Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, September 15, 2011

SEC Calls for Review of Exchanges' Reverse Merger Listing Standards

On Sept. 12 the SEC issued an Order instituting proceedings to determine whether to disapprove NASDAQ's proposed rule change to adopt additional listing requirements for reverse mergers (Rel. 34-65319).  On May 26, 2011,  NASDAQ filed with the SEC a proposed rule change to adopt additional listing requirements for a company that has become public through a combination with a public shell, whether through a reverse merger, exchange offer, or otherwise (a ”Reverse Merger”).  In its filing, Nasdaq noted that there have been widespread allegations of fraudulent behavior by certain Reverse Merger companies and that it was aware of situations where it appeared that promoters and others intended to manipulate prices of Reverse Merger companies’ securities higher to help meet Nasdaq’s initial listing bid price requirement.

In its Order, the SEC stated:

Nasdaq’s proposal would require Reverse Merger companies to meet certain “seasoning” requirements prior to listing, and is designed to address significant regulatory concerns, including accounting fraud allegations, that have recently arisen with respect to Reverse Merger companies. As noted above, NYSE and NYSE Amex subsequently filed proposed rule changes designed to address the same concerns as the Nasdaq proposal. Although similar to the Nasdaq proposal in many respects, certain provisions of the NYSE and NYSE Amex proposals materially differ from the Nasdaq proposal, including a one-year instead of a six-month seasoning period, and a more general requirement to maintain the minimum listing price for a “sustained period,” rather than on at least 30 of the 60 trading days prior to filing the listing application. Unlike the Nasdaq proposal, the NYSE and NYSE Amex proposals also include an exemption for Reverse Merger companies that list in connection with certain underwritten public offerings.

The Commission shares the concerns of Nasdaq, as well as NYSE and NYSE Amex, with respect to fraud and manipulation in connection with the formation of Reverse Merger companies and their listing on an exchange. The Commission also believes that meaningful enhancements to exchange listing standards, including more rigorous seasoning requirements that are appropriately targeted at Reverse Merger companies could help prevent fraud and manipulation in this area, and protect investors and the public interest. Because of the importance of this issue, however, the Commission believes the Nasdaq proposal should be considered together with the NYSE and NYSE Amex proposals, to assure that the exchanges develop and implement consistent and effective enhancements to their listing standards, to best address the serious concerns that have arisen with respect to the listing of Reverse Merger companies. Accordingly, in light of the material differences between the Nasdaq proposal and the NYSE and NYSE Amex proposals, and the concerns raised by commenters, the Commission believes that questions are raised as to whether Nasdaq’s proposal is consistent with the requirements of Section 6(b)(5) of the Act, including whether the proposed listing requirements would prevent fraud and manipulation, promote just and equitable principles of trade, or protect investors and the public interest.

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