[Federal Register Volume 73, Number 148 (Thursday, July 31, 2008)]
[Notices]
[Pages 44794-44797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17502]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58228; File No. SR-NASDAQ-2008-013]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval to Proposed Rule Change, as Modified by Amendment No. 1, To 
Adopt Additional Initial Listing Standards To List Securities of 
Special Purpose Acquisition Companies

July 25, 2008.

I. Introduction

    On March 14, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt additional initial listing standards to 
list securities of special purpose acquisition companies (``SPACs''). 
The proposed rule change was published in the Federal Register on April 
24, 2008.\3\ The Commission received two comment

[[Page 44795]]

letters on the proposal.\4\ On June 16, 2008, the Exchange responded to 
the comment letters.\5\ On July 10, 2008, the Exchange filed Amendment 
No. 1. In Amendment No. 1, the Exchange proposed to: (1) Amend the 
amount of gross proceeds that must be deposited from 100% to 90%; (2) 
clarify the period in which the SPAC must complete one or more business 
combinations; and (3) require that all listed SPACs contain provisions 
allowing public shareholders to convert their shares into cash if they 
vote against a business combination.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57685 (April 18, 
2008), 73 FR 22191.
    \4\ See Letters from Messrs. Steven Lofchie and Tim Geller, 
Cadwalader, Wickersham & Taft LLP, dated May 14, 2008 (``Cadwalader 
Letter'') and Mark Connolly, Chair, NASAA Corporate Finance Section 
Committee, North American Securities Administrator Association, 
dated May 15, 2008 (``NASAA Letter'').
    \5\ See Letter from Arnold P. Golub, Associate General Counsel, 
The Nasdaq Stock Market LLC, dated June 16, 2008 (``Nasdaq 
Response'').
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, and is approving 
the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.

II. Description of Proposal

    The Exchange proposes to adopt a new interpretative material to 
Nasdaq Rule 4300 to permit the initial listing of securities of 
SPACs.\6\ In the past, the Exchange has denied initial listings of 
securities of companies without a specific business plan or that have 
indicated that their plan is to engage in a merger or acquisition with 
unidentified companies.
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    \6\ SPACs raise capital in an IPO to enter into future 
undetermined business combinations through mergers, capital stock 
exchanges, asset acquisitions, stock purchases, reorganizations or 
other similar business combinations with one or more operating 
businesses or assets. In the IPO, SPACs typically sell units 
consisting of one share of common stock and one or more warrants (or 
fraction of a warrant) to purchase common stock. The units are 
separable at some point after the IPO. Management of the SPAC 
typically receives a percentage of the equity at the outset and may 
be required to purchase additional shares in a private placement at 
the time of the IPO. Due to their unique structure, SPACs do not 
have any prior financial history like operating companies.
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    Proposed IM-4300-2 would permit the Exchange to list securities of 
SPACs under the Exchange's existing initial listing standards, provided 
certain conditions are satisfied. First, at least 90% of the gross 
proceeds from the IPO and any concurrent sale by the SPAC of equity 
securities must be deposited in a deposit account.\7\ Second, within 36 
months of the effectiveness of the IPO registration statement or such 
shorter period that the SPAC specifies in the registration statement, 
the SPAC must complete one or more business combinations having an 
aggregate fair market value of at least 80% of the value of the deposit 
account \8\ at the time of the agreement to enter into the initial 
business combination. Third, each business combination must be approved 
by a majority of the SPAC's independent directors and approved by a 
majority of the shares of common stock, until the SPAC has completed 
business combinations of at least 80% of the fair market value of the 
deposit account at the time of the initial business combination. 
Finally, until the SPAC has completed business combinations of at least 
80% of the fair market value of the deposit account at the time of the 
initial business combination, each public shareholder voting against a 
business combination must have the right to convert his or her shares 
into a pro rata share of the aggregate amount then in the deposit 
account \9\ if the business combination is approved and 
consummated.\10\ In addition, until the SPAC has completed business 
combinations of at least 80% of the fair market value of the deposit 
account at the time of the initial business combination, it must notify 
the Exchange of each proposed business combination. Following each 
business combination, the resulting entity must meet the Exchange's 
initial listing standards to remain listed on the Exchange.
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    \7\ Proposed IM-4300-2(a) defines deposit account as: (1) A 
trust account maintained by an independent trustee; (2) an escrow 
account maintained by an ``insured depository institution'' as such 
term is defined in section 3(c)(2) of the Federal Deposit Insurance 
Act, 12 U.S.C. 1813(c)(2); or (3) a separate bank account 
established by a registered broker or dealer.
    \8\ Proposed IM-4300-2(b) would exclude any deferred 
underwriters fee and taxes payable on the income earned on the 
deposit account from the 80% of the value of the deposit account.
    \9\ Proposed IM-4300-2(e) would exclude taxes payable and 
amounts distributed to management for working capital purposes from 
the aggregate amount in the deposit account.
    \10\ Proposed IM-4300-2(e) would allow a SPAC to establish a 
limit (no lower than 10% of the shares sold in the IPO) as to the 
maximum number of shares with respect to which any shareholder, 
together with any affiliate or any person with whom such shareholder 
is acting as a group may exercise this conversion right. Proposed 
IM-4300-2(e) would exclude officers, directors, the SPAC's sponsor, 
the founding shareholders, and any Family Member (defined in Nasdaq 
Rule 4200(a)(14)) or affiliate of such persons as public 
shareholder.
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III. Summary of Comments and Nasdaq Response

    The Cadwalader Letter supports the proposal and suggested that 
Nasdaq require SPACs to notify the public at least ten days in advance 
of a record date. The Cadwalader Letter noted that certain listed SPACs 
have not publicly announced the record date for shareholders to vote on 
the business combination until after passage of the record date. The 
Cadwalader Letter noted that the right to vote to approve a business 
combination is central to ownership of SPAC securities, due to the 
SPAC's structure.
    In its response, the Exchange noted that other listing markets do 
not require issuers to notify the public of the record date of a 
shareholder meeting in advance, either for SPACs or any other listed 
companies. Nasdaq further notes that the rules of other markets only 
require disclosure of the record date for a meeting of shareholders to 
the exchange, not the public. The Exchange believes that any public 
notification requirement should be adopted across all listing markets.
    The NASAA Letter opposes the proposal. The NASAA Letter notes that 
historically, the structure of blank check companies makes the 
offerings risky for investors.\11\ The NASAA Letter notes that while 
disclosure for blank check companies has improved under Rule 419 under 
the Securities Act of 1933 (``Securities Act''),\12\ concerns remain 
because investors have to make their purchase decision prior to 
knowledge of the make-up of the post-business combination company. The 
NASAA Letter further notes that SPAC securities have been highly 
promoted at the IPO stage and in aftermarket trading. The NASAA Letter 
concludes that listing these securities on the major trading markets is 
inappropriate.
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    \11\ A blank check company is a development stage company that 
has no specific business plan or purpose or has indicated its 
business plan is to engage in a merger or acquisition with an 
unidentified company or companies, other entity, or person.
    \12\ See 17 CFR 230.419.
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    The Exchange responds that it is mindful of the historical concerns 
regarding blank check companies and notes that while SPAC securities 
currently could qualify for listing under Nasdaq's listing standards, 
the Exchange has in the past determined not to list them due to such 
concerns. The Exchange further notes that the proposal would impose 
additional criteria intended to protect investors and that it would 
review each SPAC that applies to list and evaluate the reputation of 
the SPAC's sponsors and underwriters. With respect to the NASAA 
Letter's statement that SPAC securities are subject to highly 
promotional marketing, the Exchange responds that the offer and sale of 
SPAC securities are subject to Federal securities laws, and that 
broker-dealers who recommend these securities are subject to investor 
suitability and ``know your customer''

[[Page 44796]]

requirements of the self-regulatory organizations.\13\
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    \13\ In the Nasdaq Response, the Exchange notes that, among 
other things, SPACs typically allow investors that vote against the 
business acquisition to convert their shares into a pro rata share 
of the trust or escrow account. As discussed below, Nasdaq 
subsequently amended the proposal to require SPACs to provide public 
shareholders these conversion rights.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of section 6(b) of the Act and the rules 
and regulations thereunder. Specifically, the Commission finds that the 
proposal is consistent with section 6(b)(5) of the Act,\14\ which 
requires that an exchange have rules designed, among other things, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, to protect investors and the public interest, and to not 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.\15\
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rules' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    The development and enforcement of adequate standards governing the 
initial listing of securities on an exchange is an activity of critical 
importance to financial markets and the investing public. Listing 
standards, among other things, serve as a means for an exchange to 
screen issuers and to provide listed status only to bona fide companies 
that have or, in the case of an IPO, will have sufficient public float, 
investor base, and trading interest to provide the depth and liquidity 
necessary to promote fair and orderly markets. Adequate standards are 
especially important given the expectations of investors regarding 
exchange trading and the imprimatur of listing on a particular market.
    SPACs are companies that raise capital in IPOs, with the purpose of 
purchasing operating companies or assets within a certain time frame. 
The proceeds of the IPOs are placed in an escrow account during this 
period. SPACs usually require a majority of shareholders to approve any 
business combination. If shareholders do not approve a deal within the 
relevant time frame, shareholders generally have the option to demand 
their investment be returned from the escrow account. Management of the 
SPAC typically invests its own money in the SPAC--typically 2% to 4%--
which generally is forfeited if a business combination is not 
consummated. If a business combination is consummated, management 
typically receives up to a 20% interest in the resulting company. The 
securities sold in the IPO generally consist of a unit made up of one 
share of common stock and a warrant (or fraction of a warrant) to 
purchase common stock. The common stock and warrants may be traded 
separately after the IPO.
    The proposal would permit Nasdaq to reverse its historical practice 
of not listing securities of SPACs; as proposed, Nasdaq would list 
securities of SPACs that meet Nasdaq's initial listing standards and 
the proposed additional initial listing criteria. The Commission 
believes that the Exchange's proposed initial listing standards to list 
SPAC securities are consistent with the requirements of the Act, 
including the protection of investors and the promotion of fair and 
orderly markets. SPACs that list securities on Nasdaq would have to 
meet Nasdaq's current initial listing standards.\16\ In addition, SPACs 
that list securities on Nasdaq would need to comply with the proposed 
additional conditions.\17\
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    \16\ See proposed Nasdaq IM-4300-2. SPAC securities could 
qualify for initial listing under the Nasdaq Global Select Market, 
Nasdaq Global Market, or the Nasdaq Capital Market.
    \17\ The Commission notes that depending on which Nasdaq listing 
market the SPAC securities are initially listed, the securities 
would need to comply with the applicable continued listing 
standards.
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    First, the SPAC must deposit at least 90% of the IPO proceeds and 
any concurrent sale in a deposit account. Second, the SPAC must 
complete, within 36 months of the effectiveness of the IPO registration 
statement or such shorter period as specified in the registration 
statement, one or more business combinations that have a fair market 
value equal to at least 80% of the deposit account at the time of the 
initial business combination.\18\ Third, until the SPAC has completed 
one or more business combinations that have a fair market value of at 
least 80% of the deposit account at the time of the initial business 
combination, each business combination must be approved by a majority 
of the SPAC's independent directors and a majority of the shares of the 
common stock. Finally, until the SPAC has completed one or more 
business combinations that have a fair market value of at least 80% of 
the deposit account at the time of the initial business combination, 
public shareholders who vote against a business combination have the 
right to convert their shares to cash if the business combination is 
approved and consummated. Moreover, following each business 
combination, the combined entity must meet Nasdaq's initial listing 
standards to remain listed.
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    \18\ This amount excludes the amount of any deferred 
underwriting fee and taxes payable on the income earned on the 
deposit account.
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    The Commission notes that some of the proposed requirements, such 
as the deposit account requirement and the public shareholder 
conversion rights, are similar in some respects to the investor 
protection measures contained in Rule 419 under the Securities Act.\19\ 
The Commission believes that these proposed investor protection 
requirements would provide additional safeguard for investors who 
invest in SPAC securities. The proposed initial listing standards would 
require that SPACs allow public shareholders to convert their shares to 
cash if they vote against a business combination. The Commission 
believes that the conversion rights will help to ensure that public 
shareholders who disagree with management's decision with respect to a 
business combination have adequate remedies. Moreover, the Commission 
believes that the proposal to require that a majority of the 
independent directors approve a business combination should help to 
ensure that a business combination is entered into by the SPAC after a 
fair and impartial decision. Finally, the Commission believes that 
requiring satisfaction of Nasdaq's initial listing quantitative 
standards following each business combination would help to ensure that 
trading in the securities of the combined entity is consistent with the 
maintenance of fair and orderly markets and investor expectations.
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    \19\ See 17 CFR 230.419. Rule 419 applies to blank check 
companies issuing penny stock as defined under Rule 3a51-1(a)(2) of 
the Act. See 17 CFR 240.3a51-1(a)(2). Rule 419 is not applicable to 
SPAC securities. See Securities Act Release No. 7024 (October 25, 
1993), 58 FR 58099 (October 29, 1993).
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    The Commission believes that these safeguards should help to ensure 
that SPACs that list securities on Nasdaq will have taken certain 
additional steps to address investor protection and other matters. The 
Commission expects Nasdaq to thoroughly review potential listings of 
SPAC securities to ensure that its initial listing standards have been 
met.\20\
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    \20\ See Nasdaq Rule 4300. In the Nasdaq Response, the Exchange 
states that it will evaluate the reputation of the SPAC's sponsors 
and underwriters under Nasdaq Rule 4300 to determine whether initial 
listing is appropriate.

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[[Page 44797]]

    As discussed above, the Commission received two comment letters on 
the proposal, one in favor and one in opposition. The Cadwalader 
Letter, while supporting the proposal, urges the Exchange to require 
SPACs to publicly disclose the record date for shareholders to vote on 
the business combination ten days prior to such date. The Commission 
notes that while exchanges have rules requiring listed issuers to 
notify the exchanges of their record date for shareholder meetings, 
there are no similar rules requiring listed issuers to notify the 
public of such record date in advance.\21\ Further, the Commission 
notes that Rule 419 under the Securities Act does not require blank 
check companies to publicly notify their shareholders of the record 
date for a shareholders vote. The Commission believes that any 
consideration of a public notice requirement of record dates should be 
conducted outside the context of a particular SRO rule filing.
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    \21\ See Amex Company Guide Sections 502 and 703 and NYSE Listed 
Company Manual Section 401.02.
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    The NASAA Letter, as summarized above, opposes the proposal due to 
the historical abuses of blank check companies. The Exchange states 
that it would conduct a regulatory review of each SPAC that applies to 
list securities on the Exchange. Further, the Exchange states that it 
would evaluate the reputation of the SPAC's sponsors and underwriters 
to determine whether initial listing is appropriate. Moreover, the 
Exchange amended the proposal to include conversion rights for public 
shareholders, should they vote against a business combination. The 
Commission believes that the additional investor protection standards, 
in addition to Nasdaq's initial listing standards, should help to 
ensure that investors are adequately protected.

V. Accelerated Approval

    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1, before the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register. In Amendment No. 1 the Exchange proposed to: (1) Amend the 
amount of gross proceeds that must be deposited from 100% to 90%; (2) 
clarify the period in which the SPAC must complete one or more business 
combinations; and (3) require that all listed SPACs contain provisions 
allowing public shareholders to convert their shares into cash if they 
vote against a business combination. The Commission believes that 
Amendment No. 1 raises no new or novel regulatory issues. The 
Commission notes that the amendment to the amount of the deposit 
account is consistent with Rule 419 under the Securities Act and NYSE 
initial listing standards for SPAC securities.\22\ The Exchange also 
clarified the time period in which SPACs must complete business 
combinations. Finally, the Commission notes that the public shareholder 
conversion right is consistent with the NYSE initial listing standards 
for SPAC securities and provides further investor protections for 
investors in SPAC securities.\23\ The Commission finds that the filing, 
as modified by Amendment No. 1, is consistent with the protection of 
investors and the public interest. Accordingly, the Commission finds 
good cause, consistent with section 19(b)(2) of the Act,\24\ to approve 
the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.
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    \22\ See NYSE Listed Company Manual Section 102.06.
    \23\ See id.
    \24\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the filing, as 
modified by Amendment No. 1, is consistent with the Act. Comments may 
be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-013. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2008-013 and should 
be submitted on or before August 21, 2008.

VII. Conclusion

    Based on the foregoing, the Commission finds the proposal is 
consistent with the requirements of the Act and should provide for the 
initial listing of securities of SPACs with baseline investor 
protection and other standards.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\25\ that the proposed rule change, as modified by Amendment No. 1 
(SR-NASDAQ-2008-013) is hereby approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-17502 Filed 7-30-08; 8:45 am]
BILLING CODE 8010-01-P