[Federal Register Volume 76, Number 87 (Thursday, May 5, 2011)]
[Notices]
[Pages 25730-25732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10936]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64371; File No. SR-NASDAQ-2011-056]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change to Adopt Additional Listing
Requirements for Reverse Mergers
April 29, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 18, 2011, The NASDAQ Stock Market LLC (``Nasdaq'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
substantially prepared by Nasdaq. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
Nasdaq proposes to adopt additional listing requirements for a
company that has become public through a reverse merger. Nasdaq will
implement the proposed rule for applications received after approval.
The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in brackets.\3\
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\3\ Changes are marked to the rule text that appears in the
electronic manual of Nasdaq found at http://nasdaqomx.cchwallstreet.com.
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5110. Change of Control, Bankruptcy and Liquidation, and Reverse
Mergers
(a)-(b) No change
(c) Reverse Mergers between a Private Operating Company and a Public
Shell Company
A Company that is formed by a combination between a private
operating company and a public shell company shall be eligible to
submit an application for initial listing only after the combined
entity has: (i) Traded for at least six months in the over-the-counter
market, on another national securities exchange, or on a listed foreign
market, following the filing with the Commission or Other Regulatory
Authority of audited financial statements for the combined entity; and
(ii) maintained a Bid Price of $4 per share or higher on at least 30 of
the 60 trading days immediately preceding the filing of the initial
listing application.
In addition, such a company may only be approved for listing if,
following the business combination, it has timely filed: (i) In the
case of a domestic issuer, at least two required periodic financial
reports with the Commission or Other Regulatory Authority; or (ii) in
the case of a Foreign Private Issuer, one or more reports including
financial statements for a period not less than six months.
This Rule 5110(c) shall not apply if the Company lists in
connection with a firm commitment, underwritten public offering.
* * * * *
5210. Prerequisites for Applying to List on The Nasdaq Stock Market
(a)-(h) No change
(i) Reverse Mergers between a Private Operating Company and a Public
Shell Company
A security issued by a Company formed by a combination between a
private operating company and a public shell company shall be eligible
for initial listing only if the conditions set forth in Rule 5110(c)
are satisfied.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
[[Page 25731]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In recent months there has been an extraordinary level of public
attention to listed companies that went public via a reverse merger,
where an unlisted operating company becomes a public company by merging
with a public shell.\4\ The financial press, short sellers and others
have raised allegations of widespread fraudulent behavior by these
companies, leading to concerns that their financial statements cannot
be relied upon. Concerns have also been raised that certain individuals
who aggressively promote these transactions have significant regulatory
histories or have engaged in transactions that are disproportionately
beneficial to them at the expense of public shareholders. The Public
Company Accounting Oversight Board (``PCAOB'') has also identified
issues with the audits of these companies and, in response, has issued
Staff Audit Practice Alert No. 6/July 12, 2010 and Staff Research Note
2011-P1/March 2011, cautioning registered accounting firms to
follow certain specified auditing practices. The SEC recently took an
enforcement action based on a firm's audit of a reverse merger
company.\5\ In addition, Nasdaq is aware of situations where it
appeared that promoters and others intended to manipulate prices higher
to satisfy Nasdaq's initial listing bid price requirement and where
companies have, for example, gifted stock to artificially satisfy the
300 round lot public holder requirement. Nasdaq does not list companies
in instances such as these, where it appears the company has achieved
compliance with a requirement in an inappropriate manner.
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\4\ See, e.g., Beware This Chinese Expor, Barron's (August 28,
2010), available at http://online.barrons.com/article/SB50001424052970204304404575449812943183940.html. See also Speech by
SEC Commissioner by Commissioner Luis A. Aguilar: Facilitating Real
Capital Formation (April 4, 2011), available at http://www.sec.gov/news/speech/2011/spch040411laa.htm. [sic]
\5\ In re Moore Stephens Wurth Frazer and Torbet, Order
Instituting Public Administrative and Cease-and-Desist Proceedings,
Securities Act Release No. 9166 (December 20, 2010).
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In response to these concerns, Nasdaq staff has, over the past
year, adopted heightened review procedures for reverse merger
applicants. However, Nasdaq also believes that additional requirements
for listing reverse merger companies are appropriate to discourage
inappropriate behavior on the part of companies, promoters and others.
Accordingly, Nasdaq proposes to adopt certain ``seasoning''
requirements for reverse mergers.\6\
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\6\ Reverse merger companies that list on Nasdaq in conjunction
with a firm commitment underwritten public offering will not be
subject to the proposed rule. These transactions are more similar to
IPOs, in that the SEC reviews the registration statement and the
underwriters and other experts are strictly liable under the federal
securities laws for any misstatements.
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Specifically, Nasdaq proposes to prohibit a company going public
via a reverse merger from applying to list until six months after the
combined entity submits audited financial statements to the SEC.\7\
Further, Nasdaq proposes to require that the company maintain a $4 bid
price on at least 30 of the 60 trading days immediately prior to
submitting the application. Finally, under the proposed rule, Nasdaq
would not approve any reverse merger for listing until the company has
filed at least two financial reports with the SEC if it is a domestic
issuer (this could be two quarterly filings or a quarterly and an
annual filing) or one financial report covering at least a six month
period if it is a foreign private issuer (this could be an interim
report on Form 6-K or an annual report on Form 20-F). While most
companies will satisfy this requirement due to the six month delay
before they can apply, Nasdaq believes that it is important to assure
that this requirement be satisfied in all cases.
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\7\ A company must file a Form 8-K within four days of
completing a reverse merger. The Form 8-K must contain audited
financial statements and information comparable to the information
provided in a Form 10 for the registration of securities. See Form
8-K Items 2.01, 5.06, and 9.01(c).
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Nasdaq believes that this proposal will result in significant
investor protection benefits. Specifically, a six month seasoning
requirement will allow FINRA more time to view trading patterns and
uncover potentially manipulative trading.\8\ It will also result in a
more bona fide shareholder base and assure that the $4 bid price was
not satisfied through a quick manipulative scheme. Requiring additional
SEC filings will tend to improve the reliability of the reported
financial results, since the auditors will have reviewed several
quarters, at least, of the public company's operating results, as will
the company's audit committee. To the extent the company had adopted
new internal controls at the time of the merger, those too will have
been in place and able to exert a corrective influence over any
previous flaws in the company's financial reporting process.
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\8\ The Commission notes that FINRA has regulatory authority
over transactions in the over-the-counter market.
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\9\ in general and with Section
6(b)(5) of the Act,\10\ in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The proposed rule change is
designed to enhance investor protection by imposing additional
requirements on a category of companies that have raised regulatory
concerns.
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\9\ 15 U.S.C. 78f.
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with
[[Page 25732]]
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 [email protected]. Please include
File Number SR-NASDAQ-2011-056 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2011-056. 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 website (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 website
viewing and printing in the Commission's Public Reference Room 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 Nasdaq. 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-2011-056, and should be submitted on or before
May 26, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10936 Filed 5-4-11; 8:45 am]
BILLING CODE 8011-01-P