Exchange Roadblocks to Going Public in Reverse Are Now in Place
In August 2011, we commented on proposals by the major national securities exchanges to impose additional listing requirements on companies completing a reverse merger with a shell company. The SEC announced earlier this month that it approved each of the rule changes, as amended, on an accelerated basis. It just became significantly harder for the shares of a reverse-merger shell company to become listed.
The SEC approved rule changes for the New York Stock Exchange (PDF), NYSE Amex (PDF) and The NASDAQ Stock Market (PDF) on Nov. 8, 2011. Prior to the SEC’s approval, each of the NYSE (PDF), NYSE Amex (PDF), and NASDAQ (PDF) amended its rule change proposal so that all three proposals were substantially aligned and to address, in some respects, the small number of comments received by the SEC.
A “Reverse Merger,” according to new Section 102.01F of the NYSE Listed Company Manual means “any transaction whereby an operating company becomes an Exchange Act reporting company by combining directly or indirectly with a shell company which is an Exchange Act reporting company, whether through a reverse merger, exchange offer, or otherwise.” Section 101(e) of the NYSE Amex Company Guide and NASDAQ Marketplace Rule 5500(a)(35) provide similar definitions. Each stock exchange will consider various factors for determining whether a company is a shell company and “Reverse Merger” excludes the acquisition of an operating company by a listed company in compliance with exchange rules.
For each of the three exchanges, a company resulting from a Reverse Merger would not be eligible for listing unless it meets each of the following requirements immediately before filing its initial listing application:
- The reverse-merger company’s securities have been “seasoned” by trading 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 consummation of the Reverse Merger. (NASDAQ amended its proposed rule change to extend its original six-month seasoning proposal to the one year proposed by both the NYSE and NYSE Amex.)
- The reverse-merger company has filed all required information with the SEC, including all required audited financial statements after the consummation of the Reverse Merger. That filing would be Form 8‑K (Item 2.01(f)) for domestic issuers or Form 20-F for foreign private issuers.
- The reverse-merger company has maintained at least a minimum closing price for a “sustained period of time,” but no less than 30 of the most recent 60 trading days prior to filing the initial listing application. For the NYSE and NASDAQ, that minimum price is $4 per share. The NYSE Amex rule specifies the minimum closing stock price under the applicable initial listing standard, which is currently either $3 or $2 depending on the listing standard. Each of the exchanges amended its original rule proposals to add the “sustained period of time” concept. This requirement is applicable both at the time the initial listing application is filed and at the time of listing approval.
- The reverse-merger company has timely filed with the SEC all required reports since the Reverse Merger, including at least one annual report that included audited financial statements for a full fiscal-year period beginning on the date the reverse-merger company filed the required information with the SEC.
- The reverse-merger company must satisfy all other initial listing requirements of the exchange.
- Each exchange may also impose more stringent requirements.
There are two exceptions to these additional listing requirements (but not all other applicable initial listing requirements). First, the requirements will not be applicable if the listing is in connection with a firm commitment underwritten public offering resulting in at least a minimum level of gross proceeds to the reverse-merger company. For NYSE Amex and NASDAQ, the rules specify $40 million. For the NYSE, the reverse-merger company must satisfy the NYSE’s Rule 102.01B regarding aggregate market value of publicly held shares after giving effect to the public offering, which is currently $40 million.
A second exception under the NYSE and NYSE Amex rules eliminates the closing price requirement if the reverse-merger company has satisfied the one-year “seasoning” requirement and has filed at least four annual reports with the SEC, which each contain all required audited financial statements for a full fiscal year beginning after the reverse-merger company’s filing of the required information with the SEC set forth in the additional listing requirements. The NASDAQ rule has a similar exception standard, but it operates as an exception to all of the additional listing requirements.
OUR TAKE: The risks associated with reverse mergers continue to make headlines. The new exchange rules, with the SEC’s approval, will result in more transparency, provide for more established company results before listing and hopefully reduce the level of risk to investors. They will not address or avoid all potential problems or abuses, but are a step in the right direction without unreasonably limiting access to the capital markets.