The Reverse Merger Wire reported today that
the Nasdaq, in a filing with the SEC, is requesting that post-reverse merged
companies that wish to uplist to Nasdaq have at least 6 months of trading over
the counter before being allowed to move up. Apparently the idea is that having
a few public filings under their belt will somehow better prepare the companies
for trading on the higher exchange. They also think the stock should trade
at a certain level for awhile before they can be allowed to uplist, something Nasdaq
has never required of any company uplisting. While China was not mentioned
in Nasdaq's filing, they did mention recent trading halts of various companies,
which are pretty much all Chinese.
As we know, in these so-called "re-IPO" transactions
(WestPark Capital, who did the first ones, calls them WRASP transactions), a
private company merges with a Form 10 shell and a PIPE is completed. Shortly
thereafter, a full public offering is undertaken to raise more money, bring in
shareholders and start trading on the Nasdaq or NYSE AMEX.
Frankly and respectfully, this suggestion by my friends
at the Nasdaq is bunk and makes absolutely no sense and I hope that the
SEC declines to approve the request. Here's what happens when these companies
uplist. They do the same thing that a company pursuing an IPO does.
They file a full-blown registration, with real, legitimate underwriters doing
their proper due diligence. The SEC reviews the registration through multiple
versions and amendments. Can fraud occur in these situations even with all the
due dili? Of course. Were there $2 billion in fines in the IPO market of
the late 1990s because of illegal actions of underwriters? Yes. So maybe the
Nasdaq should require all companies even those considering IPOs to go
public on a lower exchange first and see how they do. Of course that
makes no sense, and neither does this.
We always worry about overreaction when there is the
appearance of a crisis. The Nasdaq already has broad powers to look both
quantitatively and qualitatively at companies considering listing on their
exchange. It is not clear at all to me how 6 months of OTC trading will rout
out problems or fraud in any company. Frankly I've felt that the re-IPO
approach is cleaner than what Nasdaq is suggesting. So many talk about pump and
dumps and trading abuses on the lower exchanges, not to mention challenges in
obtaining DTC approval. The re-IPO concept allows a company to complete a major
financing (PIPE) quickly, then do a full SEC-reviewed registration so that the
very first trade that takes place is on a major, well-respected exchange. As I
said, let's hope this effort is dropped quickly.
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 &
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