Can Seasoning Restrictions Be Adjusted?

I remain determined in my quest for the major stock exchanges to consider some alterations to the reverse merger "seasoning" requirements instituted in November 2011.  As we know, these restrictions were added primarily in response to allegations of fraud in a number of Chinese companies that went public through reverse mergers.

The rules add a speed bump, requiring companies merging with reporting shell companies to trade in the over the counter markets for at least one full fiscal year. You can bypass the restriction with a $40 million public offering. This placed a giant skewer through a large number of deals in which a company merged with a shell, completed a PIPE, then moved immediately to a public offering of $15 or $20 million and trading on the Nasdaq or NYSE Amex. Very few reverse merging companies can attract a $40 million public offering.

In the year plus since the rules passed, many fewer reverse mergers. Companies that are on the over-the-counter markets struggle in a decimated PIPE market and no ability to sell shares through short form registration. Underwriters are not thrilled to do a public offering that doesn't "uplist" the company to a major exchange. So these companies have had tremendous difficulty raising money. And this in a frothy market about to hit new highs.

I suggest that the exchanges consider lowering the threshold on the Amex and Nasdaq to $10 or maybe $15 million. The investor protections are the same in both types of offerings. The exchanges retain substantial discretion if they feel a shell or its promoters seem in any way shady. In all other listing requirements the standards for the exchanges below the NYSE "big board" are lower except here. This change makes sense and retains all the protections of a larger public offering. I'm just saying.

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

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