SEC Adopts New Reverse Mergers Rules: What You Need To Know

Late last year, the Securities and Exchange Commission approved new rules that toughen the standards for companies going public through a reverse merger that seek to become listed on any of the three major US listing markets: New York Stock Exchange, NYSE Amex; and NASDAQ. For your reference, here’s what you need to know about the rules, from corporate and securities lawyers on JD Supra:

Reverse Mergers Defined

“A reverse merger is a transaction in which an unlisted private operating company becomes public via a merger with a publicly traded shell company, which is generally a company with no material business operations.” (SEC Approves New Exchange Rules to Toughen Listing Standards for Reverse Merger Companies by Katten Muchin Rosenman LLP) 

Background 

“The rulemaking follows many months (even years) of SEC analysis of reverse merger companies and warnings to investors regarding what the SEC considers significant risk in investing in these entities, including … the company’s failure or struggle to remain viable following a reverse merger, fraud and other abuses, and, with respect to foreign companies in particular, the use of smaller U.S. auditing firms which are unable to identify non-compliance with the relevant accounting standards.” (SEC Moves Forward and Approves Tougher Listing Standards for Reverse Merger Companies by Schwell Wimpfheimer & Associates LLP) 

Application

“Subject to certain exceptions, these more stringent standards will apply to any operating company that becomes an Exchange Act reporting company by combining directly or indirectly with a shell company that is an Exchange Act reporting company, whether through a reverse merger, exchange offer, or otherwise.” (SEC Approves New Exchange Act Rules to Toughen Listing Standards for Reverse Merger Companies by TroyGould PC) 

Listing Requirements

Reverse merger companies become eligible to list when they have:

1. “traded for at least one year in the U.S. over-the-counter market, on another national securities exchange, or on a foreign exchange, following the filing of all required information about the Reverse Merger, including audited financial statements for the combined entity” (SEC Approves “Seasoning” Requirements for Reverse Merger Companies by Pryor Cashman LLP) 

2. “[t]imely filed with the SEC all required reports for a certain period, including at least one annual report containing audited financial statements for a full fiscal year commencing after the reverse merger” (SEC Approves New Exchange Act Rules to Toughen Listing Standards for Reverse Merger Companies by TroyGould PC)

3. “maintained a closing stock price of $4 (or, in the case of the NYSE Amex, either $3 or $2, depending on the applicable listing standard) per share or higher for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days prior to the filing of the initial listing application and prior to listing” (SEC Approves More Rigorous Listing Requirements of the Major U.S. Stock Exchanges for Reverse Merger Companies by McDermott Will & Emery) 

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