CSX Deal A Threat To Investors

by: Paul Gillis

The Chicago Stock Exchange Inc (CSX) announced its planned sale to an investor group lead by China’s Chongqing Casin Enterprise Group.

The 134-year old bourse plans to seek approval to list companies that want to access the capital markets but may not meet the standards of Nasdaq or the New York Stock Exchange (NYSE).

The plan appears similar to one earlier announced by former Lehman Bros. CEO Dick Fuld, the so-called “Gorilla of Wall Street”, to reopen the National Stock Exchange (NSX). NSX recently received permission to restart trading operations.

US markets, particularly NASDAQ and the NYSE were until recently the preferred listing venues for privately owned Chinese companies. US exchanges were preferred over Chinese exchanges because they provided greater regulatory flexibility and good valuations. Consequentially, hundreds of Chinese companies sought listings in the US, many of which came to market as reverse mergers that were lightly regulated. Many of these listings collapsed in a wave of accounting frauds, and NASDAQ and the NYSE tightened listing requirements in a way that stopped the use of reverse mergers.

Recently, however, Chinese exchanges have offered significantly higher valuations (even after the recent major correction) and China’s new third board offers a light regulatory touch for smaller Chinese companies seeking capital.

My concern is that the main reason I see for a Chinese company to list on the CSX or NSX is to avoid the tougher regulatory requirements of the NYSE, NASDAQ, and the Chinese exchanges. What kind of company wants to avoid tougher regulation? Fraudulent ones, too often I fear

I understand that the CSX deal will require CFIUS and SEC approvals. US regulators should not approve the deal unless the CSX agrees to adopt the seasoning rule that has helped protect investors from fraudulent reverse mergers on the NYSE and NASDAQ (and killed reverse mergers in the process). Regulators might also insist that the auditors of any companies listed on these exchanges be subject to PCAOB inspections, a matter that PCAOB and Chinese regulators have been unable to agree upon.