With tightening regulation of backdoor listings, privately-offered funds are moving out of their earlier investments in listed companies that were speculated to be acquisition targets of unlisted firms seeking to avoid the lengthy formal listing process.

China's securities regulator released revised regulations on the major asset restructuring of listed companies in September to curb backdoor listings. The regulator sought public comments on the draft of revised regulations from June 17 to July 17.

"The revised regulations make speculative backdoor listings much more difficult, so speculators are cashing out from the listed companies that may be the targets of backdoor listings," said Cao Qijia, an analyst at Zero2IPO Group.

Shen Zhou Mu Fund has cashed out from Kelin Environmental Protection Equipment Inc, the Shenzhen-listed company's third quarter financial report showed in October. Shen Zhou Mu Fund held 1.2 million shares of the company three months ago.

China Science and Merchants Capital Management Group sold out their shares of Shenzhen-listed Maanshan Dingtai Rare Earth & New Materials Co Ltd, according to the statement of the company in August.

Guangzhou-based New Value Investment Co Ltd sold 125,300 shares of Shenzhen-listed Hainan Dadonghai Tourism Centre (Holdings) Co Ltd, according to Dadonghai's statement in July.

Zhejiang Think Investment Management Co sold 1.2 million shares from Shanghai-listed YanTai Yuancheng Gold Co Ltd.

After the stock slump last year, many privately-offered funds chose to purchase shares of listed companies that they thought might be the targets of backdoor listings. These shell companies became popular in the market due to the backdoor listing expectation and their share prices rose, so these funds made profits.

For instance, China Science and Merchants Capital Management Group purchased more than 5 percent of shares in each of 16 A-share listed companies last year after the stock slump. New Value Investment Co Ltd purchased shares of more than 10 listed companies at the end of last year. Shen Zhou Mu Fund purchased shares in more than 40 shell companies in April this year.

"The business model cannot continue after the China Securities Regulatory Commission released the revised regulations on the major asset restructuring of listed companies," said an investment banker, who declined to be named, at a Chinese securities firm.

According to market intelligence provider Tonghuashun, about 100 major asset restructuring deals of listed companies have failed since June.

The revised regulations set out five main indexes to judge whether an acquisition is in fact a major asset restructuring.

Previously, the regulator only looked at whether the assets of the unlisted acquiring company were greater than those of the listed one.

Cao said backdoor listing is popular in China because it is a quicker way to go public than launching an initial public offering. As of June 30, there was a backlog of 894 companies waiting to IPO on the A-share market.

Backdoor listing is also a good way for companies listed in the US market to go back to the Chinese capital market.

Yang Feng, founding partner and chief executive officer of Shenzhen-based Blue Ocean Capital Group, said earlier that backdoor listing is still the best way for a company to list on the A-share market, especially for those whose market value is more than 10 billion yuan ($1.5 billion).

"It is much quicker. The cost of a shell company and dilution of its own equity could prove acceptable for a big company with a market value of 10 billion yuan."

Bloomberg