The Securities and Exchange Commission warned investors to be “especially careful” about investing in reverse merger companies. These are private foreign firms that gain access to U.S. markets by joining with “public shell” companies, which have either no or only nominal operations and assets.

The Commission and the exchanges recently suspended trading in a more than a dozen reverse merger companies because of “a lack of current, accurate information about these firms and their finances,” according to a June 9 Investor Bulletin. "Investors should thoroughly research the company— including ensuring there is accurate and up-to-date information—before making a decision to invest," said the SEC's Director of the Office of Investor Education and Advocacy Lori Schock in the document.

“It is not often that the SEC puts out an alert on a topic,” says Sanjay Shirodkar, of counsel at the law firm DLA Piper.

In addition, the NASDAQ Stock Market proposed a rule on June 8 that would add listing requirements for reverse merger companies seeking to list on the exchange.  NASDAQ already states on its website that listed companies determined to be public shells “may be subject to delisting proceedings or additional and more stringent criteria.”

The Public Company Accounting Oversight Board published a Research Note on the growth of Chinese reverse merger transactions, which represented 13 percent of initial public offerings in the United States between January 2007 and March 2010, and the audit risk that they pose. The agency had previously issued a staff audit practice alert in July on auditing reverse mergers. “The PCAOB continues to be unable to conduct inspections in China, based primarily on assertions by the Chinese of national sovereignty issues,” which is “especially troubling given the growth in the number of Chinese companies seeking access to capital in U.S. securities markets,” said PCAOB Chairman James Doty at a Senate hearing on April 6, according to a statement.

This flurry of activity around reverse mergers could be significant, Shirdokar says.“It is pretty rare when you see so many regulators issuing guidance or modifying their rules etc. related to one particular issue,” he says.