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Another VIE collapse

Another VIE arrangement appears to be collapsing. Nutrastar International Inc. (OTC BB: NUIN) (Nutrastar) was listed in the US through a reverse merger. Nutrastar’s primary product is cordyceps militaris, a species of parasitic fungus used in traditional Chinese medicine.

Nutrastar reports $139 million of cash and only $5 million of debt, yet has a market capitalization of only $6 million. We have learned that sometimes Chinese companies do not have the cash they report, and auditors have often been duped on this. In this case, the problem seems to be that the public company, incorporated in the US, cannot access the cash (even if it exists) because it is in a VIE.

Nutrastar’s financial statements omit required disclosures of the assets of the VIE. The SEC should require the company to provide these disclosures and discipline the auditor for not requiring them. Nevertheless, we can tell from the separate financial statements of the parent that the cash is likely in the VIE, and in RMB, not US dollars.

CSX deal a threat to investors

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.

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