Document ID: SEC-2006-1567-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-12-06T05:00Z

[Federal Register: December 6, 2006 (Volume 71, Number 234)]
[Notices]               
[Page 70818-70820]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de06-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54825; File No. SR-NASDAQ-2006-047]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Clarify the Process 
Surrounding a Reverse Merger

November 28, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 13, 2006, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. 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 the 
Substance of the Proposed Rule Change

    Nasdaq proposes to clarify the process an issuer must follow when 
applying for initial listing in connection with a transaction that is a 
reverse merger. Nasdaq would implement the proposed rule immediately 
upon approval. The text of the proposed rule change is below. Proposed 
new language is in italic; proposed deletions are in [brackets].\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http: //http://www.complinet.com/nasdaq
.

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* * * * *
4340. Application for Re-Listing by Listed Issuers
    (a) Reverse Mergers. An issuer must apply for initial listing 
[following] in

[[Page 70819]]

connection with a transaction whereby the issuer combines with a non-
Nasdaq entity, resulting in a change of control of the issuer and 
potentially allowing the non-Nasdaq entity to obtain a Nasdaq Listing 
(for purposes of this rule, such a transaction is referred to as a 
``Reverse Merger''). In determining whether a Reverse Merger has 
occurred, Nasdaq shall consider all relevant factors including, but not 
limited to, changes in the management, board of directors, voting 
power, ownership, and financial structure of the issuer. Nasdaq shall 
also consider the nature of the businesses and the relative size of the 
Nasdaq issuer and non-Nasdaq entity. The issuer must submit an 
application for the post-transaction entity with sufficient time to 
allow Nasdaq to complete its review before the transaction is 
completed. If the issuer's application for initial listing has not been 
approved prior to consummation of the transaction, Nasdaq will issue a 
Staff Determination Letter as set forth in Rule 4804 and begin 
delisting proceedings pursuant to the Rule 4800 Series.
    (b) No change.
* * * * *
IM-4350-1. Interpretive Material Regarding Future Priced Securities
Summary
    No change.
How the Rules Apply
Shareholder Approval
    No change.
Voting Rights
    No change.
The Bid Price Requirement
No change.
Listing of Additional Shares
    No change.
Public Interest Concerns
    No change.
Reverse Merger

    Rule 4340(a) provides:
    An issuer must apply for initial listing [following] in connection 
with a transaction whereby the issuer combines with a non-Nasdaq 
entity, resulting in a change of control of the issuer and potentially 
allowing the non-Nasdaq entity to obtain a Nasdaq Listing (for purposes 
of this rule, such a transaction is referred to as a ``Reverse 
Merger''). In determining whether a Reverse Merger has occurred, Nasdaq 
shall consider all relevant factors including, but not limited to, 
changes in the management, board of directors, voting power, ownership, 
and financial structure of the issuer. Nasdaq shall also consider the 
nature of the businesses and the relative size of the Nasdaq issuer and 
non-Nasdaq entity. The issuer must submit an application for the post-
transaction entity with sufficient time to allow Nasdaq to complete its 
review before the transaction is completed. If the issuer's application 
for initial listing has not been approved prior to consummation of the 
transaction, Nasdaq will issue a Staff Determination Letter as set 
forth in Rule 4804 and begin delisting proceedings pursuant to the Rule 
4800 Series.
    This provision, which applies regardless of whether the issuer 
obtains shareholder approval for the transaction, requires issuers to 
qualify under the initial listing standards [following] in connection 
with a Reverse Merger.\4\ It is important for issuers to realize that 
in certain instances, the conversion of a Future Priced Security may 
implicate this provision. For example, if there is no limit on the 
number of common shares issuable upon conversion, or if the limit is 
set high enough, the exercise of conversion rights under a Future 
Priced Security could result in a Reverse Merger with the holders of 
the Future Priced Securities. In such event, an issuer may be required 
to re-apply for initial listing and satisfy all initial listing 
requirements.
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    \4\ See Securities Exchange Act Release No. 32264 (May 4, 1993), 
58 FR 27760 (May 11, 2006) (SR-NASD-93-7).
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    Footnotes to IM-4350-1: No change.
* * * * *

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

    In its filing with the Commission, Nasdaq 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. Nasdaq 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
    Nasdaq Rule 4340(a) requires that an issuer must apply for initial 
listing following a transaction whereby the issuer combines with a non-
Nasdaq entity, resulting in a change of control of the issuer and 
potentially allowing the non-Nasdaq entity to obtain a Nasdaq Listing 
(for purposes of the rule, such a transaction is referred to as a 
``Reverse Merger''). Nasdaq originally adopted this rule in 1993 to 
address concerns associated with non-Nasdaq entities seeking a 
``backdoor listing'' on Nasdaq through a business combination involving 
a Nasdaq issuer.\4\ In these combinations, a non-Nasdaq entity 
purchased a Nasdaq issuer in a transaction that resulted in the non-
Nasdaq entity obtaining a Nasdaq listing without qualifying for initial 
listing or being subject to the background checks and scrutiny normally 
applied to issuers seeking initial listing. The rule was amended in 
2001 to define ``Reverse Merger'' and to provide clarification 
regarding the factors used by Nasdaq staff to determine if a 
transaction should be considered a Reverse Merger.\5\
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    \5\ See Securities Exchange Act Release No. 44067 (March 13, 
2001), 66 FR 15515 (March 19, 2001) (SR-NASD-01-01).
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    Among other things, the Reverse Merger rule is intended to allow 
Nasdaq staff to review the post-transaction entity before the Reverse 
Merger transaction is consummated, thereby allowing staff to confirm 
that the post-transaction entity will meet all initial criteria at the 
time it begins trading. While Nasdaq has historically taken the 
position that the rule requires companies to comply with the initial 
listing requirements prior to the consummation of a Reverse Merger, the 
rule is not clear in that regard. To avoid issuer confusion, simplify 
compliance, and provide additional transparency, Nasdaq proposes to 
amend Nasdaq Rule 4340(a) to state that an issuer must apply for 
initial listing prior to consummating a Reverse Merger transaction. 
Nasdaq also proposes to make conforming changes to Nasdaq IM-4350-1, 
which discusses the Reverse Merger rules.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act \6\ in general and with Sections 
6(b)(5) of the Act \7\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, 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

[[Page 70820]]

proposed rule change would clarify Nasdaq's listing requirements 
related to Reverse Mergers and thereby provide additional transparency 
to the rules. This proposed clarification is designed to protect 
investors and the public interest by allowing Nasdaq to confirm that 
the post-transaction entity will meet all initial criteria at the time 
it begins trading.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change would result 
in 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

    Written comments were neither solicited nor received.

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

    Within 35 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 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASDAQ-2006-047 on the subject line.
Paper Comments
     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2006-047. 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 inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq. 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-2006-047 and should be submitted on or before 
December 27, 2006.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
Nancy M. Morris,
Secretary.
[FR Doc. E6-20574 Filed 12-5-06; 8:45 am]

BILLING CODE 8011-01-P