At thesaurus.com, words like "color" and "enliven"
are synonyms to the word "seasoning." Unfortunately I don't believe Nasdaq's
extreme overreaction to a real, but relatively controlled issue, does either to
the world of reverse mergers or the markets in general. Please see prior posts
for a description of their proposal to require post-reverse merged companies to
trade over-the-counter for 6 months before applying to Nasdaq for uplisting,
unless the uplist is through a firm commitment public underwriting. Here is my
reaction to the idea.
First, some perspective. Dozens and dozens of firm
commitment public underwritings in the late 1990s led to over $2 billion in
fines and much more in class action settlements because of illegal activities
in the initial public offering market during the frothy Internet days.
And frankly, quite a number of Chinese companies facing issues today also
went through full due diligence and underwritten public offerings just
like an IPO. I don't see Congress or regulators trying to eliminate
or marginalize the IPO or secondary public offering market (although I
think some commentators in the Wall Street Journal think so, read:
Sarbanes). That said, there is indeed some fraud in all corners of Wall Street,
including taking companies public, whether through IPO or other means. But
respectfully I don't see 6 months of seasoning as the solution.
If a fraudster is doing his or her thing, trading
over-the-counter for a few months has very little chance of "outing" the bad
guy. In fact, so many complain about problems that arise in the
over-the-counter markets that it is the very reason they seek uplisting, or
avoiding the OTC completely. The platforms are not the issue - I have respect
for Cromwell Coulson of OTC Markets who is working hard to up the transparency
and reliability of companies trading there. So relegating post-RM companies to
be forced to trade OTC just furthers the risk that some feel is there for
problems that are much less likely to appear if the company moves directly to a
Nasdaq says they made the proposal in part because
they believe that some promoters have bad regulatory histories or have done
deals that are "disproportionately beneficial" to them. I don't understand
this. Is Nasdaq suggesting they do not have the ability to background check the
promoters of a deal unless it has "seasoned" on the OTC for 6 months? That
respectfully just does not make sense. They also say they are "aware" of cases
where promoters tried to manipulate stock prices to qualify for Nasdaq, that
the SEC recently brought an (ie one) enforcement case based on an
alleged bad audit and the PCAOB has identified issues with post-RM companies.
So this major change should be implemented because of a few anecdotal cases,
apparently not even successful, of potential price manipulation, one enforcement
case and a concern raised by PCAOB? As to price manipulation, the same risk
attaches if the companies are sent to the OTC.
Nasdaq also believes banishment to OTC will mean
financial results will be more reliable by requiring two public filings prior
to applying to Nasdaq. That auditors will review two quarterly
financials. Again, I really think this is, to say the least, strained
logic. To come to Nasdaq anytime a company must have at least two years of
audited financial statements. But two quarters reviewing public filings will
change everything? I'm sorry but I am just not buying it.
So what is the solution to fraud in taking companies
public? Ah this is the $4.00 per share question. I know that the answer is not
hitting an annoying but relatively small flea with a Thor-sized hammer (current
popular movie reference). Nasdaq makes a circumstantial case at best
with no studies or real evidence of more than anecdotal cases of abuse. In
exchange, they will discourage many companies from considering entering the
public markets to improve their chances for growth and capital
formation if their opportunity to uplist is delayed. Is this worth it? In
my opinion no. The SEC is conducting a wide-ranging investigation into
Chinese companies that went public. How about we at least wait to see where
that goes before the massive finger-pointing begins.
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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