[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Notices]
[Pages 49513-49515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20243]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65034; File No. SR-NYSE-2011-38]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending Sections 102.01 and 
103.01 of the Exchange's Listed Company Manual To Adopt Additional 
Listing Requirements for Companies Applying To List After Consummation 
of a ``Reverse Merger'' With a Shell Company

August 4, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on July 22, 2011, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Sections 102.01 and 103.01 of the 
Exchange's Listed Company Manual (the ``Manual'') to adopt additional 
initial listing requirements for companies applying to list after 
consummation of a ``reverse merger'' with a shell company. The text of 
the proposed rule change is available at the Exchange, the Commission's 
Public Reference Room, and http://www.nyse.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The NYSE proposes to adopt more stringent listing requirements for 
operating companies that become Exchange Act reporting companies by 
combining with a shell company which is an Exchange Act reporting 
company. The proposed listing requirements would apply to combinations 
with a shell company which is an Exchange Act reporting company, 
through a reverse merger, exchange offer or otherwise (a ``reverse 
merger transaction'').
    In a reverse merger transaction, an existing public shell company 
merges with a private operating company in a transaction in which the 
shell company is the surviving legal entity.\4\ While the public shell 
company survives the merger, the shareholders of the private operating 
company typically hold a large majority of the shares of the public 
company after the merger and the management and board of the private 
company will assume those roles in the post-merger public company. The 
assets and business operations of the post-merger surviving public 
company are primarily, if not solely, those of the former private 
operating company. The Exchange understands that private operating 
companies generally enter into reverse merger transactions to enable 
the company and its shareholders to sell shares in the public equity 
markets. By becoming a public reporting company via a reverse merger, a 
private operating company can access the public markets quickly and 
avoid the generally more expensive and lengthy process of going public 
by way of an initial public offering. While the public shell company is 
required to report the reverse merger in a Form 8-K filing with the 
Securities and Exchange Commission (the ``Commission''), generally 
there are no registration requirements under the Securities Act of 1933 
(the ``Securities Act'') \5\ at that point in time, as there would be 
for an IPO.
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    \4\ In some cases a private company effects an exchange offer or 
other transaction pursuant to which it combines with a public shell 
company.
    \5\ 15 U.S.C. 77a.
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    Significant regulatory concerns, including accounting fraud 
allegations, have arisen with respect to a number of reverse merger 
companies in recent times. The Commission has taken direct action 
against reverse merger companies. During 2011, the Commission has 
suspended trading in the securities of a number of reverse merger 
companies and has revoked the securities registration of a number of 
reverse merger companies.\6\ The Commission also recently brought an 
enforcement proceeding against an audit firm relating to its work for 
reverse merger companies.\7\ In addition, the Commission issued a 
bulletin on the risks of investing in reverse merger companies, noting 
potential market and regulatory risks related to investing in reverse 
merger companies.\8\
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    \6\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry, 
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
    \7\ See Schapiro Letter at page 4.
    \8\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
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    In response to these concerns, NYSE Regulation staff has been 
conducting heightened, risk-informed reviews of reverse merger 
companies seeking to list on the NYSE or NYSE Amex to consider factors 
other than the enumerated initial listing criteria in making listing 
determinations. In this regard, Section 101.00 of the Manual provides 
that the Exchange has ``broad discretion regarding the listing of a 
company.'' Section 101.00 provides that the Exchange may use such 
discretion to ``deny listing or apply additional or more stringent 
criteria based on any event, condition, or circumstance that makes the 
listing of the company inadvisable or unwarranted in the opinion of the 
Exchange.'' The Exchange may use this discretionary authority to 
increase the stringency of its stated listing criteria but not to 
decrease their stringency.
    In light of the well-documented concerns related to some reverse 
merger companies as described above, the Exchange believes it is 
appropriate to codify in its rules specific requirements with respect 
to the initial listing qualification of reverse merger companies. As 
proposed, a reverse merger company would not be eligible for listing 
unless the combined entity had, immediately preceding the filing of the 
initial listing application:
    (1) Traded for at least one year in the U.S. over-the-counter 
market, on another national securities exchange or on a regulated 
foreign exchange following the consummation of the reverse merger and 
(i) In the case of a domestic issuer, filed with the Commission a Form 
8-K including all of the information required by Item 2.01(f) of Form 
8-K, including all required audited financial statements, or (ii) in 
the case of a foreign private issuer, filed the information described 
in (i) above on Form 20-F;

[[Page 49514]]

    (2) Maintained on both an absolute and an average basis for a 
sustained period a minimum stock price of at least $4; and
    (3) Timely filed with the Commission all required reports since the 
consummation of the reverse merger, including the filing of at least 
one annual report containing audited financial statements for a full 
fiscal year commencing on a date after the date of filing with the 
Commission of the filing described in (1) above.
    In addition, a reverse merger company would be required to maintain 
on both an absolute and an average basis a minimum stock price of at 
least $4 through listing.
    The Exchange believes that requiring a ``seasoning'' period prior 
to listing for reverse merger companies should provide greater 
assurance that the company's operations and financial reporting are 
reliable, and will also provide time for its independent auditor to 
detect any potential irregularities, as well as for the company to 
identify and implement enhancements to address any internal control 
weaknesses. The seasoning period will also provide time for regulatory 
and market scrutiny of the company, and for any concerns that would 
preclude listing eligibility to be identified.
    In addition, the Exchange believes that the proposed rule change 
will increase transparency to issuers and market participants with 
respect to the factors considered by NYSE Regulation in assessing 
reverse merger companies for listing, and generally should reduce the 
risk of regulatory concerns with respect to these companies being 
discovered after listing. However, the Exchange notes that, while it 
believes the proposed requirements would be a meaningful additional 
safeguard, it is not possible to guarantee that a reverse merger 
company (or any other listed company) is not engaged in undetected 
accounting fraud or subject to other concealed and undisclosed legal or 
regulatory problems.
    For purposes of proposed Section 102.01F of the Manual (which will 
be applicable to reverse merger companies which qualify to list under 
the domestic companies criteria of Section 102.01) and proposed Section 
103.01E of the Manual (which will be applicable to reverse merger 
companies which qualify to list under the non-U.S. companies criteria 
of Section 103.01), a ``Reverse Merger'' would mean any transaction 
whereby an operating company became an Exchange Act reporting company 
by combining with a shell company that was an Exchange Act reporting 
company, 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 that qualified for initial 
listing under Section 102.06 of the Manual (i.e., the Exchange's 
special purpose acquisition company (``SPAC'') listing standard). In 
determining whether a company was a shell company, the Exchange would 
consider, among other factors: Whether the company was considered a 
``shell company'' as defined in Rule 12b-2 under the Exchange Act; what 
percentage of the company's assets were active versus passive; whether 
the company generated revenues, and if so, whether the revenues were 
passively or actively generated; whether the company's expenses were 
reasonably related to the revenues being generated; how many employees 
worked in the company's revenue-generating business operations; how 
long the company had been without material business operations; and 
whether the company had publicly announced a plan to begin operating 
activities or generate revenues, including through a near-term 
acquisition or transaction.
    In order to qualify for initial listing, a company that was formed 
by a Reverse Merger (a ``Reverse Merger Company'') would be required to 
comply with one of the initial listing standards for operating 
companies set forth in Section 102.01C or 103.01B of the Manual and the 
applicable distribution, stock price and market value requirements of 
Sections 102.01A and 102.01B of the Manual (in the case of companies 
listing pursuant to Section 102.01) and Section 103.01A (in the case of 
companies listing pursuant to Section 103.01). Proposed Sections 
102.01F and 103.01E would supplement and not replace any applicable 
requirements of Sections 102.01 or 102.03. However, in addition to the 
otherwise applicable requirements of Sections 102.01 or 103.01, a 
Reverse Merger Company would be eligible to submit an application for 
initial listing only if it meets the additional criteria specified 
above.
    The Exchange would have the discretion to impose more stringent 
requirements than those set forth above if the Exchange believed it was 
warranted in the case of a particular Reverse Merger Company based on, 
among other things, an inactive trading market in the Reverse Merger 
Company's securities, the existence of a low number of publicly held 
shares that were not subject to transfer restrictions, if the Reverse 
Merger Company had not had a Securities Act registration statement or 
other filing subjected to a comprehensive review by the Commission, or 
if the Reverse Merger Company had disclosed that it had material 
weaknesses in its internal controls which had been identified by 
management and/or the Reverse Merger Company's independent auditor and 
had not yet implemented an appropriate corrective action plan.
    A Reverse Merger Company would not be subject to the requirements 
of proposed Section 102.01F or proposed Section 103.01E, as applicable, 
if it was listing in connection with an Initial Firm Commitment 
Underwritten Public Offering (as defined in Section 102.01B \9\) where 
the proceeds to the Reverse Merger Company were sufficient on a 
standalone basis to generate $40,000,000 in aggregate market value of 
publicly-held shares and the offering was occurring subsequent to or 
concurrently with the reverse merger.\10\ In that case, the Reverse 
Merger Company would only need to meet the requirements of one of the 
initial listing standards in Section 102.01C or Section 103.01B, as 
applicable.\11\ The Exchange believes that it is appropriate to exempt 
Reverse merger Companies from the proposed rule where they are listing 
in conjunction with a sizable offering, as those companies would be 
subject to the same Commission review and due diligence by underwriters 
as a company listing in conjunction with its IPO or any other company 
listing in conjunction with an Initial Firm Commitment Underwritten 
Public Offering, so it would be inequitable to

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subject them to more stringent requirements.
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    \9\ For purposes of Section 102.01B, a company is listing in 
connection with its Initial Firm Commitment Underwritten Public 
Offering if (i) Such company has a class of common stock registered 
under the Exchange Act, (ii) such common stock has never been listed 
on a national securities exchange in the period since the 
commencement of its current registration under the Exchange Act, and 
(iii) such company is listing in connection with a firm commitment 
underwritten public offering that is its first firm commitment 
underwritten public offering of its common stock since the 
registration of its common stock under the Exchange Act.
    \10\ The prospectus and registration statement covering the 
offering would thus need to relate to the combined financial 
statements and operations of the Reverse Merger Company.
    \11\ The Commission notes that under NYSE's proposal a non-U.S. 
Reverse Merger Company that will not be subject to the proposed 
103.01E requirements because it is listing in connection with an 
Initial Firm Commitment Underwritten Public Offering where the 
proceeds in the offering will generate a minimum of $40,000,000 in 
aggregate market value of publicly held shares would still have to 
meet all the requirements in Section 103.01A of the Manual that 
include a market value of publicly held shares of $100 million 
worldwide.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \12\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\13\ in particular in that it 
is designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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. 
The Exchange believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act in that, as discussed above under the 
heading ``Purpose'', its purpose is to apply more stringent initial 
listing requirements to a category of companies that have raised 
regulatory concerns, thereby furthering the goal of protection of 
investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#ff8d8a939ad29c9092929a918b8cbf8c9a9cd1989089"><span class="__cf_email__" data-cfemail="0674736a632b65696b6b636872754675636528616970">[email protected]</span></a>. Please include 
File Number SR-NYSE-2011-38 on the subject line.

Paper Comments

    <bullet> 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-NYSE-2011-38. 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 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 NYSE. 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-NYSE-2011-38, and should be submitted on or before August 31, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20243 Filed 8-9-11; 8:45 am]
BILLING CODE 8011-01-P


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