company. "The translation is that our company is pit by professional institutions, and everything is the underwriter's pot." Whether it is a professional investor or not, I have been silent after reading the announcement.
At present, neither the SEC nor nasdaq officials have disclosed the results of the investigation. Regarding the legal characterization of the case, whether Meihua International constitutes accounting fraud under U.S. securities law will not be commented on until the official disclosure of the facts is released. However, the compliance management problems exposed by this fraud storm are worth reflecting on by every domestic entrepreneur, especially companies that are planning to go public, and they need to borrow people to repair themselves.
According to the announcement of Meihua International, the scam of Taihe Company is almost as bad as that of a pyramid scheme company that lets investors pay membership fees first, and the leather bag company lets college students pay a deposit before they enter the job. Even if such transactions are common in the securities underwriting stage, they must be based on a full understanding and trust of the counterparty.
As a U.S. listed company, there was no due diligence on the transaction parties before major transactions, and even no direct meeting and communication; The failure to consult a lawyer on the disclosure of information by a listed company after the transaction also reflects the company's slowness in changing its identity.
On the road to closing the company to the listed company, the compliance problem is two sides of the same coin, sometimes it is a big BOSS that hinders customs clearance, and sometimes it is a talisman to fight monsters and prevent sneak attacks. If small and medium-sized entrepreneurs cannot adapt to the high requirements of compliance operations of listed companies, then entrusting professional institutions is an inevitable choice. If you are entrusted with a non-person in the choice of a professional body, you may incur various disputes.
Although Shengang Securities, the underwriter that Meihua International pointed out in the announcement, is a regular licensed securities company in China and has developed rapidly, but in recent years, it has been "bright red lighted" by the CSRC for compliance and risk control, and even some businesses have been blacklisted. [3] It can be seen that although the announcement of Meihua International is a unilateral statement, it is not empty.
In short, with the lessons of Meihua International, domestic entrepreneurs should be more prudent and pay attention to compliance. On the one hand, we must change our thinking, and leave professional things to professional people to do; On the other hand, when choosing a professional organization, we should polish our eyes and avoid becoming the "wronged head" who pays money. After all, after being promoted to a listed company, the company's profit and loss is no longer only the personal gain and loss of the entrepreneur, and the supervision of the CSRC is the "sword of Damocles" hanging over the head of each listed company.
References:
[1] Nasdaq. Sadis & Goldberg was hired to investigate accounting fraud allegations. https://www.nasdaq.com/press-release/sadis-goldberg-retained-to-investigate-allegations-of-accounting-fraud-at-meihua
[2] Link to the official website of the United States Securities and Exchange Commission (SEC). Meihua International 2021 FORM 20-F Annual Report. https://www.sec.gov/ix?doc=/Archives/edgar/data/0001835615/000121390022042817/f20f2021_meihua.htm
Tencent.com. Another broker is blacklisted! Shengang Securities is not allowed to participate in the placement of new shares under the network within half a year, and its own operation has been damaged, and this year's risk control has frequently lit up red lights. https://new.qq.com/rain/a/20201009A0HHCD00
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