Yesterday, the SEC filed a complaint against “David” Zhou for allegedly being a “gatekeeper” for Chinese companies that wanted to bypass disclosure regulations and enter the U.S. market.
This is yet another step in the agency’s crackdown against fraudulent Chinese companies. Last week, the agency filed a lawsuit against the Chinese bases of the “Big Four” accounting firms for failing to properly disclose required information about their clients.
Now we get to see how it’s done right here in the United States.
And that’s really one of the most interesting parts of the SEC’s complaint. One of the ways Zhou got Chinese companies to market while avoiding the scrutiny of regulators was through a “reverse merger”, and the complaint breaks the process down step by step.
Here’s how Zhou formed a company the SEC calls as “Company A,” according to the complaint:
Zhou first formed a holding company in Delaware and made his wife the sole shareholder. Then he merged a private Chinese company into it.
Zhou then merged the holding company with a shell company and boom!, there’s “Company A,” which can become a publicly traded entity.
Of course, he also needed investors. According to the SEC, Zhou solicited 85 people saying:
“[Company A] will be public in the U.S. by OTCBB [reverse merger] … If you invest [at prices between $2 and $3 per share] … the Delaware [company or the Holding Company] [will] become [an] OTCBB company. When we do [go] public, [you will] get  shares.”
Zhou was able to raise over $5 million from friends, family and members of Chinese community, some of whom were unsophisticated investors of limited means, the SEC alleges.
Doesn’t sound that hard, right?
Meanwhile the SEC sounds highly dubious of said company:
Company A, a supposed refiner and producer of high purity tellurium for the solar industry, is a Delaware corporation with purported operations in China. Its stock is registered pursuant to Section 12(g) of the Exchange Act and is quoted on the OTC Bulletin 5 Board. The stock virtually no longer trades.