[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Notices]
[Pages 49513-49515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20243]
[[Page 49513]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65034; File No. SR-NYSE-2011-38]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change Amending Sections 102.01 and
103.01 of the Exchange's Listed Company Manual To Adopt Additional
Listing Requirements for Companies Applying To List After Consummation
of a ``Reverse Merger'' With a Shell Company
August 4, 2011.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on July 22, 2011, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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
The Exchange proposes to amend Sections 102.01 and 103.01 of the
Exchange's Listed Company Manual (the ``Manual'') to adopt additional
initial listing requirements for companies applying to list after
consummation of a ``reverse merger'' with a shell company. The text of
the proposed rule change is available at the Exchange, the Commission's
Public Reference Room, and http://www.nyse.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The NYSE proposes to adopt more stringent listing requirements for
operating companies that become Exchange Act reporting companies by
combining with a shell company which is an Exchange Act reporting
company. The proposed listing requirements would apply to combinations
with a shell company which is an Exchange Act reporting company,
through a reverse merger, exchange offer or otherwise (a ``reverse
merger transaction'').
In a reverse merger transaction, an existing public shell company
merges with a private operating company in a transaction in which the
shell company is the surviving legal entity.\4\ While the public shell
company survives the merger, the shareholders of the private operating
company typically hold a large majority of the shares of the public
company after the merger and the management and board of the private
company will assume those roles in the post-merger public company. The
assets and business operations of the post-merger surviving public
company are primarily, if not solely, those of the former private
operating company. The Exchange understands that private operating
companies generally enter into reverse merger transactions to enable
the company and its shareholders to sell shares in the public equity
markets. By becoming a public reporting company via a reverse merger, a
private operating company can access the public markets quickly and
avoid the generally more expensive and lengthy process of going public
by way of an initial public offering. While the public shell company is
required to report the reverse merger in a Form 8-K filing with the
Securities and Exchange Commission (the ``Commission''), generally
there are no registration requirements under the Securities Act of 1933
(the ``Securities Act'') \5\ at that point in time, as there would be
for an IPO.
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\4\ In some cases a private company effects an exchange offer or
other transaction pursuant to which it combines with a public shell
company.
\5\ 15 U.S.C. 77a.
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Significant regulatory concerns, including accounting fraud
allegations, have arisen with respect to a number of reverse merger
companies in recent times. The Commission has taken direct action
against reverse merger companies. During 2011, the Commission has
suspended trading in the securities of a number of reverse merger
companies and has revoked the securities registration of a number of
reverse merger companies.\6\ The Commission also recently brought an
enforcement proceeding against an audit firm relating to its work for
reverse merger companies.\7\ In addition, the Commission issued a
bulletin on the risks of investing in reverse merger companies, noting
potential market and regulatory risks related to investing in reverse
merger companies.\8\
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\6\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry,
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
\7\ See Schapiro Letter at page 4.
\8\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
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In response to these concerns, NYSE Regulation staff has been
conducting heightened, risk-informed reviews of reverse merger
companies seeking to list on the NYSE or NYSE Amex to consider factors
other than the enumerated initial listing criteria in making listing
determinations. In this regard, Section 101.00 of the Manual provides
that the Exchange has ``broad discretion regarding the listing of a
company.'' Section 101.00 provides that the Exchange may use such
discretion to ``deny listing or apply additional or more stringent
criteria based on any event, condition, or circumstance that makes the
listing of the company inadvisable or unwarranted in the opinion of the
Exchange.'' The Exchange may use this discretionary authority to
increase the stringency of its stated listing criteria but not to
decrease their stringency.
In light of the well-documented concerns related to some reverse
merger companies as described above, the Exchange believes it is
appropriate to codify in its rules specific requirements with respect
to the initial listing qualification of reverse merger companies. As
proposed, a reverse merger company would not be eligible for listing
unless the combined entity had, immediately preceding the filing of the
initial listing application:
(1) Traded for at least one year in the U.S. over-the-counter
market, on another national securities exchange or on a regulated
foreign exchange following the consummation of the reverse merger and
(i) In the case of a domestic issuer, filed with the Commission a Form
8-K including all of the information required by Item 2.01(f) of Form
8-K, including all required audited financial statements, or (ii) in
the case of a foreign private issuer, filed the information described
in (i) above on Form 20-F;
[[Page 49514]]
(2) Maintained on both an absolute and an average basis for a
sustained period a minimum stock price of at least $4; and
(3) Timely filed with the Commission all required reports since the
consummation of the reverse merger, including the filing of at least
one annual report containing audited financial statements for a full
fiscal year commencing on a date after the date of filing with the
Commission of the filing described in (1) above.
In addition, a reverse merger company would be required to maintain
on both an absolute and an average basis a minimum stock price of at
least $4 through listing.
The Exchange believes that requiring a ``seasoning'' period prior
to listing for reverse merger companies should provide greater
assurance that the company's operations and financial reporting are
reliable, and will also provide time for its independent auditor to
detect any potential irregularities, as well as for the company to
identify and implement enhancements to address any internal control
weaknesses. The seasoning period will also provide time for regulatory
and market scrutiny of the company, and for any concerns that would
preclude listing eligibility to be identified.
In addition, the Exchange believes that the proposed rule change
will increase transparency to issuers and market participants with
respect to the factors considered by NYSE Regulation in assessing
reverse merger companies for listing, and generally should reduce the
risk of regulatory concerns with respect to these companies being
discovered after listing. However, the Exchange notes that, while it
believes the proposed requirements would be a meaningful additional
safeguard, it is not possible to guarantee that a reverse merger
company (or any other listed company) is not engaged in undetected
accounting fraud or subject to other concealed and undisclosed legal or
regulatory problems.
For purposes of proposed Section 102.01F of the Manual (which will
be applicable to reverse merger companies which qualify to list under
the domestic companies criteria of Section 102.01) and proposed Section
103.01E of the Manual (which will be applicable to reverse merger
companies which qualify to list under the non-U.S. companies criteria
of Section 103.01), a ``Reverse Merger'' would mean any transaction
whereby an operating company became an Exchange Act reporting company
by combining with a shell company that was an Exchange Act reporting
company, whether through a reverse merger, exchange offer, or
otherwise. However, a Reverse Merger would not include the acquisition
of an operating company by a listed company that qualified for initial
listing under Section 102.06 of the Manual (i.e., the Exchange's
special purpose acquisition company (``SPAC'') listing standard). In
determining whether a company was a shell company, the Exchange would
consider, among other factors: Whether the company was considered a
``shell company'' as defined in Rule 12b-2 under the Exchange Act; what
percentage of the company's assets were active versus passive; whether
the company generated revenues, and if so, whether the revenues were
passively or actively generated; whether the company's expenses were
reasonably related to the revenues being generated; how many employees
worked in the company's revenue-generating business operations; how
long the company had been without material business operations; and
whether the company had publicly announced a plan to begin operating
activities or generate revenues, including through a near-term
acquisition or transaction.
In order to qualify for initial listing, a company that was formed
by a Reverse Merger (a ``Reverse Merger Company'') would be required to
comply with one of the initial listing standards for operating
companies set forth in Section 102.01C or 103.01B of the Manual and the
applicable distribution, stock price and market value requirements of
Sections 102.01A and 102.01B of the Manual (in the case of companies
listing pursuant to Section 102.01) and Section 103.01A (in the case of
companies listing pursuant to Section 103.01). Proposed Sections
102.01F and 103.01E would supplement and not replace any applicable
requirements of Sections 102.01 or 102.03. However, in addition to the
otherwise applicable requirements of Sections 102.01 or 103.01, a
Reverse Merger Company would be eligible to submit an application for
initial listing only if it meets the additional criteria specified
above.
The Exchange would have the discretion to impose more stringent
requirements than those set forth above if the Exchange believed it was
warranted in the case of a particular Reverse Merger Company based on,
among other things, an inactive trading market in the Reverse Merger
Company's securities, the existence of a low number of publicly held
shares that were not subject to transfer restrictions, if the Reverse
Merger Company had not had a Securities Act registration statement or
other filing subjected to a comprehensive review by the Commission, or
if the Reverse Merger Company had disclosed that it had material
weaknesses in its internal controls which had been identified by
management and/or the Reverse Merger Company's independent auditor and
had not yet implemented an appropriate corrective action plan.
A Reverse Merger Company would not be subject to the requirements
of proposed Section 102.01F or proposed Section 103.01E, as applicable,
if it was listing in connection with an Initial Firm Commitment
Underwritten Public Offering (as defined in Section 102.01B \9\) where
the proceeds to the Reverse Merger Company were sufficient on a
standalone basis to generate $40,000,000 in aggregate market value of
publicly-held shares and the offering was occurring subsequent to or
concurrently with the reverse merger.\10\ In that case, the Reverse
Merger Company would only need to meet the requirements of one of the
initial listing standards in Section 102.01C or Section 103.01B, as
applicable.\11\ The Exchange believes that it is appropriate to exempt
Reverse merger Companies from the proposed rule where they are listing
in conjunction with a sizable offering, as those companies would be
subject to the same Commission review and due diligence by underwriters
as a company listing in conjunction with its IPO or any other company
listing in conjunction with an Initial Firm Commitment Underwritten
Public Offering, so it would be inequitable to
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subject them to more stringent requirements.
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\9\ For purposes of Section 102.01B, a company is listing in
connection with its Initial Firm Commitment Underwritten Public
Offering if (i) Such company has a class of common stock registered
under the Exchange Act, (ii) such common stock has never been listed
on a national securities exchange in the period since the
commencement of its current registration under the Exchange Act, and
(iii) such company is listing in connection with a firm commitment
underwritten public offering that is its first firm commitment
underwritten public offering of its common stock since the
registration of its common stock under the Exchange Act.
\10\ The prospectus and registration statement covering the
offering would thus need to relate to the combined financial
statements and operations of the Reverse Merger Company.
\11\ The Commission notes that under NYSE's proposal a non-U.S.
Reverse Merger Company that will not be subject to the proposed
103.01E requirements because it is listing in connection with an
Initial Firm Commitment Underwritten Public Offering where the
proceeds in the offering will generate a minimum of $40,000,000 in
aggregate market value of publicly held shares would still have to
meet all the requirements in Section 103.01A of the Manual that
include a market value of publicly held shares of $100 million
worldwide.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \12\ of the Act, in general, and furthers the
objectives of Section 6(b)(5) of the Act,\13\ in particular in that it
is designed 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 Exchange believes that the proposed rule change is consistent with
Section 6(b)(5) of the Act in that, as discussed above under the
heading ``Purpose'', its purpose is to apply more stringent initial
listing requirements to a category of companies that have raised
regulatory concerns, thereby furthering the goal of protection of
investors and the public interest.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
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 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-NYSE-2011-38 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-NYSE-2011-38. 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 Web site
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 NYSE. 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-NYSE-2011-38, and should be submitted on or before August 31, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20243 Filed 8-9-11; 8:45 am]
BILLING CODE 8011-01-P