SEC Approves New Rules Regarding Listing Standards for Reverse Merger Companies
By: CHRISTOPHER J. MELSHA
On November 9, 2011, the Securities and Exchange Commission (SEC) approved new rules of the New York Stock Exchange (NYSE), the NYSE Amex Exchange (Amex), and NASDAQ that toughen the standards that companies that have gone public through a reverse merger must meet to become listed on those exchanges.
In a reverse merger, a private operating company merges with an existing public reporting shell company, resulting in the operating company becoming a public reporting company without having conducted a traditional initial public offering. Previously, companies that go public through a reverse merger can apply for listing on a stock exchange, provided they meet the exchange’s initial listing standards applicable to all companies seeking initial listing. Under the new rules, NYSE, Amex, and NASDAQ will impose more stringent listing requirements for companies that become public through a reverse merger than the current rules require. Specifically, under the new rules, a reverse merger company must wait to apply for a listing until:
- The company has completed a one-year “seasoning period” by trading in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange following the reverse merger.
- The company has timely filed all required reports with the SEC, including at least one annual report containing audited financial statements for a full fiscal year commencing on a date that is after the date of filing all information required to be filed about the reverse merger.
- The company has maintained the requisite minimum share price ($4 for NYSE and NASDAQ, and either $2 or $3 for Amex, depending on the applicable standard under which listing is sought) for a sustained period, but in no event less than 30 of the last 60 trading days, immediately prior to its listing application and the exchange’s decision to list the company’s shares.
In addition, the NYSE and Amex rules give those exchanges the discretion to impose more stringent listing requirements in the case of a particular company if there is an inactive trading market in the company’s securities, there is a low number of publicly held shares that are not subject to transfer restrictions, the company has not had a Securities Act registration statement subject to a comprehensive SEC review, or the company has disclosed that it has material weakness in its internal controls that have been identified by management and/or the company’s independent auditors but the company has not yet implemented an appropriate corrective action plan.
A reverse merger company generally would be exempt from these special requirements if it is listing in connection with a substantial firm commitment underwritten public offering with proceeds to the company of at least $40 million, or if it has filed with the SEC at least four annual reports with audited financial information as of the application for listing.