The stock exchange operator's actions come 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 nosedive in the days that follow, bruising investors who are bold enough to speculate on penny stocks.

Douglas Ellenoff, a corporate and securities attorney at Ellenoff Grossman & Schole LLP, said he was informed by the Nasdaq that certain IPOs will not be allowed to proceed "until they determined what has been the aberrational trading activity in certain Chinese issuers earlier this year."

"These were last-minute phone calls, just as we thought we were going to go somewhere with the deals," Ellenoff said.

Nasdaq started asking the advisers of small Chinese IPO candidates questions in mid-September. The questions concerned 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, according to one of the bankers, Dan McClory, who is head of equity capital markets at Boustead Securities.

The lawyers and bankers spoke to Reuters on condition that the names of the four companies whose IPOs were halted not be disclosed.

It is not clear what action the Nasdaq will take once it completes its probe and whether all or some of the halted IPOs will be allowed to continue. A Nasdaq spokesman declined to comment.

Seven sources who work on IPOs of small Chinese companies spoke to Reuters on the condition that neither they nor their clients be identified. These sources said that the ephemeral 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 a staggering 426% in their first day of trading, compared with 68% for all other IPOs, according to data from Dealogic.

The Securities and Exchange Commission (SEC) and other U.S. financial regulators have yet to announce a case of successfully prosecuting such pump-and-dump schemes because Chinese companies and their overseas bankers have so far been effective in carrying them out secretly, the seven sources said.

An SEC spokesperson did not immediately respond to a request for comment.

LOOPHOLES

Nasdaq's intervention underscores how liquidity standards it adopted in the last three years to prevent stock manipulation in small IPOs have loopholes that Chinese companies are exploiting. The rules dictate that a company going public should have at least 300 investors holding at least 100 shares each, totaling a minimum of $2,500.

Yet these requirements have not been sufficient to prevent trading manipulation in some penny stocks. Small Chinese companies have been attracted to Nasdaq's exchange rather than the New York Stock Exchange because the former has traditionally been the venue of red-hot technology startups - an image these companies often try to project.

"Almost all of these microcap IPOs are 'story' stocks, where the promoters try to convince unsophisticated retail investors that this could be the next Moderna or this could be the next Facebook," said Jay Ritter, a University of Florida professor who studies IPOs.

There have been 57 listings of small Chinese companies in the last five years, up from 17 listings in the prior five years, according to Dealogic. So far this year there have been nine such listings despite the U.S. IPO market facing its worst drought in nearly two decades due to market volatility fueled by the Federal Reserve raising interest rates to fight inflation.

McClory said the trend highlights the looser regulatory requirements for listings in the United States compared with China. "It is virtually impossible for these companies to list onshore in China, and now the Hong Kong market has completely shut down as well," he said.