[Federal Register Volume 76, Number 220 (Tuesday, November 15, 2011)]
[Notices]
[Pages 70795-70799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-29439]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65709; File No. SR-NYSE-2011-38]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice and Order Granting Accelerated Approval to Proposed Rule Change,
as Modified by Amendment No. 2, Amending Sections 102.01 and 103.01 of
the Exchange's Listed Company Manual Adopting Additional Listing
Requirements for Companies Applying to List After Consummation of a
``Reverse Merger'' With a Shell Company
November 8, 2011.
I. Introduction
On July 22, 2011, New York Stock Exchange LLC (``NYSE'' 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 adopting additional listing requirements for a
company that has become an Act reporting company by combining with a
public shell, whether through a reverse merger, exchange offer, or
otherwise (a ``Reverse Merger''). The proposed rule change was
published for comment in the Federal Register on August 10, 2011.\3\ On
September 21, 2011, the Commission extended the time period in which to
either approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether the proposed rule
change should be disapproved to November 8, 2011.\4\ The Commission
received one comment letter on the proposal.\5\ NYSE filed Amendment
No. 1 to the proposed rule change on November 4, 2011, which was later
withdrawn.\6\ NYSE filed Amendment No. 2 to the proposed rule change on
November 8, 2011.\7\ This order approves the proposed rule change, as
modified by Amendment No. 2, on an accelerated basis.
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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. 65034 (August 4,
2011), 76 FR 49513 (``Notice'').
\4\ See Securities Exchange Act Release No. 65368 (September 21,
2011), 76 FR 59756 (September 27, 2011).
\5\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from James Davidson, Hermes Equity Ownership Services Limited dated
August 31, 2011 (``Hermes Letter''). In addition, the Commission
received five comment letters on a substantially similar proposal by
Nasdaq. (See Securities Exchange Act Release No. 64633 (June 8,
2011), 76 FR 34781 (June 14, 2011) (SR-NASDAQ-2011-073)). The
comment letters received on the Nasdaq filing are: Letter from David
Feldman, Partner, Richardson and Patel LLP dated August 20, 2011
(``Feldman Letter''); Letter to Elizabeth M. Murphy, Secretary,
Commission, from WestPark Capital, Inc. dated September 2, 2011
(``WestPark Letter''); Letter to Elizabeth M. Murphy, Secretary,
Commission, from Locke Lord LLP dated October 17, 2011 (``Locke Lord
Letter''); Letter to Elizabeth M. Murphy, Secretary, Commission,
from James N. Baxter, Chairman and General Counsel, New York Global
Group dated October 17, 2011 (``New York Global Group Letter''); and
Letter to Elizabeth M. Murphy, Secretary, Commission, from David A.
Donohoe, Jr., Donohoe Advisory Associates LLC dated October 18, 2011
(``Donohoe Letter''). One of the comment letters submitted on the
Nasdaq filing specifically referenced this proposal by NYSE.
However, the Commission believes all of the filings submitted on the
Nasdaq filing are applicable to this filing. Since the comment
letters received on the Nasdaq filing either specifically reference
the NYSE filing, or discuss issues directly related to this filing,
the Commission has included them in its discussions of this filing.
\6\ Amendment No. 1, dated November 4, 2011, was withdrawn on
November 8, 2011.
\7\ See Amendment No. 2, dated November 8, 2011. Amendment No. 2
replaces Amendment No. 1 in its entirety. In Amendment No. 2, NYSE
made several changes to the proposed rule change. The changes
proposed by NYSE include: (i) Amending the proposed price
requirement to make is applicable for a sustained period of time,
but in no event for less than 30 of the most recent 60 trading days;
(ii) added a new exception from certain requirements contained in
the rule for companies that conducted their reverse merger a
substantial length of time before applying to list; and (iii) other
additional changes to clarify the rule and harmonize it with a
similar proposal by Nasdaq.
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II. Description of the Original Proposal
The Exchange proposes to adopt more stringent listing requirements
for companies that become public through a Reverse Merger, to address
significant regulatory concerns including accounting fraud allegations
that have arisen with respect to Reverse Merger companies. In its
filing, the Exchange noted that the Commission has taken direct action
against Reverse Merger companies. In addition, the Exchange noted that
the Commission has suspended trading in, and revoked the securities
registration of, a number of Reverse Merger companies.\8\ The Exchange
also stated that the Commission recently brought an enforcement
proceeding against an audit firm relating to its work for Reverse
Merger companies \9\ and issued a bulletin on the risks of investing in
Reverse Merger companies, noting potential market and regulatory risks
related to investing in such companies.\10\
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\8\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry,
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
\9\ See Schapiro Letter at page 4.
\10\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
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In response to the concerns noted above, the Exchange proposed to
adopt additional listing requirements for Reverse Merger companies.\11\
Specifically, NYSE proposed to prohibit a Reverse Merger company from
applying to list until the combined entity has traded in the U.S. over-
the-counter market, on another national securities exchange, or on a
regulated foreign exchange, for at least one year following the filing
of all required information about the Reverse Merger transaction,
including audited financial statements, with the Commission. The
Reverse Merger company would also be required to timely file 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 all required
information about the Reverse Merger transaction and satisfying the
one-year trading requirement. Further, NYSE proposed to require that
the Reverse Merger company maintain on
[[Page 70796]]
both an absolute and an average basis for a sustained period a minimum
stock price of $4 both immediately preceding the filing of the initial
listing application and the company's listing on the Exchange. Finally,
the Exchange proposed an exception from the requirements of the rule if
the Reverse Merger company is listing in connection with an initial
firm commitment underwritten public offering where the proceeds to the
company are sufficient on a stand-alone basis to meet the aggregate
market value of publicly-held shares requirement set forth in Section
102.01B of the Exchange's Listed Company Manual (``Manual'').\12\
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\11\ In addition to the specific additional listing requirements
contained in the proposal, the Exchange included language in the
proposed rule that states that the Exchange may ``in its discretion
impose more stringent requirements than those set forth above if the
Exchange believes it is 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 are not
subject to transfer restrictions, if the Reverse Merger Company has
not had a Securities Act registration statement or other filing
subjected to a comprehensive review by the Commission, or if the
Reverse Merger Company has disclosed that it has material weaknesses
in its internal controls which have been identified by management
and/or the Reverse Merger Company's independent auditor and has not
yet implemented an appropriate corrective action plan.''
\12\ The Commission notes that Section 102.01B of the Manual
would require a company to demonstrate an aggregate market value of
publicly-held shares of $40 million for companies that list either
at the time of their initial public offerings or as a result of
spin-offs or under the affiliated company standard or, for companies
that list at the time of their initial firm commitment underwritten
public offering and $100 million for other companies.
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III. Comment Summary
As stated previously, the Commission received only one comment
letter on the proposal.\13\ However, a related proposal by Nasdaq
received five comment letters,\14\ one of which specifically discusses
the NYSE proposal.\15\ The Commission is treating all six comment
letters as being applicable to the NYSE filing since the NYSE and
Nasdaq filing address the same substantive issues.\16\ Two of the
commenters objected broadly to the proposed additional listing
requirements for Reverse Merger companies,\17\ while four commenters
suggested discrete changes to the proposal.\18\
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\13\ See Hermes Letter.
\14\ See Feldman Letter; WestPark Letter; Locke Lord Letter; New
York Global Group Letter; and Donohoe Letter.
\15\ See Locke Lord Letter.
\16\ In instituting disapproval proceedings for the Nasdaq
proposal, the Commission stated that the NYSE and NYSE Amex had
filed similar proposals designed to address the same concerns as the
Nasdaq proposal.
\17\ See Feldman Letter and New York Global Group Letter.
\18\ See Hermes Letter; WestPark Letter; Donohoe Letter; and
Locke Lord Letter.
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One commenter who objected broadly to Nasdaq's related proposal
expressed the view that it could have a ``chilling effect of
discouraging exciting growth companies from pursuing all available
techniques to obtain the benefits of a public listed stock and greater
access to capital.'' \19\ The commenter further noted, in response to
Nasdaq's justifications for the proposed rule change, that virtually
all of the suggestions of wrongdoing involve Chinese companies that
completed reverse mergers, but that a number of other Chinese companies
that completed full traditional initial public offerings face the very
same allegations, so that focusing on the manner in which these
companies went public may not be appropriate. Rather than imposing a
seasoning requirement, the commenter suggests a review of regulatory
histories and financial arrangements with promoters, and refrain from
listing companies where the issues are great. In any event, the
commenter recommends an exception from the seasoning requirement for a
company coming to the Exchange with a firm commitment underwritten
public offering. In addition, the commenter expressed concern that the
requirement to maintain a $4 trading price for 30 days prior to the
listing application is unfair, and unrealistic to expect companies to
achieve in the over-the-counter markets, and suggested it be
eliminated.\20\
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\19\ See Feldman Letter.
\20\ Id.
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The other commenter that objected broadly to the proposal believed
that the proposal would harm capital formation and hinder small
companies' access to the capital markets.\21\ The commenter expressed
the view that no objective research or hard data has been published
that supports the notion that Reverse Merger companies bear additional
scrutiny, and that the Commission should not approve the proposal until
an independent and comprehensive study concludes that (i) Exchange
listed reverse merger companies tend to fail more often than IPO
companies, thus necessitating the additional scrutiny, (ii) the
proposed six to twelve month ``seasoning'' for reverse merger companies
will indeed deter corporate frauds, and (iii) the exchanges do not
already have sufficient rules in place to discourage corporate frauds
in both reverse merger and IPO companies.\22\ Based on its research,
the commenter believes that more Chinese companies have been delisted
that have gone public through an IPO than through a Reverse Merger, and
that they were delisted more than three years after they became public,
which is well beyond the seasoning period.\23\
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\21\ See New York Global Group Letter.
\22\ Id.
\23\ Id. As noted above, the comment letter refers specifically
to Nasdaq, but applies equally to the NYSE proposal.
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The commenter that specifically commented on the NYSE proposed rule
change was supportive of the changes proposed but also stated that more
stringent listing requirements are necessary to reduce the risk of
fraud and other regulatory concerns that can occur when companies seek
to list on an exchange quickly and inexpensively through a Reverse
Merger with a shell company.\24\ This commenter believed that ``further
tests'' should be introduced that go beyond the proposed seasoning
period, but did not offer any specific suggestions.
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\24\ See Hermes Letter.
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A fourth commenter expressed support for the proposed rule change's
objective to protect investors from potential accounting fraud,
manipulative trading, abusive practices or other inappropriate behavior
on the part of companies, promoters and others.\25\ The commenter,
however, recommended that, in order to avoid unnecessary burdens on
smaller capitalization issuers, the proposed rule change be modified to
exclude Form 10 share exchange transactions from the reverse merger
definition, or provide an exception for a reverse merger company
listing in connection with a firm commitment underwritten public
offering.\26\ This commenter also recommended that an exchange should
consider requiring companies listing on the Exchange to engage a
recognized independent diligence firm to conduct a forensic audit and
issue a forensic diligence report prior to approval of the listing
application.\27\
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\25\ See WestPark Letter.
\26\ Id.
\27\ Id. As noted above, this comment letter was specifically
addressed to Nasdaq, but applies equally to the NYSE proposal.
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Another commenter, while it did not believe the Exchange had
presented a sufficient rationale or data to support the need for a
Reverse Merger seasoning period, agreed that a reasonable seasoning
period for Reverse Merger companies could be beneficial, and was of the
view that the six-month seasoning period proposed by Nasdaq was
preferable to the one-year seasoning period proposed by NYSE and NYSE
Amex.\28\ The commenter also believed that Nasdaq's proposed
requirement that a Reverse Merger company maintain the requisite stock
price for at least 30 of the 60 trading days immediately preceding the
filing of the listing application was lacking because, among other
things, it would not apply to the period during which the listing
application was under review.\29\ In addition, this commenter expressed
support for an underwritten public offering exception, regardless of
size, from the proposed rule's additional listing requirement.\30\
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\28\ See Donohoe Letter.
\29\ Id.
\30\ Id.
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[[Page 70797]]
A sixth commenter also expressed the view that there should be an
exception where the securities issued in the Reverse Merger were
registered with the Commission, so that the additional listing
standards would be directed toward those transactions that have not
been subjected to full Commission review.\31\ This commenter also
suggested that, if a Reverse Merger company is controlled by a non-U.S.
person, the control person should be required to execute a consent to
service of process in the U.S.\32\
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\31\ See Locke Lord Letter.
\32\ Id.
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IV. NYSE Amendment No. 2 and Response to Comments
In Amendment No. 2, NYSE proposed several changes to more
effectively align its proposal with that of Nasdaq. NYSE amended its
proposal to require that a Reverse Merger company ``maintain a closing
stock price of $4 or higher for a sustained period of time, but in no
event for less than 30 of the most recent 60 trading days prior to the
filing of the initial listing application'' and prior to listing. In
addition, NYSE amended the requirement that a Reverse Merger company
provide all required reports to clarify that such reports must include
``all required'' audited financial statements.
Amendment No. 2 also proposes a new exception to the Reverse Merger
rules and clarifies that all other listing requirements are applicable
to all Reverse Merger companies, even those Reverse Merger companies
that can take advantage of either of the two exceptions being proposed
under the new rules. As noted above, as proposed, the rule provides
that a Reverse Merger company would not be subject to the requirements
of the rule if, in connection with the listing, it completes a firm
commitment underwritten public offering where the proceeds to the
company will be sufficient on a stand-alone basis to meet the
aggregated market value of publicly-held shares requirement for Initial
Firm Commitment Underwritten Public Offerings as set forth in Section
102.01B and the offering is occurring subsequent to or concurrently
with the Reverse Merger.\33\ Amendment No. 2 additionally proposes that
the Reverse Merger company would not be subject to the requirement that
it maintain a closing stock price of $4 or higher for at least 30 of
the most recent 60 days prior to each of the filing of the initial
listing application and the date of the Reverse Merger company's
listing, if it has satisfied the one-year trading requirement and has
filed at least four annual reports with the Commission which each
contain all required audited financial statements for a full fiscal
year commencing after filing the required information.\34\ The amended
rule language states that a Reverse Merger company must comply with all
applicable listing requirements. Applicable listing standards include,
but are not limited to, the corporate governance requirements set forth
in Section 303A of the Manual and the applicable distribution, stock
price and market value requirements of Sections 102.01A, 102.01B and
303A of the Manual. In either case, the language makes clear that
companies that fall under the exceptions must also comply with all
other listing requirements.
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\33\ See note 12, supra.
\34\ Amendment No. 2 also proposes that, to be eligible for this
exception, such companies be required to (i) Comply with the stock
price requirement of Section 102.01B of the Manual at the time of
the filing of the initial listing application and the date of the
Reverse Merger company's listing and (ii) not be delinquent in its
filing obligations with the Commission.
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Finally, NYSE made several technical changes in Amendment No. 2,
including those to conform its language more closely to that of the
Nasdaq proposal.
On November 7, 2011, NYSE responded to the comments received on the
proposal.\35\ One commenter expressed concern that the NYSE proposal
might not provide investors with sufficient protections in relation to
listed Reverse Merger companies and noted and welcomed the NYSE's
ability to exercise its discretion to apply additional or more
stringent criteria to a Reverse Merger company. In response, NYSE noted
that the same discretion is included in the NYSE Amex proposal. The
NYSE further noted that it does not believe that it is necessary at
this time to adopt any additional general requirements for all
companies that would be considered for listing under the proposed
rules. The Exchange also stated that the proposed approach, in its
belief, strikes an appropriate balance by providing discretionary
authority to the Exchange to apply additional or more stringent
criteria,\36\ while also providing transparency as to the factors that
would prompt the imposition of such criteria. NYSE believes that it is
appropriate to apply those new requirements for a period of time, while
closely monitoring the performance of Reverse Merger companies that
list under the new rules. If at any time it becomes apparent that there
are significant continuing investor protection or regulatory concerns
associated with the listing of Reverse Merger companies, NYSE will
consider the desirability of adopting additional more stringent
requirements.
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\35\ See Email from John Carey, Chief Counsel, NYSE Regulation
Inc., to Sharon Lawson, Senior Special Counsel, Commission and David
Michehl, Special Counsel, Commission dated November 7, 2011.
\36\ See supra, note 11.
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NYSE noted that the Commission received two negative comment
letters in relation to the NYSE Amex filing.\37\ Both commenters
supported the proposed rule's exception for Reverse Merger companies
listing in conjunction with an underwritten public offering, but argued
that the transaction size requirement should either be eliminated from
the proposal or set at a far lower level. The Exchange believes that
the substantial offering size requirement provides a significant
regulatory benefit. One of the commenters argued that the requirement
that a Reverse Merger Company must trade in another market for at least
a year prior to listing is unnecessary. As noted in the filing,
significant regulatory concerns have arisen with respect to a number of
reverse merger companies in recent times. NYSE believes that a
``seasoning'' period prior to listing 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. NYSE believes that the
elimination of the one year trading requirement would significantly
weaken the value of the seasoning period in that less scrutiny would
generally be present. The other commenter argued that the rule should
not apply to a Reverse Merger company which resulted from a merger
between an operating company and a new shell company with no prior
business operations. Based on the Exchange's experience with the
listing of Reverse Merger companies, the Exchange believes that it is
appropriate to apply the proposed rules to all Reverse Merger
companies, regardless of whether the shell company into which the
operating company merged had ever had any previous business operations.
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\37\ The Commission notes that the two comment letters submitted
on the NYSE Amex filing are substantially similar to two of the
letters filed on the Nasdaq proposal. See Feldman Letter and
Westpark Letter.
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[[Page 70798]]
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing and whether Amendment No. 2 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 email 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 email 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 December 6, 2011.
VI. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change, as
modified by Amendment No. 2, and finds that it is consistent with the
requirements of the Act and the rule and regulations thereunder
applicable to a national securities exchange,\38\ and, in particular,
Section 6(b)(5) of the Act,\39\ which, among other things, requires
that the rules of a national securities exchange be 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.
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\38\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\39\ 15 U.S.C. 78f(b)(5).
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The development and enforcement of meaningful listing standards for
an exchange is of substantial importance to financial markets and the
investing public. Among other things, listing standards provide the
means for an exchange to screen issuers that seek to become listed, and
to provide listed status only to those that are bona fide companies
with sufficient public float, investor base, and trading interest
likely to generate depth and liquidity sufficient to promote fair and
orderly markets. Meaningful listing standards also are important given
investor expectations regarding the nature of securities that have
achieved an exchange listing, and the role of an exchange in overseeing
its market and assuring compliance with its listing standards.
NYSE proposed to make more rigorous its listing standards for
Reverse Merger companies, given the significant regulatory concerns,
including accounting fraud allegations, that have recently arisen with
respect to these companies. As noted above, Nasdaq and NYSE Amex filed
similar proposals for the same reasons.\40\ Among other things, the
proposals seek to improve the reliability of the reported financial
results of Reverse Merger companies by requiring a pre-listing
``seasoning period'' during which the post-merger public company would
have produced financial and other information in connection with its
required Commission filings. The proposals also seek to address
concerns that some might attempt to meet the minimum price test
required for exchange listing through a quick manipulative scheme in
the securities of a Reverse Merger company, by requiring that minimum
price to be sustained for a meaningful period of time.
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\40\ See Securities Exchange Act Release No. 65633 (August 4,
2011), 76 FR 49513 (August 10, 2011) and Securities Exchange Act
Release No. 65033 (August 4, 2011), 76 FR 49522.
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The Commission believes the proposed one-year seasoning requirement
for Reverse Merger companies that seek to list on the Exchange is
reasonably designed to address concerns that the potential for
accounting fraud and other regulatory issues is more pronounced for
this type of issuer. As discussed above, these additional listing
requirements will assure that a Reverse Merger company has produced and
filed with the Commission at least one full year of all required
audited financial statements following the Reverse Merger transaction
before it is eligible to list on NYSE. The Reverse Merger company also
must have filed all required Commission reports since the consummation
of the Reverse Merger, which should help assure that material
information about the issuer have been filed with the Commission and
that the issuer has a demonstrated track record of meeting its
Commission filing and disclosure obligations. In addition, the
requirement that the Reverse Merger company has traded for at least one
year in the over-the-counter market or on another exchange could make
it more likely that analysts have followed the company for a sufficient
period of time to provide an additional check on the validity of the
financial and other information made available to the public.
Although certain commenters expressed concern that the proposal
might inhibit capital formation and access by small companies to the
markets, the Commission notes that the enhanced listing standards apply
only to the relatively small group of Reverse Merger companies--where
there have been numerous instances of fraud and other violations of the
federal securities laws--and merely requires those entities to wait
until their first annual audited financial statements are produced
before they become eligible to apply for listing on the Exchange. While
fraud and other illegal activity may occur with other types of issuers,
as noted by certain commenters, the Commission does not believe this
should preclude NYSE from taking reasonable steps to address these
concerns with Reverse Merger companies.
The Commission also believes the proposed requirement for a Reverse
Merger company to maintain the specified minimum share price for a
[[Page 70799]]
sustained period, and for at least 30 of the most recent 60 trading
days, prior to the date of the initial listing application and the date
of listing, is reasonably designed to address concerns that the
potential for manipulation of the security to meet the minimum price
requirements is more pronounced for this type of issuer. By requiring
that minimum price to be maintained for a meaningful period of time,
the proposal should make it more difficult for a manipulative scheme to
be successfully used to meet the Exchange's minimum share price
requirements.
In addition, the Commission believes that the proposed exceptions
to the enhanced listing requirements for Reverse Merger companies that
(1) Complete a substantial firm commitment underwritten public offering
in connection with its listing,\41\ or (2) have filed at least four
annual reports containing all required audited financial statements
with the Commission following the filing of all required information
about the Reverse Merger transaction, and satisfying the one-year
trading requirement, reasonably accommodate issuers that may present a
lower risk of fraud or other illegal activity. The Commission believes
it is reasonable for the Exchange to conclude that, although formed
through a Reverse Merger, an issuer that (1) Undergoes the due
diligence and vetting required in connection with a sizeable
underwritten public offering, or (2) has prepared and filed with the
Commission four years of all required audited financial statements
following the Reverse Merger, presents less risk and warrants the same
treatment as issuers that were not formed through a Reverse Merger.
Nevertheless, the Commission expects the Exchange to monitor any
issuers that qualify for these exceptions and, if fraud or other abuses
are detected, to propose appropriate changes to its listing standards.
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\41\ The Commission notes that several commenters supported an
exception for issuers with underwritten public offerings. See
WestPark Letter; Donohoe Letter; and Locke Lord Letter.
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The Commission notes that certain commenters suggested the Exchange
impose specific additional requirements on Reverse Merger companies
that seek an exchange listing, such as the completion of an independent
forensic diligence report on the issuer, the execution of a consent to
service of process in the U.S. by foreign controlling persons, and
additional more stringent standards in addition to the proposed
seasoning period. Although there may be merit in these or other
potential ways to enhance listing standards for Reverse Merger
companies, the Commission believes that the additional listing
standards proposed by the Exchange should help prevent fraud and
manipulation, protect investors and the public interest, and are
otherwise consistent with the Act.
The Commission also notes that several of the changes proposed by
the Exchange in Amendment No. 2 were clarifying in nature and designed
to make its proposal consistent with the proposals submitted by Nasdaq
and NYSE Amex.
For the reasons discussed above, the Commission believes that
NYSE's proposal will further the purposes of Section 6(b)(5) of the Act
by, among other things, helping prevent fraud and manipulation
associated with Reverse Merger companies, and protecting investors and
the public interest.
The Commission also finds good cause, pursuant to Section 19(b)(2)
of the Act,\42\ for approving the proposed rule change, as modified by
Amendment No. 2, prior to the 30th day after the date of publication of
notice in the Federal Register. As noted above, the changes made in
Amendment No. 2 harmonize the proposed rule change with similar
proposals by Nasdaq and NYSE Amex that have been subject to public
comment, in addition to providing clarifying language consistent with
the intent of the original rule proposal. In addition, the Commission
believes it is in the public interest for NYSE to begin applying its
enhanced listing standards as soon as practicable, in light of the
serious concerns that have arisen with respect to the listing of
Reverse Merger companies.
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\42\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSE-2011-38), as amended, be, and
hereby is, approved, on an accelerated basis.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-29439 Filed 11-14-11; 8:45 am]
BILLING CODE 8011-01-P