In addition to the comment I provided to the NYSE Amex's
proposal to require reverse merged companies to "season" by trading
over-the-counter for a period before applying to uplist (with an exception for
a large public offering), I also submitted the comment below with regard to
Nasdaq's similar proposal, which does not even have an exception for a public
offering. This comment is similar to the one I provided to the NYSE Amex
proposal, but focuses on certain aspects of the proposals that are different,
as well as somewhat different rationales provided in the Nasdaq proposal for
why they believe this is necessary. Anyway, take a read for yourself. The
official comment can be found at http://www.sec.gov/comments/sr-nasdaq-2011-073/nasdaq2011073-1.htm.
David N. Feldman
August 30, 2011
As an attorney I have been involved in dozens of reverse
mergers in my 26 years of practice. I have also written a text on the subject,
Reverse Mergers (Bloomberg Press, 2009), now in its second edition. My blog on
the topic, www.reversemergerblog.com, is visited by over 3000 professionals
each month. I write this comment in my individual capacity and I am not
speaking for my law firm or any of its clients.
I strongly object to the premise of the proposed
"seasoning" requirement, and believe a broad brush application to all
transactions of a particular type may have the chilling effect of discouraging
exciting growth companies from pursuing all available techniques to obtain the
benefits of a public listed stock and greater access to capital while still
maintaining appropriate investor protections.
The Exchange's justifications include (1) allegations of
fraud raised by the financial press, short sellers and others, (2) concerns
raised that certain promoters have regulatory histories or are involved in
transactions that are "disproportionately beneficial" to them, (3) the Public
Company Accounting Oversight Board (PCAOB) has cautioned accounting firms
having "identified issues" with audits of these companies, (4) an SEC
enforcement action against an auditing firm involved with reverse mergers and
(5) Nasdaq's being aware of situations where it appeared that efforts to
manipulate prices took place to meet Nasdaq's minimum price.
In response to these points, I am surprised to see such a
dramatic proposal in response to mere allegations of fraud, much less the
source. I am not aware of any rule adopted because the financial press and
short sellers made allegations. We are not aware of the "others" the proposal
is referring to.
Virtually all of these suggestions of wrongdoing involve
Chinese companies that completed reverse mergers. The proposal fails to note
that a number of other Chinese companies that completed full traditional
initial public offerings with major underwriting and accounting firms face the
very same allegations. In addition, many of the Chinese companies facing
allegations went public through a reverse merger followed by a fully
underwritten, SEC-reviewed public offering before a single share of stock
traded. So if these allegations turn out to be true, it would not be a result
of the manner in which the companies went public.
As to the backgrounds of promoters, one would think that
Nasdaq is able to review the regulatory histories and financial arrangements
made with promoters in these transactions and can choose not to list companies
where the issues are great. It is not clear to me how requiring a company to
list over-the-counter for six months addresses this issue at all.
The PCAOB's concerns follow the same issues above -
namely allegations of wrongdoing yet to be proven in almost all cases. But
again, the Nasdaq has the ability to list a company based in part on its
comfort with the auditors involved, and it is not clear that looking at two
quarterly filings before listing would change that.
One SEC enforcement action against one auditing firm,
several years ago, seems not sufficient to warrant such a draconian response.
And the concerns raised about artificially inflating
trading prices can be examined individually. Six months of trading would not
prevent this abuse. Indeed, in many transactions we work on with reverse
mergers with non-trading Form 10 shells, there is no trading at all until a firm
commitment underwriting is completed and Nasdaq application approved. In those
cases, this issue is removed completely.
Nasdaq's solution to require over-the-counter trading for
six months and to maintain a $4.00 stock price for 30 days would not in any meaningful
way reduce these concerns, and it places substantial and undue burdens on
companies seeking the benefit of an exchange listing against very few
As we know the governance and other obligations on the
OTC markets are substantially less than on Nasdaq. It is much more difficult to
generate trading volume in stocks traded over-the-counter because analysts do
not generally follow these stocks and certain funds and brokerages are
prohibited from purchasing their stock.
The original Nasdaq proposal in April did provide an
exemption from seasoning for a company coming to Nasdaq with a firm commitment
underwritten public offering. Unfortunately, the June 8 amended proposal
eliminated this exemption. Even the New York Stock Exchange and the NYSE Amex,
in their similar proposals, provide for an exemption from seasoning for a firm
commitment public offering. To suggest that a company can come to Nasdaq with a
traditional initial public offering without concern, but not with an equally investor-protective
secondary public offering after a reverse merger seems illogical.
The requirement to maintain a $4 trading price for 30
days before application is also unfair. It is even more difficult to reach this
price trading over-the-counter than obtaining this price upon initial listing
on Nasdaq, when one has all the benefits of the major exchange, including
analyst coverage and institutional investor opportunity. Thus, by requiring
minimum trading qualifications the proposal could well result in the next great
software or defense company being denied the opportunity for an uplisting
because of the very challenges of the trading platform that the proposal would
relegate them to.
Nasdaq already has broad discretionary authority with
respect to what companies it wishes to have listed. The traditional initial
public offering market remains out of reach or unduly expensive or risky for
many legitimate growth companies that could absolutely benefit from a publicly
traded stock and can bear the costs of being public. I propose, therefore, that
the seasoning proposal be rejected in its entirety as an overreaction to a
specific and limited problem with a relatively small group of companies against
which, almost universally, no wrongdoing has been proven.
In the alternative, it appears to have become much more
common for the SEC to complete full reviews of "super" Forms 8-K filed
following reverse mergers with reporting shell companies. In lieu of the
seasoning requirement, Nadaq could simply require that the "super" 8-K review
be complete to the SEC's satisfaction before an application can be made.
If it not possible to reject this proposal, I propose
that the original proposal providing for an exemption for any firm commitment
underwritten public offering be adopted. In a firm commitment public offering
with an SEC and Financial Industry Regulatory Authority (FINRA)-registered
underwriter, investors are provided the same level of protection as in any
initial public offering.
I also propose that, if any seasoning is required,
trading of the stock not be a requirement. A period where all SEC filings are
made timely and completely and can be examined by Nasdaq officials would seem
sufficient. To require the maintenance of a price that is the same as the
expected initial price on Nasdaq is unfair and unrealistic to achieve on the
OTC markets. And a Nasdaq application should be able to be processed during the
In 2010, at the SEC's Government-Business Forum on Small
Business Capital Formation, SEC Chairman Mary L. Schapiro said, "Reliable data
suggests that small businesses have created 60-to-80 percent of net new
American jobs over the last ten years. Making sure small businesses can attract
the investments they need to grow and thrive is vital to America's economic
Let us hope that the Commission's actions mirror Chairman
Schapiro's words by doing all it can to reduce impediments to capital formation
for these key engines of the American economy, with an appropriate balance to
ensure that small company investors are well protected.
David N. Feldman
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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