Document ID: SEC-2011-1149-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Amex LLC
Posted Date: 2011-08-10T04:00Z

[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Notices]
[Pages 49522-49525]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20242]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65033; File No. SR-NYSEAmex-2011-55]

Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing of 
Proposed Rule Change Amending Section 101 of the NYSE Amex Company 
Guide 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, NYSE Amex LLC (the ``Exchange'' or ``NYSE 
Amex'') 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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[[Page 49523]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Section 101 of the NYSE Amex Company 
Guide (the ``Company Guide'') 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
    NYSE Amex 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, Commentary .01 to Section 101 of the 
Exchange's Company Guide, provides that the Exchange has ``broad 
discretionary authority over the initial and continued listing of 
securities 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.'' Thus, pursuant to Section 101 of 
the Company Guide, ``[t]he Exchange may use such discretion to deny 
initial inclusion, apply additional or more stringent criteria for the 
initial or continued inclusion of particular securities, or suspend or 
terminate the inclusion of particular securities based on any event, 
condition, or circumstance that exists or occurs that makes initial or 
continued inclusion 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.''
    In light of the well-documented concerns related to some reverse 
merger companies 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;
    (2) Maintained on both an absolute and an average basis for a 
sustained period a minimum closing stock price equal to the stock price 
requirement, including all requirements based on stock price, 
applicable to the initial listing standard under which the Reverse 
Merger Company was qualifying to list; 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 
through listing, on both an absolute and an average basis, a minimum 
closing stock price equal to the stock price requirement, including all 
requirements based on stock price, applicable to the

[[Page 49524]]

initial listing standard under which the reverse merger company was 
qualifying to list.
    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 101(e) of the Company Guide, 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 119 of the Company Guide (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 101(a)-(d) of the Company Guide and the 
applicable distribution, stock price and market value requirements of 
Section 102 of the Company Guide.\9\ Proposed Section 101(e) would 
supplement and not replace any applicable requirements of Sections 101 
and 102. However, in addition to the otherwise applicable requirements 
of Sections 101 and 102, a Reverse Merger Company would be eligible to 
submit an application for initial listing only if it meets the 
additional criteria specified above.
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    \9\ Section 110(a) of the Company Guide sets forth alternative 
distribution requirements for foreign companies.
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    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 101(e) if it was listing in connection with a firm 
commitment underwritten public offering where the proceeds to the 
Reverse Merger Company were at least $40,000,000 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 Sections 
101(a)-(d). 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, so it would be 
inequitable to subject them to more stringent requirements.
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    \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.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \11\ of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\12\ 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 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

[[Page 49525]]

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

     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-NYSEAmex-2011-55 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-NYSEAmex-2011-55. 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 Amex. 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-NYSEAmex-2011-55, and should be submitted on or before 
August 31, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20242 Filed 8-9-11; 8:45 am]
BILLING CODE 8011-01-P