[Federal Register Volume 66, Number 26 (Wednesday, February 7, 2001)]
[Notices]
[Pages 9398-9399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3113]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43907; File No. SR-NASD-01-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To Amend 
NASD Rule 4330(f) To Require a Nasdaq Issuer To Apply for Initial 
Inclusion Following a Reverse Merger With a Non-Nasdaq Entity

January 30, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 9, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, the Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq has filed with the Commission a proposed rule change to 
amend NASD Rule 4330(f) to require a Nasdaq issuer to apply for initial 
inclusion following a reverse merger with a non-Nasdaq entity. Nasdaq 
also proposes to make conforming changes to IM-4300, Interpretive 
Material Regarding Future Priced Securities.\3\ Below is the text of 
the proposed rule change. Proposed new language is italicized; proposed 
deletions are in brackets.
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    \3\ Future Priced Securities are private financing instruments 
which were created as an alternative means of quickly raising 
capital for issuers. A Future Priced Security is generally 
structured in the form of a convertible security and is often issued 
via a private placement. See IM-4300.
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* * * * *

IM-4300. Interpretive Material Regarding Future Priced Securities

* * * * *

[Change of Control and Change in Financial Structure] Reverse Merger

    NASD Rule 4330(f) provides:
    [Nasdaq shall require a Nasdaq SmallCap Market issuer to comply 
with all applicable requirements for initial inclusion under this Rule 
4300 Series and shall require a Nasdaq National Market issuer to comply 
with all applicable requirements for initial inclusion under the Rule 
4300 Series and Rule 4400 Series in the event that such issuer enters 
into a merger, consolidation, or other type of acquisition with a non-
Nasdaq entity (including domestic and foreign corporations and limited 
partnerships), which results in a change of control and either a change 
in business or change in the financial structure of the Nasdaq SmallCap 
Market or Nasdaq National Market issuer.]
    An issuer must apply for initial inclusion following a transaction 
whereby the issuer combines with a non-Nasdaq entity, resulting in a 
change of control of the issuer and potentially allowing the non-Nasdaq 
entity to obtain a Nasdaq Listing (for purposes of this rule, such a 
transaction is referred to as a ``Reverse Merger''). In determining 
whether a Reverse Merger has occurred, Nasdaq will consider all 
relevant factors including, but not limited to, changes in the 
management, board of directors, voting power, ownership, and financial 
structure of the issuer. Nasdaq will also consider the nature of the 
businesses and the relative size of the Nasdaq issuer and non-Nasdaq 
entity.
    This provision, which applies regardless of whether the issuer 
obtains shareholder approval for the transaction, requires issuers to 
qualify under the initial inclusion standards following a Reverse 
M[m]erger [or consolidation that results in a change of control if 
there is also a change in either the business or the financial 
structure of the issuer].\4\ It is important for issuers to realize 
that in certain instances, the conversion of a Future Priced Security 
may implicate this provision. For example, if there is no limit on the 
number of common shares issuable upon conversion, or if the limit is 
set high enough, the exercise of conversion rights under a Future 
Priced Security could result in a [change of control in a deemed] 
Reverse M[m]erger [or consolidation] with the holders of the Future 
Priced Securities. [In addition, the issuance of the Future Priced 
Security and the large increase in the number of common shares 
outstanding after conversion of the Future Priced Security may be 
viewed as a change in financial structure.] In such event, an issuer 
may be required to re-apply for initial inclusion and satisfy all 
initial inclusion requirements.
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    \4\ This provision is designed to address situations where a 
company attempts to obtain a ``backdoor listing'' on Nasdaq by 
merging with a Nasdaq issuer with minimal assets and/or operations.
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* * * * *

Rule 4330. Suspension or Termination of Inclusion of a Security and 
Exceptions to Inclusion Criteria

    (a)-(e) No change.
    (f) [Securities issued in connection with the merger, 
consolidation, or other type of acquisition of at least one issuer of 
qualifying securities shall be promptly included in Nasdaq, provided 
that the conditions of Rule 4310(c) or rule 4320(e) for securities that 
have already been included are satisfied. Nasdaq shall require a Nasdaq 
SmallCap Market issuer to comply with all applicable requirements for 
initial inclusion under this Rule 4300 Series and shall require a 
Nasdaq National Market issuer to comply with all applicable 
requirements for initial inclusion under the Rule 4300 Series and Rule 
4400 Series in the event that such issuer enters into a merger, 
consolidation, or other type of acquisition with a non-Nasdaq entity 
(including domestic and foreign corporations and limited partnerships), 
which results in a change of control and either a change in business or 
change in the financial structure of the Nasdaq SmallCap Market or 
Nasdaq National Market issuer.]
    An issuer must apply for initial inclusion following a transaction 
whereby the issuer combines with a non-Nasdaq entity, resulting in a 
change of control of the issuer and potentially allowing the non-Nasdaq 
entity to obtain a Nasdaq Listing (for purposes of this rule, such a 
transaction is referred to as a ``Reverse Merger''). In determining 
whether a Reverse Merger has occurred, Nasdaq will consider all 
relevant factors including, but not limited to, changes in the 
management, board of directors, voting power, ownership, and financial 
structure of the issuer. Nasdaq will also consider the nature of the 
businesses and the relative size of the Nasdaq issuer and non-Nasdaq 
entity.
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[[Page 9399]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend NASD Rule 
4330(f) (the ``Rule'') which provides, in pertinent part, that a Nasdaq 
issuer must comply with all applicable initial inclusion requirements 
under Nasdaq rules in the event that the issuer enters into a merger, 
consolidation, or other type of acquisition with a non-Nasdaq entity, 
which results in a change of control and either a change in business or 
a change in the financial structure of the Nasdaq issuer.
    Nasdaq originally adopted the Rule in 1993 to address the trend of 
non-Nasdaq entities seeking a ``backdoor listing'' on Nasdaq through a 
business combination involving a Nasdaq issuer.\5\ In these 
combinations, a non-Nasdaq entity purchased a Nasdaq issuer in a 
transaction that resulted in the non-Nasdaq entity obtaining a Nasdaq 
listing without qualifying for initial listing or being subject to the 
background checks and scrutiny normally applied to issuers seeking 
initial listing.
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    \5\ See Securities Exchange Act Release No. 32264 (May 4, 1993), 
58 FR 27760 (May 11, 1993) (ordering approving File No. SR-NASD-93-
07).
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    Some issuers and their counsel have expressed uncertainty regarding 
the exact circumstances under which the Rule is applicable. Therefore, 
Nasdaq proposes to amend the Rule to more clearly define that it is 
intended to apply to business combinations between a Nasdaq issuer and 
a non-Nasdaq entity in which there is a change of control of the Nasdaq 
issuer \6\ and the potential for the non-Nasdaq entity to acquire a 
Nasdaq listing (for purposes of this rule, such a transaction is 
referred to as a ``Reverse Merger''). To provide further clarification, 
the proposed Rule would also set forth a list of non-exclusive factors 
to be considered when determining whether a Reverse Merger has 
occurred. These factors include changes in the management, board of 
directors, voting power, ownership, and financial structure of the 
Nasdaq issuer. The nature of the businesses and the relative size of 
the Nasdaq issuer and non-Nasdaq entity would also constitute 
additional factors to be considered. Nasdaq believes that these 
proposed amendments will clarify the Rule for issuers while continuing 
to prevent ``backdoor listings'' on Nasdaq.
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    \6\ It is not necessary to obtain a majority interest in order 
for a change of control to occur.
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    Nasdaq also proposes to make conforming changes to IM-4300, 
Interpretive Material Regarding Future Priced Securities.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A(b)(6) \7\ of the Act, in that the proposal is designed to 
prevent fraudulent and manipulative acts and practices, and to protect 
investors and the public interest. As noted above, the proposed rule 
change is aimed at clarifying NASD Rule 4330(f), which prevents non-
Nasdaq entities from obtaining a ``backdoor listing'' on Nasdaq through 
a business combination involving a Nasdaq issuer.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. 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 inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-01-01 and should 
be submitted by February 28, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3113 Filed 2-6-01; 8:45 am]
BILLING CODE 8010-01-M