The flow of reverse mergers and IPOs continues to be weak due to the increased regulation and scrutiny towards the listing requirements.

The major focus has been on reverse mergers originating from China, which has resulted so far in numerous scams. As a result, the flow of Chinese stocks trying to list via reverse mergers has dissipated and I do not sense a return to the recent years when Chinese IPOs came to U.S. markets by the hundreds. There have been only 11 Chinese IPOs this year.

The flow of reverse mergers has plummeted by about 50% in the third quarter compared to the previous year, largely due to the decline in IPOs from China.

In addition, the demand for IPOs and reverse mergers has been negatively impacted by the higher global risk that is impacting the interest in speculators wanting to buy.

The flow of IPOs is continuing to suffer, as many issuers hold off due to the negative environment for new stocks.

Reverse-merger-based IPOs continue to be a disappointment for investors, as we approach the fourth quarter. The near term is poor for new reverse merger stocks, but I believe there could be better companies once the regulations are cleaned up.

The weakness of the reverse merger stocks is evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies trading on U.S. exchanges following reverse mergers. As of November 8, the index is down over 50% from December 2010, compared to the S&P 500 rise of about 0.32% during the same period. The results have been horrendous; but, over the past month, there has been some improvement, as the CHINARTO Index is up about seven percent.

The non-weighted China Main Index (TCM) tracks 40 profitable U.S.-listed Chinese small-cap growth stocks. Yet, despite these companies having profits, the performance has been dismal; down 65.7% from its inception in December 2009.

At present, investors continue to be nervous towards IPOs via reverse mergers due to the enormous volatility in the share prices and the higher risk in the broader market.

The majority of reverse merger stocks have taken a hit following the U.S. Securities and Exchange Commission (SEC) announcement irrespective of the strength and growth prospects of the business, solid financial performance, and clean reputation of the management. This gives an opportunity to investors to be selective and invest in such firms, and earn higher returns.

If you want to play Chinese stocks, but with less risk, take a look at an example of how to do this with an exchange-traded fund (ETF) in How to Play China with Less Risk.

And I still believe the landing in China will be fine, as I discussed in China’s Economic Landing: Hard or Soft?