SEC Approves Tougher Rules for Reverse Merger Companies
By Mark Agulnik, Partner, Assurance and David Maggio, Staff
On November 8, 2011, theSecurities and Exchange Commission (SEC) approved new amendments to the listing rules for reverse-merger companies (RMCs). A reverse merger occurs when a private operating company becomes a reporting company under the Securities Exchange Act of 1934 by merging with a public shell.
These new rules seek to toughen the initial listing requirements for most reverse merger companies or reverse takeover companies (RTOs) before they can become eligible to be listed on any of the 3 major US Exchanges (NASDAQ, NYSE, and NYSE Amex). These new rules are a direct response to the increasing use of reverse mergers by foreign owned companies as a means to enter US markets. In the past, RMCs have experienced less scrutiny than Initial Public Offerings (IPOs). This has lead to an abundance of fraudulent reporting allegations. China has been the number one focus of these allegations as more than 25% of all class-action lawsuits alleging securities fraud were filed against Chinese RMCs. The new rules that the SEC has designed are geared towards restoring investor confidence in the segment of public companies relating to RMC’s and other financial reporting.
Under the new rules, RMCs will now be required to adhere to the following:
- a seasoning period
- additional filing requirements
- minimum stock requirements
A Seasoning Period:
The RMC must complete a one-year seasoning period from the time of entering into the reverse merger. During this period, the RMC must trade on the U.S. over-the-counter market, or on another regulated U.S. or foreign exchange.
Additional Filing Requirements:
The RMC must file all required reports with the SEC. There are different filing rules depending on which listing the RMC plans to apply. However, they all require audited financial statements.
Minimum Stock Price:
The RMC must maintain a minimum closing price for a period of time. The minimum period of time is at least 30 or more of the last 60 trading days prior to the RMC filing its listing.
Certain exemptions apply to RMCs under the following two circumstances:
- The RMC complete a firm commitment (which occurs subsequent to or simultaneously with the reverse merger) underwritten public offering of at least $40 million.
- The RMC files at least four annual reports with the SEC subsequent to completing the merger.
The SEC is constantly looking into ways to improve investor confidence. Enhancing the listing requirements of RMCs is a step towards improving the reliability of financial information and helping to reduce potential securities fraud.