The U.S. Financial Industry Regulatory Authority (FINRA) issued a warning on Thursday in response to a spate of minor initial public offers (IPOs), many of which were coming from China and were pump-and-dump operations that investors should avoid.
The government-approved not-for-profit organization FINRA is in charge of supervising American broker-dealers. It guarantees that everyone can engage in market activity with confidence. To engage in securities and do business with the investing public, both organizations and individuals need to be registered with FINRA.
In order to artificially inflate share prices, many of them include Chinese firms and assign up to 90% of their offering to foreign broker-dealers, most of whom are situated in Hong Kong. According to FINRA, the majority of these initial public offerings raise less than $25 million for businesses with valuations under $100 million.
So according to FINRA, criminals also use social media and texting to try to convince individuals to invest in these IPOs. Sometimes they appear to be sending the wrong message, which creates a connection that persuades victims to place orders for IPOs at a particular time and price.
As was reported in October, Nasdaq Inc. has halted the IPO plans of a number of tiny Chinese companies while it looks at brief stock rallies of these companies after their debuts. Separately on Thursday, Nasdaq and the New York Stock Exchange announced that they will examine small-cap IPOs more closely. Recently, after raising modest amounts, some stocks had launched gains of up to 2000% before taking a plunge in the days that followed.
"You're dealing with market manipulations, small companies, small float, so they got to figure out what happened," Drew Bernstein, co-chairman of Marcum Bernstein & Pinchuk said.
The U.S.-China Economic and Security Review Commission estimates that as of March 2022, there were 261 Chinese businesses listed in the US, with a total market value of $1.3 trillion. More than 500 Chinese companies have been listed on the NYSE since the 1990s, and their initial public offerings have generated enormous profits (IPOs).
The number of Chinese stocks listed in the United States rose from 248 to 261 the previous year, with 18 new stocks launched on three markets, generating combined IPO revenues of nearly $8.6 billion. However, during a similar time period, five Chinese equities were also delisted.
The Nasdaq Golden Dragon China Index (HXC), an ETF that monitors companies that are listed publicly in the United States but do the majority of their business in mainland China, is doing well despite the difficult market conditions.