The Securities and Exchange Commission recently approved new rules for the three major U.S. listing markets that toughen the standards that companies going public through reverse mergers must meet to become listed on those exchanges.
Reverse merger companies, like other operating companies, can pay to be listed on an exchange where investors can purchase and sell company shares. However, regulators and auditors sometime have greater difficulty obtaining reliable information from reverse merger companies, particularly those based overseas. Reverse mergers permit private companies, including those located outside the U.S., to access U.S. investors and markets by merging with an existing public shell company.
In 2010, the SEC launched an initiative to determine whether certain companies with foreign operations, including those that were the product of reverse mergers, were accurately reporting their financial results, and to assess the quality of the audits being done by the auditors of such companies. The SEC and U.S. stock exchanges recently suspended or halted trading in numerous companies based overseas, citing a lack of current and accurate information about the firms and their finances. These included a number of companies that were formed by reverse mergers. In June, 2011, the SEC issued an investor bulletin warning investors about companies that engage in reverse mergers.
Under the new rules, NASDAQ, NYSE, and NYSE Amex will impose more stringent listing requirements for companies that become public through a reverse merger. Among other things, the new rules would prohibit a reverse merger company from applying to list until:
The company has completed a one-year "seasoning period" by trading in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange following the reverse merger, and filed all required reports with the Commission, including audited financial statements.
The company maintains the requisite minimum share price for a sustained period, and for at least 30 of the 60 trading days, immediately prior to its listing application and the exchange’s decisions to list.
Under the rules, a reverse merger company generally would be exempt from the special requirements if it is listed in connection with a substantial firm commitment underwritten public offering, or the reverse merger occurred at a time resulting in the prior filing of at least four annual reports, with audited financial information, with the SEC.
The reverse merger continues to provide a viable means of going public under appropriate circumstances. However, the new rules warrant close scrutiny by anyone contemplating a reverse merger to insure understanding of the ramifications upon the company as well as its shareholders.
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