11/21/2011

SEC Approves Tougher Listing Standards for Reverse Merger Companies

On November 9, 2011, the Securities and Exchange Commission (SEC) issued a press release announcing the approval of new rules of the three major exchanges - the New York Stock Exchange (NYSE), the NYSE Amex (NYSE Amex) and the Nasdaq Stock Market (Nasdaq) - that impose more stringent listing standards for companies that have gone public through a reverse merger.

In recent years, regulators and auditors have had difficulty acquiring reliable information from reverse merger companies, especially those based outside the United States. These issues prompted the SEC to commence an initiative to determine whether certain companies with overseas operations, including those formed by reverse mergers, were accurately reporting their financial information and also to assess the auditing quality of the companies' auditors. As a result of this initiative, the SEC and the exchanges have either suspended or halted trading in more than 35 foreign-based public companies (a number of which gained access to the U.S. markets via reverse merger). In June, the SEC issued an investor bulletin warning investors about companies that engage in reverse mergers.

The New Rules
Under the new rules, NYSE, NYSE Amex and Nasdaq will impose tougher listing requirements for companies that go public through a reverse merger transaction. Specifically, these companies will not be eligible to apply to list until:

• The company completes a one-year "seasoning period" by trading in the over-the-counter market or another regulated U.S. or foreign exchange following the reverse merger and has filed all SEC required reports and audited financial statements; and
• The company maintains the minimum share price for a sustained period, and for at least 30 to 60 trading days, immediately prior to (i) its listing application and (ii) the exchange's decision to list the company.

Exceptions
Under the new rules, reverse merger companies are exempt from these requirements if either of the following applies:

• The company has completed a firm commitment underwritten public offering with proceeds to the company of at least $40 million; or
• The company has filed at least four annual reports (including audited financial information) with the SEC since the occurrence of the reverse merger.

For more information on this alert, contact any one of our Corporate Finance attorneys.