Nasdaq Proposes Heightened Requirements for Companies Going Public Through Reverse Mergers
By Cydney Posner
Nasdaq has proposed additional listing requirements for companies going public through reverse mergers. http://www.sec.gov/rules/sro/nasdaq/2011/34-64371.pdf. The more onerous requirements were triggered by reports in recent months of fraud allegations regarding operating companies that went public through reverse mergers. 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." In addition, the PCAOB has identified issues relating to the audits of these companies, resulting in an "Audit Practice Alert." Nasdaq also sites attempts at price and other types of manipulation aimed at artificially satisfying the Nasdaq listing requirements. As a result, in addition to heightened review procedures, Nasdaq is proposing to impose "seasoning" requirements designed to allow FINRA more time to view trading patterns and uncover potentially manipulative trading, to develop a more bona fide shareholder base and to assure that the $4 bid price was not satisfied through a "quick manipulative scheme." The requirement for additional SEC filings is intended to improve the reliability of the reported financial results, given the opportunity for auditor and audit committee review of several quarters, as well as the possible corrective effect of internal controls.
Under the proposal, a company formed by a combination between a private operating company and a public shell would be eligible to apply for initial listing only after the combined entity:
- Has traded for at least six months in the over-the-counter market, on another national securities exchange or on a listed foreign market, following the filing with the SEC or other regulatory authority of audited financial statements for the combined entity; and
- Has maintained a bid price of $4 per share or higher on at least 30 of the 60 trading days immediately preceding the filing of the initial listing application.
The listing application would be approved following the business combination only if the company has timely filed: (i) in the case of a domestic issuer, at least two required periodic financial reports with the SEC or other regulatory authority; or (ii) in the case of a foreign private issuer, one or more reports including financial statements for a period not less than six months.
This new rule would not apply if the company listed in connection with a firm commitment, underwritten public offering.
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