[Federal Register Volume 76, Number 114 (Tuesday, June 14, 2011)]
[Notices]
[Pages 34781-34783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-14648]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64633; File No. SR-NASDAQ-2011-073]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt Additional Listing
Requirements for Reverse Mergers
June 8, 2011.
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 May 26, 2011, The NASDAQ Stock Market LLC (``Nasdaq'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II 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 the
Substance of the Proposed Rule Change
Nasdaq proposes to adopt additional listing requirements for a
company that has become public through a combination with a public
shell, whether through a reverse merger, exchange offer, or otherwise
(a ``Reverse Merger'').\3\ Nasdaq will implement the proposed rule for
applications received after approval.
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\3\ This proposed rule change replaces a previous filing by
Nasdaq in order to eliminate the previously proposed exception for a
Reverse Merger that was also conducting a firm commitment,
underwritten public offering and to clarify other portions of the
original proposal. See Securities Exchange Act Release No. 64371
(April 29, 2011), 76 FR 25730 (May 5, 2011) (SR-NASDAQ-2011-056).
The Commission notes that SR-NASDAQ-2011-056 was withdrawn on May
26, 2011.
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The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in [brackets].\4\
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\4\ Changes are marked to the rule text that appears in the
electronic manual of Nasdaq found at http://nasdaqomx.cchwallstreet.com.
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5005. Definitions
(a) The following is a list of definitions used throughout the
Nasdaq Listing Rules. This section also lists various terms together
with references to other rules where they are specifically defined.
Unless otherwise specified by the Rules, these terms shall have the
meanings set forth below. Defined terms are capitalized throughout
the Listing Rules.
(1)--(34) No change.
(35) ``Reverse Merger'' means any transaction whereby an
operating company becomes public by combining with a public shell,
whether through a reverse merger, exchange offer, or otherwise.
However, a Reverse Merger does not include the acquisition of an
operating company by a listed company satisfying the requirements of
IM-5101-2 or a business combination described in Rule 5110(a). In
determining whether a Company is a shell, Nasdaq will look to a
number of factors, including but not limited to: whether the Company
is considered a ``shell company'' as defined in Rule 12b-2 under the
Act; what percentage of the Company's assets are active versus
passive; whether the Company generates revenues, and if so, whether
the revenues are passively or actively generated; whether the
Company's expenses are reasonably related to the revenues being
generated; how many employees support the Company's revenue-
generating business operations; how long the Company has been
without material business operations; and whether the Company has
publicly announced a plan to begin operating activities or generate
revenues, including through a near-term acquisition or transaction.
(36) ''Round Lot'' or ``Normal Unit of Trading'' means 100
shares of a security unless, with respect to a particular security,
Nasdaq determines that a normal unit of trading shall constitute
other than 100 shares. If a normal unit of trading is other than 100
shares, a special identifier shall be appended to the Company's
Nasdaq symbol.
[(36)] (37) ``Round Lot Holder'' means a holder of a Normal Unit
of Trading. The number of beneficial holders will be considered in
addition to holders of record.
[(37)] (38) ``Shareholder'' means a record or beneficial owner
of a security listed or applying to list. For purposes of the Rule
5000 Series, the term ``Shareholder'' includes, for example, a
limited partner, the owner of a depository receipt, or unit.
[(38)] (39) ``Substantial Shareholder'' is defined in Rule
5635(e)(3).
[(39)] (40) ``Substitution Listing Event'' means: a reverse
stock split, re-incorporation or a change in the Company's place of
organization, the formation of a holding company that replaces a
listed Company, reclassification or exchange of a Company's listed
shares for another security, the listing of a new class of
securities in substitution for a previously-listed class of
securities, or any technical change whereby the Shareholders of the
original Company receive a share-for-share interest in the new
Company without any change in their equity position or rights.
[(40)] (41) ``Total Holders'' means holders of a security that
includes both beneficial holders and holders of record.
5110. Change of Control, Bankruptcy and Liquidation, and Reverse
Mergers
(a)-(b) No change
(c) Reverse Mergers
A Company that is formed by a Reverse Merger shall be eligible
to submit an application for initial listing only if the combined
entity has, immediately preceding the filing of the initial listing
application: (i) traded for at least six months in the U.S. over-
the-counter market, on another national securities exchange, or on a
foreign exchange, following the filing with the Commission or Other
Regulatory Authority of all required information about the
transaction, including audited financial statements for the combined
entity; and (ii) maintained a Bid Price of $4 per share or higher on
at least 30 of the most recent 60 trading days.
In addition, such a Company may only be approved for listing if,
at the time of approval, it has timely filed: (i) in the case of a
domestic issuer, its most recent two required periodic financial
reports with the Commission or Other Regulatory Authority (Forms 10-
Q or 10-K) containing at least six months of information about the
combined entity; or (ii) in the case of a Foreign Private
[[Page 34782]]
Issuer, comparable information as described in (i) above on Forms 6-
K, 20-F or 40-F. In the case of a Foreign Private Issuer, a Form 6-K
would be considered timely if, consistent with Rule 5250(c)(2), it
includes an interim balance sheet and income statement, which must
be presented in English, and is filed no later than six months
following the end of the applicable quarter.
* * * * *
5210. Prerequisites for Applying to List on The Nasdaq Stock Market
(a)-(h) No change
(i) Reverse Mergers
A security issued by a Company formed through a Reverse Merger
shall be eligible for initial listing only if the conditions set
forth in Rule 5110(c) are satisfied.
* * * * *
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
In recent months there has been an extraordinary level of public
attention to listed companies that went public via a Reverse Merger,
where an unlisted operating company becomes a public company by merging
with a public shell.\5\ The financial press, short sellers and others
have raised allegations of widespread fraudulent behavior by these
companies, leading to concerns that their financial statements cannot
be relied upon. Concerns have also been raised that certain individuals
who aggressively promote these transactions have significant regulatory
histories or have engaged in transactions that are disproportionately
beneficial to them at the expense of public shareholders. The Public
Company Accounting Oversight Board (``PCAOB'') has also identified
issues with the audits of these companies and, in response, has issued
Staff Audit Practice Alert No. 6/July 12, 2010 and Staff Research Note
2011-P1/March 2011, cautioning registered accounting firms to
follow certain specified auditing practices. The SEC recently took an
enforcement action based on a firm's audit of a Reverse Merger
company.\6\ In addition, Nasdaq is aware of situations where it
appeared that promoters and others intended to manipulate prices higher
to satisfy Nasdaq's initial listing bid price requirement and where
companies have, for example, gifted stock to artificially satisfy the
300 round lot public holder requirement. Nasdaq does not list companies
in instances such as these, where it appears the company has achieved
compliance with a requirement in an inappropriate manner.
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\5\ See, e.g., Beware This Chinese Export, Barron's (August 28,
2010), available at http://online.barrons.com/article/SB50001424052970204304404575449812943183940.html. See also Speech by
SEC Commissioner by Commissioner Luis A. Aguilar: Facilitating Real
Capital Formation (April 4, 2011), available at http://www.sec.gov/news/speech/2011/spch040411laa.htm.
\6\ In re Moore Stephens Wurth Frazer and Torbet, Order
Instituting Public Administrative and Cease-and-Desist Proceedings,
Securities Act Release No. 9166 (December 20, 2010).
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In response to these concerns, Nasdaq staff has, over the past
year, adopted heightened review procedures for Reverse Merger
applicants. However, Nasdaq also believes that additional requirements
for listing Reverse Merger companies are appropriate to discourage
inappropriate behavior on the part of companies, promoters and others.
Accordingly, Nasdaq proposes to adopt certain ``seasoning''
requirements for Reverse Mergers.\7\
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\7\ Even if a company meets these proposed new requirements,
Nasdaq could still deny listing based on the authority described in
Rule 5101 to apply additional or more stringent criteria in order to
maintain the quality of and public confidence in the market, to
prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and to protect investors and
the public interest.
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Specifically, Nasdaq proposes to prohibit a company going public by
combining with a public shell \8\ from applying to list until six
months after the combined entity submits all required information about
the transaction, including audited financial statements, to the SEC.\9\
Further, Nasdaq proposes to require that the company maintain a $4 bid
price on at least 30 of the 60 trading days immediately prior to
submitting the application. Finally, under the proposed rule, Nasdaq
would not approve any Reverse Merger for listing unless the company has
timely filed its two most recent financial reports with the SEC if it
is a domestic issuer (this could be two quarterly filings or a
quarterly and an annual filing) or comparable information if it is a
foreign private issuer.\10\ While most companies will satisfy this
requirement due to the six month delay before they can apply, Nasdaq
believes that it is important to assure that this requirement be
satisfied in all cases.
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\8\ For purposes of this rule, Nasdaq will treat as a
combination any transaction whereby an operating company becomes
public by combining with a public shell, whether through a reverse
merger, exchange offer, or otherwise. However, a Reverse Merger does
not include the acquisition of an operating company by a listed
company satisfying the requirements of IM-5101-2 (relating to
companies whose business plan is to complete one or more
acquisitions) or a business combination described in Rule 5110(a)
(relating to a listed company that combines with a non-Nasdaq
entity, resulting in a change of control of the Company and
potentially allowing the non-Nasdaq entity to obtain a Nasdaq
Listing, sometimes called a ``back-door listing''). In these cases,
FINRA is already reviewing the trading of the listed security and
Nasdaq is already reviewing the company and the individuals
associated with it. Additionally, Nasdaq rules require that the
company re-apply for initial listing and during that process Nasdaq
would review any newly associated individuals as well as the
financial information of the combined company. A Reverse Merger
would also not include a Substitution Listing Event, as defined in
Rule 5005(a)(39) (proposed to be renumbered as Rule 5005(a)(40),
such as the formation of a holding company to replace the listed
company or a merger to facilitate a re-incorporation, because in
these cases the operating company is already a listed entity.
\9\ A company must file a Form 8-K within four days of
completing a reverse merger. The Form 8-K must contain audited
financial statements and information comparable to the information
provided in a Form 10 for the registration of securities. See Form
8-K Items 2.01, 5.06, and 9.01(c). This six month period would not
begin to run until the complete Form 8-K, meeting the Commission's
requirements, is filed.
\10\ Nasdaq's experience has been that Reverse Merger's
typically involve domestic shells. However, in the event that the
Reverse Merger involves a shell that is a foreign private issuer,
the combined entity would have to timely file financial reports for
the most recent annual period, or a more recent six-month period.
These reports would have to reflect at least six months of
information about the post-merger entity and could be an interim
report on Form 6-K or an annual report on Forms 20-F or 40-F. A Form
6-K would be considered timely if, consistent with Rule 5250(c)(2),
it includes an interim balance sheet and income statement, which
must be presented in English, no later than six months following the
end of the applicable quarter.
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Nasdaq believes that this proposal will result in significant
investor protection benefits. Specifically, a six month seasoning
requirement will allow the Financial Industry Regulatory Authority,
Inc. (``FINRA'') and other regulators more time to view trading
patterns and uncover potentially manipulative trading.\11\ It will also
result in a more bona fide shareholder base and assure that the $4 bid
price was not satisfied through a quick manipulative scheme. Requiring
additional SEC filings will tend to improve the reliability of the
reported
[[Page 34783]]
financial results, since the auditors will have reviewed several
quarters, at least, of the public company's operating results, as will
the company's audit committee. To the extent the company had adopted
new internal controls at the time of the merger, those too will have
been in place and able to exert a corrective influence over any
previous flaws in the company's financial reporting process.
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\11\ FINRA reviews trading of companies trading in the over-the-
counter market in the United States. Foreign regulators and other
exchanges would similarly have more time to review trading for other
companies.
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\12\ in general and with Section
6(b)(5) of the Act,\13\ in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The proposed rule change is
designed to enhance investor protection by imposing additional
requirements on a category of companies that have raised regulatory
concerns.
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\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(5).
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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, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove 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, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASDAQ-2011-073 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2011-073. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site
viewing and printing in the Commission's Public Reference Room on
official business days between the hours of 10 a.m. and 3 p.m. Copies
of such filing also will be available for inspection and copying at the
principal office of Nasdaq. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASDAQ-2011-073, and should be submitted on or before
July 5, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14648 Filed 6-13-11; 8:45 am]
BILLING CODE 8011-01-P