On November 8, 2011, the SEC
approved new rules that add requirements for initial listings that are
accomplished through a reverse merger with a publicly traded shell company.
Those that feel the new rules will have little impact base their view on the
fact that American exchanges had already informally adopted to the new trading
requirements. Others feel the new rules will hamper small businesses and their
ability to legitimately raise capital.
On November 8,
2011, the U.S. Securities and Exchange Commission ("SEC") approved
new rules that had been proposed by the three major U.S. stock exchanges,
NASDAQ, the New York Stock Exchange ("NYSE") and NYSE Amex, that add
requirements for initial listings that are accomplished through a reverse
merger or a similar transaction ("Reverse Merger Companies") with a
publicly traded shell company. The new rules prohibit a Reverse Merger Company
from listing its shares on all three major U.S. stock exchanges until three
basic conditions are met. First the company must trade in the U.S.
over-the-counter market or on another regulated U.S. or foreign exchange for at
least one year following the reverse merger. Second, the reverse merger company
must timely file all required reports with the SEC for at least one year.
Third, the company must have maintained the requisite minimum share price in
the over-the-counter market for a sustained period, and also for at least 30 of
the 60 trading days immediately prior to submitting its listing application and
the exchange's decision to approve the application for listing. Certain
exceptions to these new stringent requirements apply, including for
transactions over a certain dollar threshold. The new rules were adopted after
U.S. exchanges suspended or halted trading in more than 35 companies based
overseas, many of which were formed through reverser mergers with shell
companies, due to a lack of current and accurate information about the firms
and their finances.
Background to the New Rules.
In the last several years foreign companies (including many Chinese companies)
have sought to access U.S. capital markets by merging with U.S. companies that
are publicly traded on an American exchange. A typical scenario how this is
accomplished is as follows: a business is acquired by a U.S. shell company that
is worthless except that it is publicly traded. The American board then
resigns; the foreign board takes over, changes the company's name, and issues
new stock to hedge funds and other new investors, raising millions of dollars
in fresh capital. Companies also may purchase a defunct American-listed
company, merge with it and then adopt its ticker symbol. As reported by
Bloomberg, many Chinese companies were attracted to reverse mergers because it
is faster and less onerous than a traditional Initial Public Offering
("IPO"). Getting listed on an American exchange through a reverse
merger can take as little as a few months.
The three major U.S. exchanges requested additional listing requirements
because there were allegations that many of the Reverse Merger Companies were
engaging in fraudulent actions and their financial statements were unreliable.
Moreover, it was alleged that promoters intended to manipulate the prices of
Reverse Merger Companies securities higher to help meet NASDAQ's initial
listing bid price requirement and that these companies had gifted stock to
artificially satisfy NASDAQ's public holder listing requirement."
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