Reverse Mergers: SEC Tightens Listing Norms

[Image taken from IBNLive.com]

Earlier this year, the SEC had issued a warning to those investing in reverse mergers. The main cause of all concern was the fact that foreign companies decided to enter the US markets via the reverse merger route by merging with a public shell company, thereby circumventing the IPO requirements. However the SEC knew all along that warning the investors would not be enough, and had been mulling over putting in place stringent listing norms for reverse merger companies all along.

Finally, on November 9, 2011, the SEC has issued the stringent listing norms for reverse merger companies. Changing the listing norms for these reverse merger companies had been proposed by NYSE, NYSE Amex and NASDAQ in the recent past.
 

Under the new regulations, to be eligible to be listed on any of the three exchanges, the company's share must be traded in the US Over-the-counter market or in any other regulated exchange, whether in the US or in any other country, for a period of at least one year following the reverse merger. In addition, the company must file all required financial audited statements with the SEC for at least one full year to be eligible for listing.

Also, the company is required to maintain the minimum share pricing requirements of the Exchange for at least 30 of the 60 trading days immediately prior to its listing application, and the date of listing.

The SEC has accepted that the following companies pose less risk of fraud or other illegal activities and hence are exempt from the new stringent requirements:

-  Companies that list in order to complete a substantial firm commitment underwritten public offering, 

- Companies that have filed at least four annual reports with the audited information with the Commission after filing the required documents about the reverse merger. 

The new requirements would definitely cater to some of the concerns of the SEC. Entry through the reverse merger process would be difficult for companies without a bona fide intention.  The SEC had already issued notices to, and restricted a number of companies from accessing the market post reverse mergers due to accounting issues. The regulations would also make it difficult for such companies  to list on the exchanges. However it must be mentioned that the new requirements may be cumbersome for small bona fide merging entities. This was acknowledged by the SEC. However, in light of the bad experiences with reverse mergers, the SEC seems to believe that this is too small a price to pay. This move is certain to help investors and the development of the markets in the US.

[A brief jurisprudence of the new norms can be read here.]