Baby Heading Down with Bathwater? Nasdaq Requests Delay in “Re-IPO” Transactio

Baby Heading Down with Bathwater? Nasdaq Requests Delay in “Re-IPO” Transactio

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 & Patel LLP.

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