
[Federal Register Volume 75, Number 250 (Thursday, December 30, 2010)]
[Notices]
[Pages 82420-82424]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32904]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63607; File No. SR-NASDAQ-2010-137]


Self-Regulatory Organizations, The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change To Amend IM-5101-2 To Provide Special 
Purpose Acquisition Companies the Option To Hold a Tender Offer in Lieu 
of a Shareholder Vote on a Proposed Acquisition and Other Changes to 
the SPAC Listing Standards

December 23, 2010.

I. Introduction

    On October 22, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to provide special purpose acquisition companies 
(``SPACs'') an option to hold a tender offer in lieu of a shareholder 
vote on a proposed acquisition and to make certain other changes to the 
SPACs listing requirements as discussed below. The proposed rule change 
was published in the Federal Register on November 9, 2010.\3\ The 
Commission received three comment letters on the proposal.\4\ This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63239 (November 3, 
2010), 75 FR 68846.
    \4\ See Letters from Floyd I. Wittlin and Ann F. Chamberlain, 
Bingham McCutchen LLP, dated November 22, 2010 (``Bingham Letter''); 
David Alan Miller, Managing Partner and Jeffrey M. Gallant, Partner, 
Graubard Miller, dated November 22, 2010 (``Graubard Letter''); and 
Joel L. Rubinstein and Jonathan Rochwarger, McDermott Will & Emery, 
dated November 30, 2010 (``McDermott Letter'').
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II. Description of the Proposal

    As discussed in more detail below, the Exchange is proposing to 
amend its listing rules to provide SPACs an option to hold a tender 
offer in lieu of a shareholder vote on a proposed acquisition, to 
require SPACs, trying to complete a business combination, that are not 
subject to the Commission's proxy rules to conduct a tender offer 
allowing shareholders to redeem shares for cash and provide information 
similar to that provided under the Commission's proxy rules and to 
amend the definition of public shareholder for purposes of the SPAC 
conversion rights to also exclude beneficial holders of more than 10% 
of the total shares outstanding, consistent with the Exchanges existing 
definition of Public Holder.\5\
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    \5\ See Nasdaq IM-5101-2(e) and Nasdaq Rule 5005(a)(34).
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    SPACs are companies that raise capital in an initial public 
offering (``IPO'') to enter into future undetermined business 
combinations through mergers, capital stock exchanges, asset 
acquisitions, stock purchases, reorganizations or other similar 
business combinations with one or more operating businesses or assets. 
In the IPO, SPACs typically sell units consisting of one share of 
common stock and one or more warrants (or fraction of a warrant) to 
purchase common stock. The units are separable at some point after the 
IPO. Management of the SPAC typically receives a percentage of the 
equity at the outset and may be required to purchase additional shares 
in a private placement at the time of the IPO. Due to their unique 
structure, SPACs do not have any prior financial history like operating 
companies. In July 2008, the Commission approved Nasdaq rules to permit 
the listing of securities of SPACs.\6\ Prior to that time, the Exchange

[[Page 82421]]

did not list securities of companies without a specific business plan 
or that indicated that their plan was to engage in a merger or 
acquisition with unidentified companies. In addition to requiring 
securities of SPACs to meet the Exchange's initial listing standards, 
Nasdaq's rules provided additional investor protection standards to 
provide safeguards to shareholders who invest in SPAC securities.
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    \6\ See Securities Exchange Act Release No. 58228 (July 25, 
2008), 73 FR 44794 (July 31, 2008).
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    Currently, Nasdaq's rules for listing securities of SPACs provide 
at least 90% of the proceeds raised in the IPO and any concurrent sale 
of equity securities must be placed in a trust account.\7\ Further, 
Nasdaq's listing rules specify that within 36 months or such shorter 
time period as specified by the SPAC, the SPAC must complete one or 
more business combinations having an aggregative fair market value of 
at least 80% of the value of the trust account.\8\ Until the SPAC has 
completed a business combination of at least 80% of the trust account 
value, the SPAC must, among other things, submit the business 
combination to a shareholder vote.\9\ Any public shareholders who vote 
against the business combination have a right to convert their shares 
of common stock into a pro rata share of the aggregate amount then in 
the trust account, if the business combination is approved and 
consummated.\10\
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    \7\ See Nasdaq IM-5101-2(a).
    \8\ See Nasdaq IM-5101-2(b).
    \9\ See Nasdaq IM-5101-2(d).
    \10\ See Nasdaq IM-5101-2(e).
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    Nasdaq proposes three changes to the SPAC shareholder approval 
process. First, Nasdaq proposes to add an option for the SPAC to 
conduct a tender offer instead of a shareholder vote. Nasdaq proposes 
that until a SPAC has completed a business combination of at least 80% 
of the trust account value, if a shareholder vote on the business 
combination is not held for which the SPAC must file and furnish a 
proxy or information statement subject to Regulation 14A or 14C under 
the Act, in order to complete the business combination the SPAC must 
provide all shareholders with the opportunity to redeem all their 
shares for cash equal to their pro rata share of the aggregate amount 
then in the deposit account pursuant to Rule 13e-4 and Regulation 14E 
under the Act.\11\ The SPAC must file tender offer documents with the 
Commission containing substantially the same information about the 
business combination and the redemption rights as required under 
Regulation 14A of the Act, which regulates proxy solicitations.
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    \11\ See proposed Nasdaq IM-5101-2(e).
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    Second, Nasdaq proposes to require that the shareholder vote 
provisions currently in the rule requiring the business combination to 
be approved by a majority of the shares voting at the meeting apply to 
shareholder votes where the SPAC must file and furnish a proxy or 
information statement subject to Regulation 14A or 14C under the Act in 
advance of the shareholder meeting.\12\ This part of the Exchange's 
proposal, taken together with the tender offer provisions discussed 
above, in essence require a SPAC, not required by law to file and 
furnish a proxy or information statement subject to Regulation 14A or 
14C under the Act, to conduct a tender offer for shares in exchange for 
a pro rata share of the cash held in deposit in the trust account. As 
noted above, any issuer that elects to or is required to conduct a 
tender offer must comply with Rule 13e-4 and Regulation 14E under that 
Act, as well as file tender offer documents with the Commission 
containing substantially the same financial and other information about 
the business combination and redemption rights as would be required 
under the federal proxy rules in Regulation 14A of the Act. This 
provision will assure that investors will receive comparable 
information about a proposed business combination irrespective of 
whether the company is conducting a tender offer with or without a 
vote, or a shareholder vote that requires the issuer to file and 
furnish a proxy or information statement in compliance with the 
Commission's proxy rules.
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    \12\ See proposed Nasdaq IM-5101-2(d).
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    Finally, Nasdaq proposes to exclude beneficial holders of more than 
10% of the total outstanding SPAC shares from those public shareholders 
entitled to receive conversion rights under paragraph (d) of IM-5101-2. 
According to Nasdaq, when it originally adopted the SPAC rules, Nasdaq 
intended to have the public shareholder exclusions closely mirror the 
defined term ``Public Holders'' as well as exclude certain categories 
specific to SPACs. However, the definition of public shareholder under 
the SPAC rules did not exclude beneficial holders of more than 10% of 
the total shares outstanding while the definition of Public Holders 
excludes this group. Nasdaq is amending the SPAC rules to ensure 
consistency between these two rules.\13\
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    \13\ See proposed Nasdaq IM-5101-2(d).
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III. Summary of Comments

    The Commission received three comments supporting the proposal. One 
commenter stated that the proposal ``would represent a major step 
toward elimination of the abuses that have plagued the shareholder 
voting process relating to acquisitions by SPACS while continuing to 
enable shareholders to make a fully informed voting decision on 
proposed acquisitions by SPACs.'' \14\
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    \14\ See Bingham Letter.
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    While the three commenters support the proposal, they believed that 
Nasdaq should propose to change its shareholder approval rule in Nasdaq 
Rule 5635, which, among other things, require that a Nasdaq listed 
issuer obtain shareholder approval to issue securities in connection 
with an acquisition where the number of shares of common stock to be 
issued is equal to or more than 20% of the number of shares outstanding 
prior to the issuance.\15\ One commenter believed that ``adoption of 
the proposed change to Rule IM-5101-2 will not be sufficient to 
encourage SPACs to list on Nasdaq'' and anticipated that ``the proposed 
rule change, standing alone, will have no practical effect.'' \16\ The 
commenter stated that the value of the target for a SPAC is generally 
greater than the amount in the SPAC's trust account, and thus, the SPAC 
would need to issue additional shares at the time of the business 
combination to raise capital.\17\ According to the commenter, the 
greater number of shares issued, the lesser the dilutive impact of the 
founders' shares and the warrants. The commenter argues that any 
protection provided by Nasdaq's shareholder approval requirements is 
unnecessary since under Nasdaq's proposal, shareholders not subject to 
a vote are able to ``vote with their feet'' and get their investment 
back through the tender offer process. Accordingly, the commenter urged 
Nasdaq to exempt SPACs from Nasdaq's shareholder approval requirements 
in Rule 5635.
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    \15\ See Nasdaq Rule 5635(a).
    \16\ See Bingham Letter.
    \17\ See Bingham Letter.
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    Another commenter stated that because ``SPACs are often unable to 
determine with accuracy the amount of funds that will be required to 
pay shareholders that ultimately elect to convert their shares into 
cash, the funds held in the trust account are typically not used as 
consideration to effect the acquisition transaction.'' \18\ As a 
result, this commenter stated that SPACs often use stock as 
consideration for the business combination and cash in the trust 
account is used to redeem shareholders and possibly finance the 
operations of the target. As a result, the securities issued to do a 
business

[[Page 82422]]

combination almost always represent more than 20% of the outstanding 
shares before the business combination. This commenter views the tender 
offer proposal providing even greater participation for shareholders 
then a vote alone under Nasdaq Rule 5635 since in the tender offer 
situation shareholders can receive their money back and therefore, 
believes that there should be an exception to the voting requirements 
in Nasdaq's rules.
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    \18\ See Graubard Letter.
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    Another commenter noted that most ``SPAC business combination 
transactions involve the issuance by the SPAC of a significant number 
of shares, which typically triggers one or more shareholder approval 
requirements of Rule 5635.'' \19\ This commenter believes that by 
having the ability to redeem their shares and ``vote with their feet'', 
shareholders do not need the additional protection of Nasdaq Rule 5635. 
The commenter also notes that the shareholder vote requirement 
currently in the SPAC rules has resulted in greenmail \20\ tactics that 
the rule filing is meant to address, and that without an exception to 
the shareholder approval requirements the potential for greenmail to 
continue and other delays caused by the vote can narrow the pool of 
quality acquisition targets for the SPAC which would be contrary to 
shareholder interests.
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    \19\ See McDermott Letter.
    \20\ See Section IV, infra.
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    Finally, two more additional comments were raised by the 
commenters. First, the Bingham Letter suggests Nasdaq's rule be amended 
to make clear that the SPAC founders' shares can be excluded from the 
pro rata calculation used to determine the per share redemption price 
in those cases where the sponsor has agreed not to exercise their 
redemption rights.\21\ Second, the Graubard Letter states that Nasdaq 
should be allowed to amend its rule to permit it to list securities of 
SPACs with smaller size by eliminating the 2 year operating history in 
one of its Capital Market initial listing requirements.\22\ In support 
of this, the commenter notes that all the other protections for SPACs 
in Nasdaq's rules would apply and that this would recognize the current 
market environment for smaller offerings.
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    \21\ See Bingham Letter.
    \22\ See Graubard Letter.
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IV. Discussion and Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of Section 6(b) of the Act and the rules 
and regulations thereunder. Specifically, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\23\ which 
requires that an exchange have rules designed, among other things, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, to protect investors and the public interest, and to not 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.\24\
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rules' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    The development and enforcement of adequate standards governing the 
initial and continued listing of securities on an exchange is an 
activity of critical importance to financial markets and the investing 
public. Listing standards, among other things, serve as a means for an 
exchange to screen issuers and to provide listed status only to bona 
fide companies that have or, in the case of an IPO, will have 
sufficient public float, investor base, and trading interest to provide 
the depth and liquidity necessary to promote fair and orderly markets. 
Adequate standards are especially important given the expectations of 
investors regarding exchange trading and the imprimatur of listing on a 
particular market. Once a security has been approved for initial 
listing, maintenance criteria allow an exchange to monitor the status 
and trading characteristics of that issue to ensure that it continues 
to meet the exchange's standards for market depth and liquidity so that 
fair and orderly markets can be maintained.
    As noted above, SPACs are companies that raise capital in IPOs, 
with the purpose of purchasing operating companies or assets within a 
certain time frame. Because of their unique structure, and the fact 
that at the outset investors will not know the ultimate business of the 
company similar to a blank check company, the Commission approved 
Nasdaq listing standards for SPACs that were similar in some respects 
to the investor protection measures contained in Rule 419 under the 
Securities Act of 1933.\25\ One of the important investor protection 
safeguards, as noted above, is the ability of public shareholders to 
convert their shares for a pro rata share of the cash held in the trust 
account if they vote against a business combination. In approving this 
provision, the Commission noted that the conversion rights will help to 
ensure that public shareholders who disagree with management's decision 
with respect to a business combination have adequate remedies.\26\
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    \25\ See 17 CFR 230.419. Rule 419 applies to blank check 
companies issuing penny stock as defined under rule 3a51-1(a)(2) of 
the Act. See 17 CFR 240.3a51-1(a)(2).
    \26\ The Commission also noted, among other things, that the 
requirement that a majority of the independent directors approve a 
business combination should also help to ensure that a business 
combination is entered into by the SPAC after a fair and impartial 
decision. See IM-5101-2(c). This provision will continue to apply to 
all SPAC business combinations whether approved through a 
shareholder vote or conducted through a tender offer under the new 
provisions being adopted in this order.
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    As noted by Nasdaq in its rule filing, however, there have been 
certain abuses as a result of the vote requirement. According to 
Nasdaq, hedge funds and other activist investors would acquire an 
interest in a SPAC and use their ability to vote against a proposed 
acquisition as leverage to obtain additional consideration not 
available to other shareholders. In its filing, Nasdaq refers to these 
abuses as ``greenmail'' and is now proposing to add an option for the 
SPAC to conduct a tender offer instead of a shareholder vote. As 
described above, under the proposal the SPAC must provide all 
shareholders with the opportunity to redeem all their shares for cash 
equal to their pro rata share of the aggregate amount then in the 
deposit account pursuant to Rule 13e-4 and Regulation 14E under the 
Act.\27\ The SPAC must file tender offer documents with the Commission 
containing substantially the same information about the business 
combination and the redemption rights as required under the Federal 
proxy solicitation rules. According to Nasdaq this is the same outcome 
available to public shareholders who vote against the acquisition 
pursuant to Nasdaq's existing rule and will allow shareholders to 
``vote with their feet'' if they oppose a proposed acquisition by the 
SPAC while preventing activist shareholders from denying shareholders 
the benefit of the transaction.
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    \27\ See proposed Nasdaq IM-5101-2(e).
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    The Commission notes that the commenters are supportive of this 
proposal and believe that the change should help to eliminate the 
abuses that have occurred in relation to the voting process on 
acquisitions by SPACs.\28\ Nasdaq's rule would retain the option to

[[Page 82423]]

hold a shareholder vote, and provide SPACs with a tender offer option, 
so long as the tender offer is consistent with Federal securities laws. 
Further, shareholders' right to redeem their shares would be preserved 
under either scenario. The Commission further notes that irrespective 
of whether a SPACs business combination is achieved through a tender 
offer or shareholder vote, shareholders, under Nasdaq's rule, will 
receive comparable financial and other information about the business 
combination and the redemption rights.
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    \28\ See Section III, supra. As noted above, while generally 
supportive of the proposal, the commenters raised concerns that 
Nasdaq's proposal does not go far enough.
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    In summary, the Commission believes that shareholders who are not 
in favor of a business combination should continue to have an adequate 
remedy under Nasdaq's proposal if they disagree with management's 
decision with respect to a business combination, and that the Nasdaq's 
SPAC rules will continue to have safeguards to address investor 
protection, while at the same time allowing the greenmail abuses noted 
by Nasdaq to be addressed. Based on the above, the Commission finds 
that this proposal is consistent with the requirements of the Act and 
in particular the investor protection standards under Section 6(b)(5) 
of the Act.
    Nasdaq is also proposing to add language to existing provision IM-
5101-2(d) which concerns the shareholder voting requirements applicable 
to business combinations. Under this change if a SPAC holds a 
shareholder vote to approve a business combination, the provisions, 
only apply where the SPAC must file and furnish a proxy or information 
statement subject to Regulation 14A or 14C under the Act in advance of 
the shareholder meeting. This change, viewed together with the changes 
discussed above allowing a SPAC to do a business combination through a 
tender offer rather than a shareholder vote, basically ensures that 
certain SPACs that are not required under the federal securities laws 
to comply with the Commission's proxy solicitation rules when 
soliciting proxies, will have to follow the tender offer provisions 
under Nasdaq's rules. Under this provision, the tender offer documents 
are specifically required to contain substantially the same financial 
and other information about the business combination and redemption 
rights as would be required under the proxy rules in Regulation 14A of 
the Act.\29\ The Commission notes that this proposal would clarify the 
manner in which a shareholder vote is held and the information that 
would be required by the SPAC to send to shareholders. Further, it 
ensures that all investors will be receiving the same information about 
a proposed business combination whether it is holding a vote and 
required by law to follow the proxy rules or conducting a tender offer 
under the conditions set forth in Nasdaq's rules. This provision also 
does not preclude a SPAC that does not have to comply with the federal 
proxy rules when soliciting proxies from having a shareholder vote, but 
just ensures, through the tender offer process, that the SPAC will be 
required to provide comparable information. Based on the above, the 
Commission finds that this portion of the proposal is consistent with 
the requirements of the Act, and in particular, the investor 
protections requirements under Section 6(b)(5) of the Act.
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    \29\ See proposed Nasdaq IM-5101-2(e).
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    Finally, Nasdaq proposes to amend language in the SPAC rules to 
also include beneficial holders of more than 10% of the total 
outstanding SPAC shares to the groups of shareholders that are not 
entitled to convert their shares on a pro rata basis for cash if they 
vote against a business combination.\30\ The SPAC definition was 
originally drafted, according to Nasdaq, to mirror the ``Public 
Holder'' definition under Nasdaq rules in addition to excluding other 
groups from having conversion rights such as the sponsors and founding 
shareholders. The Commission notes that the proposed change in the 
definition is consistent with Nasdaq's definition of ``Public 
Holders,'' which also excludes from its definition ``the beneficial 
holder of more than 10% of the total shares outstanding.'' \31\ This 
will ensure consistency with the two rules and according to Nasdaq is 
consistent with its original intent. Based on this and the existing 
definition under Nasdaq's rules, the Commission, finds that this 
proposal is consistent with the requirements of the Act.
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    \30\ See proposed Nasdaq IM-5101-2(d).
    \31\ See Nasdaq Rule 5005(a)(34).
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    The commenters also urge the Commission to permit Nasdaq to change 
its rules to exempt from the shareholder approval requirements in 
Nasdaq Rule 5635, SPACs that issue 20% or more of their outstanding 
shares to achieve an acquisition. As summarized above, the commenters 
believe that the proposed changes allowing a tender offer option to 
avoid ``greenmail'' situations will not be effective if there is a 
separate shareholder approval requirement for issuances of 20% or more 
of the SPACs common stock since most SPACs issue a large number of 
shares when conducting a business combination. The Commission notes 
that the instant proposal centers on the approval of shareholders with 
respect to a business combination and the recourse a shareholder may 
have should the shareholder disapprove the business combination. 
Nasdaq's shareholder approval rules, on the other hand, are stand alone 
requirements that are meant to address different issues such as 
dilution of existing shareholders by the issuance of additional shares. 
While the commenters have attempted to address some of the concerns 
arguing that the shareholders don't need the further protection of a 
vote since shareholders in a SPAC will be fully aware of their 
redemption rights through disclosure and that dilution is not a concern 
since the SPAC must complete business combinations with a target having 
a fair market value of at least 80% of the value of the trust account, 
the Commission is not convinced that these factors alone adequately 
address the concerns underlying the shareholder approval rules.
    In conclusion, the Commission notes that it has long recognized 
that the Exchange's shareholder approval requirements provide important 
protections to shareholders of listed companies from certain corporate 
transactions. These protections are central to a shareholder owning 
shares in a Nasdaq listed issuer. Based on this, the Commission is not 
prepared to state that a shareholder vote is unnecessary in situations 
where certain disclosures are made or there is only a possibility the 
issuance may not cause dilution. Any such determination would raise 
significant issues that would have to be fully considered by the 
Commission and published for public comment, and may raise issues that 
could potentially go beyond the listing of SPACs. The Commission 
further notes that since the Exchange has not proposed to change the 
shareholder approval rule at this time, that topic is not before the 
Commission and does not need to be separately considered at this time. 
Moreover, the commenters indicated that issuing additional shares is 
not a requirement, but rather a typical business practice for SPACs. 
The Commission notes, for example, that SPACs could seek out business 
combinations with a fair market value consistent with the value of the 
SPAC's trust account and possibly avoid the issuance of additional 
shares to trigger Nasdaq Rule 5635.
    As to the two remaining comments, that the Nasdaq rule language 
should be amended to permit founders shares from being excluded from 
the pro rate calculation and that the Nasdaq listing rules should be 
amended to permit the

[[Page 82424]]

listing of smaller sized SPACs, the Commission notes that Nasdaq has 
not proposed such changes. As to the suggestion on the language 
concerning the pro rata calculation, the Commission notes that the 
current language states that the pro rata amount is calculated based on 
the aggregate amount in the deposit account. It is unclear if founders 
share funds are typically deposited in the deposit account. If they 
are, then it is possible a clarification may be helpful that the value 
of the founders shares and founders warrants should not be used in 
calculating the pro rata amount owed the shareholders in cases where 
the founders agree not to exercise their redemption rights. Nasdaq may 
wish to examine this issue further to see if a rule filing is necessary 
to clarify the issue. Finally, as to the suggestion that Nasdaq's 
initial listing standards be changed to accommodate the listing of 
smaller sized SPACs, the Commission notes that such SPACS can currently 
trade in the over-the-counter market. Any change to permit smaller 
sized SPACs to trade on Nasdaq would have to be separately proposed and 
considered and could only be approved if such a proposal was found to 
be consistent with the requirements of the Act.

V. Conclusion

    Based on the foregoing, the Commission finds the proposal is 
consistent with the requirements of the Act. It is therefore ordered, 
pursuant to Section 19(b)(2) of the Act,\32\ that the proposed rule 
change (SR-NASDAQ-2010-137) is hereby approved.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR. 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32904 Filed 12-29-10; 8:45 am]
BILLING CODE 8011-01-P


