New Rules to Toughen Listing Standards for Reverse Merger Companies Approved by the SEC
Yoomi Lee | Bloomberg Law
The Securities and Exchange Commission (SEC) approved rules adopting stringent requirements that companies going public through a reverse merger must meet to be listed on the NASDAQ Stock Market LLC (NASDAQ), the New York Stock Exchange LLC (NYSE), and NYSE Amex LLC (NYSE Amex, and collectively, Exchanges). Typically, many private companies, in addition to those that operate in foreign countries, seek access to U.S. capital markets by merging with an existing public shell company through a reverse merger. Due to the nature of transaction, regulators and auditors have had difficulty obtaining reliable information from reverse merger companies, especially those based in foreign countries. According to the SEC, trading either has been suspended or halted in more than 35 companies based overseas for lack of current and accurate information about the firms and their finances. To that end, the SEC issued an investor bulletin about reverse mergers, and also launched an initiative to examine whether such companies were accurately reporting their financial results. For more information see, Bloomberg Law Reports®—Securities Law, SEC Warns Investors about Investing in Reverse Merger Companies (June 10, 2011)
Under the new rules, the Exchanges will prohibit a reverse merger company from applying to list until the combined entity has traded in the U.S. over-the-counter market, on another national securities exchange, or on a regulated foreign exchange, for at least six months or one year following the filing of all required information about the transaction with the SEC, including audited financial statements. Further, the reverse merger company must maintain a minimum stock price on at least 30 of the 60 trading days immediately prior to submitting the list application.
Generally, depending on the exchange, a reverse merger company will be exempt from the requirements of the new rules, if (1) the listing is in connection with a significant firm commitment underwritten public offering, or (2) at least four annual reports with audited financial information have been filed with the SEC.
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