Document ID: SEC-2012-1070-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2012-07-05T04:00Z

[Federal Register Volume 77, Number 129 (Thursday, July 5, 2012)]
[Notices]
[Pages 39781-39783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16440]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67304; File No. SR-BATS-2012-023]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Amend BATS Rules 14.2 and 14.3 To 
Adopt Additional Listing Requirements for Reverse Merger Companies and 
To Align BATS Rules With the Rules of Other Self-Regulatory 
Organizations

June 28, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'' or the ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on June 15, 2012, BATS Exchange, Inc. (the 
``Exchange'' or ``BATS'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend BATS Rules 14.2 and 14.3 to 
adopt additional listing requirements for a company that has become an 
Act reporting company by combining either directly or indirectly with a 
public shell, whether through a Reverse Merger, exchange offer, or 
otherwise (a ``Reverse Merger''). The text of the proposed rule 
addition is available at the Exchange's Web site at http://www.batstrading.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

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 Exchange 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 those 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 Exchange is proposing to adopt more stringent listing 
requirements for operating companies that become Exchange Act reporting 
companies through a Reverse Merger (``Reverse Merger Companies''). In a 
Reverse Merger, an existing public shell company merges with a private 
operating company in a transaction in which the shell company is the 
surviving legal entity. 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 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 Commission, generally there are no registration 
requirements under the Securities Act of 1933 (the ``Securities Act'') 
\3\ at that point in time, as there would be for an IPO.
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    \3\ 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 suspended 
trading in the securities of numerous Reverse Merger Companies.\4\ The 
Commission also recently brought an enforcement proceeding against an 
audit firm relating to its work for Reverse Merger Companies.\5\ 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.\6\
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    \4\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry, 
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
    \5\ See Schapiro Letter at page 4.
    \6\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
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    BATS Rule 14.2 provides the exchange with ``broad discretionary 
authority over the initial and continued listing of securities on the 
Exchange in order to maintain the quality of and public confidence in 
its market, to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and to protect 
investors and the public interest.'' BATS Rule 14.2 also provides that 
the Exchange may use such discretion to ``deny initial listing, apply 
additional or more stringent criteria for the initial or continued 
listing of particular securities, or suspend or delist particular 
securities based on any event, condition, or circumstance that exists 
or occurs that makes initial or continued listing of the securities on 
the Exchange inadvisable or unwarranted in the opinion of the Exchange, 
even though the securities meet all enumerated criteria for initial or 
continued listing on 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 described above, the Exchange believes that 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

[[Page 39782]]

the information described in (i) above on Form 20-F;
    (2) Maintained on both an absolute and an average basis for a 
sustained period a minimum stock price of at least $4, but in no event 
for less than 30 of the most recent 60 trading days prior to each of 
the filing of the initial listing application and the date of the 
Reverse Merger Company's listing on the Exchange, except that a Reverse 
Merger Company that has satisfied the one-year trading requirement 
described in (1) above and has filed at least four annual reports with 
the Commission which each contain all required audited financial 
statements for a full fiscal year commencing after filing the 
information described in paragraph (1) above will not be subject to 
this price requirement; 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 great 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 the Exchange in assessing Reverse 
Merger Companies for listing and should generally reduce the risk of 
regulatory concerns with respect to these companies being discovered 
after listing. However, the Exchange notes that, while it believes that 
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 the proposed amendment to BATS Rules 14.2(c) and 
14.3(b)(9) (which will both be applicable to Reverse Merger Companies 
which qualify to list under BATS Rules) and as defined above, a Reverse 
Merger would mean any transaction whereby an operating company became 
an Exchange Act reporting company by combining either directly or 
indirectly 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 BATS Rule 14.2(b) (the Exchange's standard for companies 
whose business plan is to complete one or more acquisitions). 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 generates 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 Reverse Merger Company 
would be required to comply with one of the initial listing standards 
set forth in BATS Rule 14.4 or 14.5 and the stock price and market 
value requirements of BATS Rule 14.8 or 14.9, as appropriate. Proposed 
Rules 14.2(c)(3) and 14.3(b)(9) would supplement and not replace any 
applicable requirements of Chapter XIV of BATS Rules. However, in 
addition to the otherwise applicable requirements of BATS Rules, a 
Reverse Merger Company would be eligible to submit an application for 
an 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 that 
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.
    The Exchange reiterates that any Reverse Merger Company would have 
to comply with all listing standards set forth in BATS Rules, including 
corporate governance standards. The Exchange also notes that it will 
monitor the compliance with applicable BATS Rules by any Reverse Merger 
Company and will investigate any issues that indicate that a Reverse 
Merger Company is non-compliant with BATS Rules.
    A Reverse Merger Company would not be subject to the requirements 
of proposed BATS Rules 14.2(c)(3) and 14.3(b)(9) if, in connection with 
its listing, it completes a firm commitment underwritten public 
offering where the gross proceeds to the Reverse Merger Company will be 
at least $40 million.\7\ In that case, the Reverse Merger Company would 
only need to meet the initial listing standards. 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 subject them to more stringent requirements.
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    \7\ 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.
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    The Exchange notes that the proposal is based on and consistent 
with recent Commission approvals of analogous rules for the New York 
Stock Exchange LLC (``NYSE''), NYSE Amex LLC (``AMEX'') and the NASDAQ 
Stock Market LLC (``Nasdaq'').\8\
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    \8\ See Securities Exchange Act Release Nos. 65709 (November 8, 
2011), 76 FR 70795 (November 15, 2011) (File No. SR-NYSE-2011-38); 
65710 (November 8, 2011), 76 FR 70790 (November 15, 2011) (File No. 
SR-NYSEAmex-2011-55); 65708 (November 8, 2011), 76 FR 70799 
(November 15, 2011) (File No. SR-NASDAQ-2011-073).

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[[Page 39783]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\9\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\10\ 
because 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. As set forth above, the proposal 
is based on and consistent with recent Commission approvals of 
analogous rules for NYSE, AMEX and Nasdaq.\11\
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ See supra note 8.
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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 
result in any burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
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 is consistent with the Act. 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 email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2012-023 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-BATS-2012-023. This file 
number should be included on the subject line if email 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. The text of the proposed rule change is available on 
the Commission's Web site at http://www.sec.gov. 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-BATS-2012-023, and should be submitted on or before July 26, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16440 Filed 7-3-12; 8:45 am]
BILLING CODE 8011-01-P