
[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]
[Notices]
[Pages 57791-57793]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23735]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65319; File No. SR-NASDAQ-2011-073]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Instituting Proceedings To Determine Whether to Disapprove Proposed 
Rule Change To Adopt Additional Listing Requirements for Reverse 
Mergers

September 12, 2011.

I. Introduction

    On May 26, 2011, 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 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''). The proposed rule change was published for 
comment in the Federal Register on June 14, 2011.\3\ On July 25, 2011, 
the Commission extended the time period in which to either approve the 
proposed rule change, disapprove the proposed rule change, or to 
institute proceedings to determine whether to disapprove the proposed 
rule change, to September 12, 2011.\4\ The Commission received two 
comment letters on the proposal.\5\ This order institutes proceedings 
under Section 19(b)(2)(B) of the Act to determine whether to disapprove 
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. 64633 (June 8, 
2011), 76 FR 34781 (``Nasdaq Notice'').
    \4\ See Securities Exchange Act Release No. 64956 (July 25, 
2011), 76 FR 45636 (July 29, 2011).
    \5\ See Letter from David Feldman dated August 30, 2011 
(``Feldman Letter'') and letter from Richard Rappaport, Chief 
Executive Officer, WestPark Capital, Inc. to Elizabeth M. Murphy, 
Secretary, Commission dated September 2, 2011 (WestPark Letter'').
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II. Description of the Proposal

    The Exchange proposes to adopt additional listing standards for 
companies that become public through a Reverse Merger,\6\ to address 
significant regulatory concerns, including accounting fraud allegations 
that have recently arisen with respect to Reverse Merger companies. In 
its filing, Nasdaq noted, among other things, that there have been 
widespread allegations of fraudulent behavior by certain Reverse Merger 
companies, leading to concerns that their financial statements cannot 
be relied upon.\7\ Nasdaq also stated that it was aware of situations 
where it appeared that promoters and others intended to manipulate 
prices of Reverse Merger companies' securities higher to help meet 
Nasdaq's initial listing bid price requirement, and where companies 
have gifted stock to artificially satisfy Nasdaq's public holder 
listing requirement.\8\ As a result of these concerns, Nasdaq believes 
certain ``seasoning'' requirements in connection with the listing of 
Reverse Merger companies are appropriate.
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    \6\ For purposes of the Nasdaq proposal, Nasdaq would treat as a 
Reverse Merger 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 
would 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''). 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.
    \7\ See Nasdaq Notice.
    \8\ Id.
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    Specifically, Nasdaq proposes to prohibit a Reverse Merger company 
from applying to list until the combined entity has traded in the U.S. 
over-the-counter market, on another national securities exchange, or on 
a foreign exchange for at least six months following the filing of all 
required information about the Reverse Merger transaction, including 
audited financial statements, to the Commission.\9\ Further, Nasdaq 
proposes to require that the Reverse Merger company maintain a minimum 
of a $4 bid price on at least 30 of the 60 trading days immediately 
prior to submitting the listing application. Finally, under the 
proposed rule, Nasdaq would not approve any Reverse Merger company for 
listing unless the company has timely filed its two most recent 
financial reports with the Commission if it is a domestic issuer or 
comparable information if it is a foreign private issuer.
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    \9\ According to the Nasdaq proposal, the six month period would 
not begin to run until the filing of a Form 8-K. 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).
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III. Comment Letters

    The Commission received two comment letters on the proposal.\10\ 
One commenter \11\ objects broadly to the proposed ``seasoning'' 
requirement,\12\ while the other supports the objectives of the 
proposed rule change, but believes it should include a particular 
exception.\13\
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    \10\ See, note 5, supra.
    \11\ See Feldman Letter.
    \12\ Id.
    \13\ See WestPark Letter.
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    One commenter expressed the view that the proposal could have a 
``chilling effect of discouraging exciting growth companies from 
pursuing all available techniques to obtain the benefits of a public 
listed stock and greater access to capital.'' \14\ The commenter 
further noted, in response to Nasdaq's justifications for the proposed 
rule change, that virtually all of the suggestions of wrongdoing 
involve Chinese companies that completed reverse mergers, but that a 
number of other Chinese companies that completed full traditional 
initial public offerings face the very same allegations, so that 
focusing on the manner in which these companies went public may not be 
appropriate. Rather than imposing a seasoning requirement, the 
commenter suggests Nasdaq review regulatory histories and financial 
arrangements with promoters, and refrain from listing companies where 
the issues are great. In any event, he recommends an exemption from the 
seasoning requirement for a company coming to the exchange with a firm 
commitment underwritten public offering. In addition, the commenter 
expressed concern that the requirement to maintain a $4 trading price 
for 30 days prior to the listing application is unfair, and unrealistic 
to expect companies to achieve in the over-the-counter markets, and 
suggests it be eliminated.
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    \14\ See Feldman Letter.
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    Another commenter expressed support for the proposed rule change's 
objective to protect investors from potential accounting fraud, 
manipulative trading, abusive practices

[[Page 57792]]

or other inappropriate behavior on the part of companies, promoters and 
others.\15\ The commenter, however, recommended that, in order to avoid 
unnecessary burdens on smaller capitalization issuers, the proposed 
rule change be modified to exclude Form 10 share exchange transactions 
from the reverse merger definition, or provide an exception for a 
reverse merger company listing in connection with a firm commitment 
underwritten public offering. This commenter also recommended that 
Nasdaq consider requiring companies listing on the exchange to engage a 
recognized independent diligence firm to conduct a forensic audit and 
issue a forensic diligence report prior to approval of the listing 
application.
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    \15\ See WestPark Letter.
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IV. NYSE and NYSE Amex Proposals

    On July 22, 2011, the New York Stock Exchange LLC (``NYSE'') \16\ 
and the NYSE Amex LLC (``NYSE Amex'') \17\ each filed a proposed rule 
change to adopt additional listing requirements for a company that has 
become public through a Reverse Merger. NYSE and NYSE Amex filed these 
proposed rule changes for similar reasons as Nasdaq--to address 
significant regulatory concerns, including accounting fraud 
allegations, that have recently arisen with respect to Reverse Merger 
companies. The NYSE and NYSE Amex proposals, while similar to the 
Nasdaq proposal in many respects, contain certain provisions that 
materially differ from the Nasdaq proposal. For example, the NYSE and 
NYSE Amex proposals would prohibit a Reverse Merger company from 
applying to list until it has traded in another market for one year 
after the combined entity submits all required information about the 
transaction, including audited financial statements, to the Commission. 
The NYSE and NYSE Amex proposals also would require the maintenance of 
the minimum stock price for listing on an ``absolute and an average 
basis for a sustained period'' of time immediately preceding the filing 
of the initial listing application and through listing. In addition, 
NYSE and NYSE Amex would not approve any Reverse Merger company for 
listing unless the company has timely filed with the Commission all 
required reports since the consummation of the Reverse Merger, 
including at least one annual report containing audited financial 
statements for a full fiscal year commencing on a date after the date 
of filing of a Form 8-K, or Form 20-F, relating to the Reverse Merger. 
Finally, the NYSE and NYSE Amex proposals include an exemption from the 
proposed listing requirements for Reverse Merger companies when the 
listing is in connection with an initial firm commitment underwritten 
public offering where the proceeds will be at least $40 million and the 
offering is occurring subsequent to or concurrently with the Reverse 
Merger. The comment period for each of the NYSE and NYSE Amex proposals 
expired on August 31, 2011, and the Commission currently is reviewing 
the comments received.
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    \16\ See Securities Exchange Act Release No. 65034 (August 4, 
2011), 76 FR 49513 (August 10, 2011) (SR-NYSE-2011-38).
    \17\ See Securities Exchange Act Release No. 65033 (August 4, 
2011), 76 FR 49522 (August 10, 2011) (SR-NYSEAmex-2011-55).
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V. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2011-073 
and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposed rule change 
should be disapproved. Institution of such proceedings is appropriate 
at this time in view of the legal and policy issues raised by the 
proposal that are discussed below. Institution of disapproval 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described in greater detail below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
change.
    Pursuant to Section 19(b)(2)(B), the Commission is providing notice 
of the grounds for disapproval under consideration. In particular, 
Section 6(b)(5) of the Act \18\ requires that the rules of an exchange 
be designed, among other things, to prevent fraudulent and manipulative 
acts and practices, 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 and, in general, to protect 
investors and the public interest.
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    \18\ 15 U.S.C. 78f(b)(5).
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    Nasdaq's proposal would require Reverse Merger companies to meet 
certain ``seasoning'' requirements prior to listing, and is designed to 
address significant regulatory concerns, including accounting fraud 
allegations, that have recently arisen with respect to Reverse Merger 
companies. As noted above, NYSE and NYSE Amex subsequently filed 
proposed rule changes designed to address the same concerns as the 
Nasdaq proposal. Although similar to the Nasdaq proposal in many 
respects, certain provisions of the NYSE and NYSE Amex proposals 
materially differ from the Nasdaq proposal, including a one-year 
instead of a six-month seasoning period, and a more general requirement 
to maintain the minimum listing price for a ``sustained period,'' 
rather than on at least 30 of the 60 trading days prior to filing the 
listing application. Unlike the Nasdaq proposal, the NYSE and NYSE Amex 
proposals also include an exemption for Reverse Merger companies that 
list in connection with certain underwritten public offerings.
    The Commission shares the concerns of Nasdaq, as well as NYSE and 
NYSE Amex, with respect to fraud and manipulation in connection with 
the formation of Reverse Merger companies and their listing on an 
exchange. The Commission also believes that meaningful enhancements to 
exchange listing standards, including more rigorous seasoning 
requirements that are appropriately targeted at Reverse Merger 
companies could help prevent fraud and manipulation in this area, and 
protect investors and the public interest. Because of the importance of 
this issue, however, the Commission believes the Nasdaq proposal should 
be considered together with the NYSE and NYSE Amex proposals, to assure 
that the exchanges develop and implement consistent and effective 
enhancements to their listing standards, to best address the serious 
concerns that have arisen with respect to the listing of Reverse Merger 
companies. Accordingly, in light of the material differences between 
the Nasdaq proposal and the NYSE and NYSE Amex proposals, and the 
concerns raised by commenters, the Commission believes that questions 
are raised as to whether Nasdaq's proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, including whether the 
proposed listing requirements would prevent fraud and manipulation, 
promote just and equitable principles of trade, or protect investors 
and the public interest.

VI. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
proposal. In particular, the Commission invites the written views of 
interested persons concerning whether the proposed rule change is 
inconsistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulation thereunder.

[[Page 57793]]

Although there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\19\
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    \19\ Section 19(b) (2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be 
disapproved by October 17, 2011. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 26, 2011.
    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 rule-comments@sec.gov. 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, 100 F 
Street, NE., Washington, DC 20549, 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 the 
Exchange. 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 October 17, 2011. 
Rebuttal comments should be submitted by October 26, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(57).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23735 Filed 9-15-11; 8:45 am]
BILLING CODE 8011-01-P


