Capital Markets Alert: SEC Approves New Rules to Toughen Listing Standards for Reverse Merger Companies
11/15/2011
The Securities and Exchange Commission (“SEC”) has approved new rules of the three major U.S. listing markets aimed at tightening standards for companies pursuing a reverse merger in order to be listed on the these exchanges. The rules, which will force reverse merger companies to trade in the U.S. over-the-counter (“OTC”) market or on another regulated U.S. or foreign exchange for at least one year from the date of the merger transaction before they may apply for a listing on the NYSE, Nasdaq, NYSE, or NYSE Amex exchanges, are intended to protect investors by making it more difficult for reverse merger companies to obtain listings on those exchanges until they have met certain requirements.
Reverse mergers permit private companies to access U.S. investors and markets by merging with an existing public shell company. This methodology has caused hardship for investors, regulators, and auditors due to the frequent difficulty in obtaining reliable information on these companies, which are often based outside of the U.S. The new SEC exchange rules will require that:
- The company has completed a one-year “seasoning period” by trading in the U.S. OTC market or on another regulated U.S. or foreign exchange following the reverse merger, and filed all required reports with the SEC including audited financial statements; and
- The company maintains the requisite minimum share price (based upon each exchange’s requirements) for a sustained period, and for at least 30 of the 60 trading days, immediately prior to its listing application and the applicable exchange’s decision to list.
The reverse merger company, according to the SEC statement, “generally would be exempt from these special requirements if it is listing in connection with a substantial firm commitment underwritten public offering, or the reverse merger occurred long ago so that at least four annual reports with audited financial information have been filed with the SEC.”
We at J.H. Cohn understand the need to protect investors, especially in these types of transactions. We continue to believe, however, that a “one size fits all” approach to these types of activities can limit access to capital by legitimate companies.
For more information about this or other SEC developments please contact Richard Salute, CPA, a J.H. Cohn partner and director of the Firm’s Capital Markets and SEC Practice, at rsalute@jhcohn.com or 516-336-5501, or your J.H. Cohn engagement partner at 877-704-3500.