Nasdaq halts IPOs of small Chinese firms over stock rallies probe

Nasdaq Inc has put hold on initial public offering preparations of at least four small Chinese companies while it investigates short-lived stock rallies of such firms after their debuts. It is not clear what action the Nasdaq will take after the probe and whether all or some of the halted IPOs will be allowed to continue.

This comes amid a surge in the shares of Chinese companies that raise small amounts, typically $50 million or less, in their IPO. These stocks rise as much as 2,000% in their debuts, only to drop in the days that follow, impacting investors who are bold enough to speculate on penny stocks.

Nasdaq started asking questions to the advisers of small Chinese IPO candidates concerning the identity of their existing shareholders, where they reside, how much they are investing and if they were offered interest-free debt so they can participate.

Seven sources who work on IPOs of small Chinese companies said that the stock rallies were caused by a few overseas investors who concealed their identities and snapped up most of the shares in the offerings, creating the perception that the debuts were in demand. As a result, Chinese IPOs in the United States have returned this year on average 426% in their first day of trading, compared with 68% for all other IPOs.