On November 9, 2011, the U.S. Securities and Exchange Commission (SEC) approved tougher listing standards for companies using reverse mergers to list on the major U.S. exchanges. New rules for the NASDAQ Stock Market, New York Stock Exchange, and NYSE Amex raise the level of regulatory scrutiny on reverse merger companies and delay access to U.S. exchanges. In its announcement, the SEC noted particular concerns with foreign companies that have gone public in the United States through reverse mergers, which include many Chinese companies.
The new regulations reduce the benefits historically associated with going public through a reverse merger: greater speed and lesser expense. With two exemptions, reverse merger companies must now wait for a one-year “seasoning period” to elapse and maintain a minimum share price for a sustained period of time before they are permitted to list on a U.S. exchange.
Specifically, these rules prohibit reverse merger companies from applying to list on a U.S. exchange until the combined entity has traded for at least one year, after filing all required information to apply to be listed. The company must trade either in the U.S. over-the-counter market, on a regulated foreign exchange or on another U.S. national securities exchange. To comply with the filing requirements, companies must submit “all required reports” after the consummation of the reverse merger. These reports include at least one annual report containing audited financial statements for a full fiscal year after the reverse merger.
Additionally, reverse merger companies must maintain the requisite minimum share price for at least 30 of the most recent 60 trading days prior to both the filing of the initial listing application and prior to the listing itself.
The new requirements allow for two exemptions. First, a company is exempt when it initially lists in connection with a firm commitment underwritten public offering where the proceeds of the offering equal or exceed $40 million and the offering occurred subsequent to or concurrent with the reverse merger. Second, a company is exempt from maintaining the requisite minimum share price if it has satisfied the one-year trading requirement and filed at least four annual reports with the SEC—basically, in cases where the reverse merger occurred long ago.
These new rules reduce the ease of accessibility to U.S. markets through a reverse merger with an existing public shell company. There remain great benefits for foreign companies to list on U.S. exchanges. However, foreign companies should be cognizant of these enhanced rules, and may wish to assess whether listing through a reverse merger is the best choice.