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SEC Approves Addtional Listing Standards for Reverse Merger Companies

On November 9, 2011, the Securities and Exchange Commission (the "SEC") approved additional listing requirements applicable to any company that became public through a reverse merger and that seeks to list its securities on The Nasdaq Stock Market ("Nasdaq"), The New York Stock Exchange ("NYSE"), or NYSE Amex markets.[1] The additional listing requirements, which were proposed this past summer by Nasdaq, NYSE and NYSE Amex, will make it more difficult for reverse merger companies to list their securities on U.S. stock exchanges following a reverse merger with a publicly traded company.

Reverse Mergers Generally

In a reverse merger, an existing public shell company merges, completes an exchange offer or otherwise combines with a private operating company in a transaction in which the public shell company is the legal acquirer.[2] Although the public shell company survives the transaction as the legal acquirer, the equity holders of the private operating company typically hold a large majority of the equity of the post-transaction public company and the management and board of the private company assumes those roles in the post-transaction public company. In addition, the business operations of the post-transaction public company are primarily, if not solely, those of the former private operating company.

Additional Listing Requirements

The additional listing requirements prohibit reverse merger companies from submitting an application to list on Nasdaq, NYSE or NYSE Amex until:

  • the reverse merger company has completed a one year "seasoning period" in which its securities have 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 SEC;

  • the reverse merger company has timely filed all required SEC 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 SEC of all required information about the reverse merger transaction and satisfying the one-year trading requirement; and

  • the reverse merger company has maintained the requisite minimum share price ($4 in the case of Nasdaq and the NYSE and $3 for NYSE Amex) in the over-the-counter market for a sustained period, and also for at least 30 of the most recent 60 trading days prior to submitting its initial listing application and for a similar period prior to the date of listing.

Although the Nasdaq, NYSE and NYSE Amex additional listing requirements are substantially similar, both the NYSE and NYSE Amex proposals indicated that the NYSE and NYSE Amex may, in their discretion, impose more stringent requirements on a case-by-case basis in addition to those described above. Factors the NYSE and NYSE Amex may consider in making such a determination include, among other things, an inactive trading market in the reverse merger company's securities, the existence of a low number of publicly held shares of the reverse merger company 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 SEC, or if the reverse merger company had disclosed that it had material weaknesses in its internal controls which had been identified by its management or independent auditor and had not yet implemented an appropriate corrective action plan.

Exemptions

The Nasdaq, NYSE and NYSE Amex listing standards provide two exemptions from compliance with the additional listing requirements:

  • the listing is in connection with a firm commitment underwritten public offering where the proceeds to the reverse merger company will be at least $40 million and such offering occurs subsequent to, or concurrently with, the listing; or

  • the reverse merger company has satisfied the one year "seasoning period" requirement and has filed at least four annual reports with the SEC containing audited financials for each full fiscal year after the reverse merger.

For Further Information

If you have any questions regarding the information in this alert please contact Richard I. Anslow at ranslow@anslowlaw.com or Gregg E. Jaclin at gjaclin@anslowlaw.com or any lawyer in the firm with whom you are regularly in contact.


Disclaimer: This Alert has been prepared and published for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Transmission of the materials and information contained herein is not intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship.

[1] See http://www.sec.gov/news/press/2011/2011-235.htm

[2] The new listing requirements define "reverse merger" as 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. See NYSE Listed Company Manual Sections 102.01F and 103.01E; NYSE Amex Company Guide Section 101(e); Nasdaq Rule 5005(a)(35).