In response to recent investigations into companies that went public through reverse merger transactions, the Securities and Exchange Commission (SEC) has approved new rules proposed by NASDAQ, NYSE Amex and the New York Stock Exchange (NYSE) that call for, among other things, a “seasoning” period following the reverse merger.

On November 9, 2011, the SEC approved new rules initially proposed by NASDAQ, NYSE Amex and the NYSE that toughen listing standards with respect to companies that go public through reverse mergers. A reverse merger is a transaction whereby a private company merges with an existing public shell company and thereby becomes public.

NASDAQ and NYSE Proposals

In June 2011, the SEC issued an investor bulletin stating that "there have been instances of fraud and other abuses involving reverse merger companies" and that investors "should be careful" when they consider investing in the stock of such companies.

Around the same time, NASDAQ and the NYSE (on behalf of itself and NYSE Amex) separately proposed amendments to their respective listing standards that would apply solely to reverse merger companies. While the proposals were similar in many respects, there were some key differences:

  • The NYSE proposal would have prohibited a reverse merger company from applying to list until it traded in another market for one year after the filing of the “Super 8-K” following the reverse merger, whereas the NASDAQ proposal called for six months.
  • The NYSE proposal would have required the maintenance of a minimum $4 stock price ($3 for NYSE Amex) for listing on an “absolute and an average basis for a sustained period” of time immediately preceding the filing of the initial listing application and through listing, as opposed to a minimum $4 stock price for 30 of the 60 trading days prior to filing a listing application as provided in the NASDAQ proposal.

SEC Approval

The SEC believed the NASDAQ and NYSE proposals should be considered together to ensure that the standards developed and implemented by the exchanges are consistent and effective in addressing concerns that have arisen with respect to the listing of reverse merger companies.

Under the new rules approved by the SEC, a reverse merger company will be prohibited from submitting an application to list on NASDAQ, NYSE or NYSE Amex until:

  • The company has completed a one-year “seasoning period” by trading in the U.S. over-the-counter market or other regulated U.S. or foreign exchange following the reverse merger, and has filed all required reports with the SEC, including audited financial statements; and
  • The company maintains the requisite minimum share price for at least 30 of the 60 trading days immediately prior to both the submission of its listing application and the exchange’s approval of the application to list.

In addition to the above approved rules, the new NYSE rule states that the NYSE may, in its discretion, impose more stringent requirements than those formally adopted if the NYSE believes it is warranted in the case of a particular reverse merger company. The NYSE rule indicates that certain factors it would consider include:

  • an inactive trading market in the reverse merger companies securities;
  • the existence of a low number of publicly held shares that are not subject to transfer restrictions;
  • if the reverse merger company has not had a Securities Act registration statement or other filing subjected to a comprehensive review by the SEC; or
  • if the reverse merger company has disclosed that it has material weaknesses in its internal controls and has not yet adopted an appropriate corrective action plan.

Exemptions

The final NASDAQ and NYSE proposals that were approved by the SEC did provide two scenarios under which a reverse merger company generally would be exempt from these new rules:

  • if the listing is in connection with a firm commitment underwritten public offering where the proceeds are at least $40 million and the offering occurs subsequent to, or concurrently with, the listing; or
  • the reverse merger occurred at such point in the past that at least four annual reports with all required audited financial statements have been filed with the SEC.