Double due diligence efforts before investing

Shanghai-based partner Zhong Lin of Chen & Co Law Firm suggested that more extensive due diligence is needed on the part of investors.

“Going forward, the substance of the review and reporting requirements of the listing market should continue to serve as a first line of defence for investors,” he said. “ Investors should redouble due diligence efforts on potential investees.”

These include working closely with experienced legal counsel, accountants and, occasionally, private investigation firms to affirm an investee's representations, as well as speaking with its clients. When necessary, a visit to the investee's operations should be conducted.

“Such efforts should be undertaken before investing and, as warranted, from time to time during the investment period,” said Lin. “Although China is a very promising market with many investment opportunities, finding and properly qualifying these opportunities requires effort and determination.”

For Chinese issuers, selecting intermediary agencies with a sound reputation is an important first step.“The company should make inquiries to understand the capabilities and experiences of these accounting firms instead of simply relying on recommendations of existing contacts,” said Lin.

A full understanding of the legal and financial frameworks of the US market is fundamental and any “blind” actions should be avoided.

Commentators predict that there might be a closer cooperation between the China Securities Regulatory Commission (CSRC) and the SEC, including a closer alignment of standards and review strategies, and possibly having the US regulator seek permission from the Chinese to allow it to audit files of domestic accounting firms. JQ