Document ID: SEC-2017-1006-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2017-06-14T04:00Z

[Federal Register Volume 82, Number 113 (Wednesday, June 14, 2017)]
[Notices]
[Pages 27315-27318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12265]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80888; File No. SR-NASDAQ-2017-053]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 5110(c) To Permit a Reverse Merger Company To Qualify for 
Initial Listing Under Any Applicable Listing Standard After Satisfying 
the Required Seasoning Period

June 8, 2017.
    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 May 25, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III 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 proposes to allow a former reverse merger company to 
qualify for initial listing under any applicable listing standard after 
satisfying the required seasoning period.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deleted text is in brackets.
* * * * *

5110. Change of Control, Bankruptcy and Liquidation, and Reverse 
Mergers

    (a)-(b) No change.

(c) Reverse Mergers

    (1) A Company that is formed by a Reverse Merger (a ``Reverse 
Merger Company'') shall be eligible to submit an application for 
initial listing only if the combined entity has, immediately preceding 
the filing of the initial listing application:
    (A) No change.
    (B) maintained a closing price [of $4 per share or higher]equal to 
the share price requirement applicable to the initial listing standard 
under which the Reverse Merger Company is qualifying to list for a 
sustained period of time, but in no event for less than 30 of the most 
recent 60 trading days.
    (2) In addition to satisfying all of Nasdaq's other initial listing 
requirements, a Reverse Merger Company will only be approved for 
listing if, at the time of approval, it has:
    (A) No change.
    (B) maintained a closing price [of $4 per share or higher]equal to 
the share price requirement applicable to the initial listing standard 
under which the Reverse Merger Company is qualifying to list for a 
sustained period of time, but in no event for less than 30 of the most 
recent 60 trading days prior to approval.
    (3) No change.
* * * * *
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.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 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.

[[Page 27316]]

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

1. Purpose
    In 2011, Nasdaq adopted additional requirements (the ``Reverse 
Merger Rules'') for companies applying to list after consummating a 
reverse merger with a shell company (a ``Reverse Merger Company'').\3\ 
These additional requirements were proposed in response to regulatory 
concerns, including accounting fraud allegations, which had arisen with 
respect to Reverse Merger Companies, and were designed to improve the 
reliability of the reported financial results of Reverse Merger 
Companies by requiring a pre-listing ``seasoning period'' during which 
the post-merger public company would have produced financial and other 
information in connection with its required Commission filings. A 
Reverse Merger Company was also required to meet the minimum share 
price requirement for a sustained period of time, but in no event for 
less than 30 of the most recent 60 trading days, before filing its 
application and before being approved for listing.\4\ Of course, a 
Reverse Merger Company is also required to meet all other requirements 
for initial listing before it could be approved.
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    \3\ See Exchange Act Release No. 65708 (November 8, 2011), 76 FR 
70799 (November 15, 2011) (SR-NASDAQ-2011-073). Rule 5005(a)(35) 
defines a ``Reverse Merger'' as any transaction whereby an operating 
company becomes an Exchange Act reporting company by combining, 
either directly or indirectly, with a shell company which is an 
Exchange Act reporting company, whether through a reverse merger, 
exchange offer, or otherwise. The rule also provides certain 
exceptions to this general definition and provides guidance on the 
factors Nasdaq will consider in determining whether a company is a 
shell company.
    \4\ Rule 5110(c). A publicly traded company that applies for 
listing under the Market Value of Listed Securities standard in Rule 
5505(b)(2) would also need to meet the applicable price requirement 
for 90 consecutive trading days prior to applying, although these 
periods can run concurrently.
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    At the time Nasdaq adopted the Reverse Merger Rules, all companies 
were required to achieve a minimum $4 bid price for listing. 
Subsequently, in 2012, Nasdaq modified its listing requirements to add 
an alternative to the $4 minimum bid price per share requirement (the 
``Alternative Price Requirement'').\5\ Under the Alternative Price 
Requirement, a security could qualify for listing on the Nasdaq Capital 
Market if, for at least five consecutive business days prior to 
approval, the security has a minimum closing price of at least $3 per 
share, if the issuer meets the Equity or Net Income standards, or at 
least $2 per share, if the issuer meets the Market Value of Listed 
Securities standard, in addition to other criteria designed to ensure 
that the listed security would not be considered a penny stock.\6\
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    \5\ See Exchange Act Release No. 66830 (April 18, 2012), 77 FR 
24549 (April 24, 2012) (approving SR-NASDAQ-2012-002) (the 
``Alternative Price Filing'').
    \6\ Specifically, the company must have net tangible assets in 
excess of $2 million, if the issuer has been in continuous operation 
for at least three years; or net tangible assets in excess of $5 
million, if the issuer has been in continuous operation for less 
than three years; or average revenue of at least $6 million for the 
last three years. See Nasdaq Rule 5505(a)(1)(B) and IM-5505.
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    At the time, because Nasdaq did not yet have sufficient experience 
with the Reverse Merger Rules or any experience with the new 
alternative price criteria, Nasdaq did not allow Reverse Merger 
Companies to list under the Alternative Price Requirement.
    Nasdaq now believes it is appropriate to allow a former Reverse 
Merger Company to qualify for initial listing under any applicable 
listing standard, including the Alternative Price Requirement, after 
satisfying the seasoning period required by the Reverse Merger Rules. 
In making this change, Nasdaq notes that the Reverse Merger Rules' 
seasoning period requires that a company must wait at least one year 
after it files with the Commission or other Regulatory Authority all 
required information about the transaction, including audited financial 
statements for the combined entity and that the Reverse Merger Company 
must have timely filed all required periodic financial reports with the 
Commission or other Regulatory Authority for the prior year, including 
at least one annual report with financial statements for a full fiscal 
year commencing after it filed the necessary information about the 
transaction. Nasdaq believes that, upon completion of this period, it 
is appropriate to treat a Reverse Merger Company in the same manner as 
any other company and to permit listing under any of Nasdaq's 
applicable listing requirements, including the Alternative Price 
Requirement.
    Rule 3a51-1 under the Act \7\ defines ``penny stock'' as any equity 
security that does not satisfy one of the exceptions enumerated in 
subparagraphs (a) through (g) under the Rule. If a security is a penny 
stock, Rules 15g-1 through 15g-9 under the Act \8\ impose certain 
additional disclosure and other requirements on brokers and dealers 
when effecting transactions in such securities. Rule 3a51-1(a)(2) under 
the Act \9\ excepts from the definition of penny stock securities 
registered on a national securities exchanges that have initial listing 
standards that meet certain requirements, including a $4 bid price at 
the time of listing. If a security listed under the Alternative Price 
Requirement no longer meets the applicable net tangible assets or 
average revenue tests following initial listing, and does not qualify 
for another exclusion under the penny stock rules, the security could 
become subject to the penny stock rules.\10\ Further, broker-dealers 
that effect recommended transactions in securities that originally 
qualified for listing under the Alternative Price Requirement, among 
other things, under Commission Rule 3a51-1(g), need to review current 
financial statements of the issuer to verify that the security meets 
the applicable net tangible assets or average revenue test, have a 
reasonable basis for believing they remain accurate, and preserve 
copies of those financial statements as part of its records. To 
facilitate compliance by broker-dealers, Nasdaq monitors the companies 
listed under the Alternative Price Requirement and publishes on the 
Nasdaq Listing Center Web site a daily list of any such company that no 
longer meets the net tangible assets or average revenue tests of the 
penny stock exclusion, and which does not satisfy any other penny stock 
exclusion.\11\ Nasdaq also specifically reminds broker-dealers of their 
obligations under the penny stock rules.\12\
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    \7\ 17 CFR 240.3a51-1.
    \8\ 17 CFR 240.15g-1 et seq.
    \9\ 17 CFR 240.3a51-1(a)(2).
    \10\ The Commission has previously noted the potential for abuse 
with respect to penny stocks. See, e.g., Securities Exchange Act 
Release No. 49037 (January 16, 2004), 69 FR 2531 (January 8, 2004) 
(``Our original penny stock rules reflected Congress' view that many 
of the abuses occurring in the penny stock market were caused by the 
lack of publicly available information about the market in general 
and about the price and trading volume of particular penny 
stocks'').
    \11\ https://listingcenter.nasdaq.com/PennyStockList.aspx.
    \12\ In approving the Alternative Price Filing, the Commission 
stated that it believed that although the listing of securities that 
do not have a blanket exclusion from the penny stock rules and 
require ongoing monitoring may increase compliance burdens on 
broker-dealers, the additional steps taken by Nasdaq to facilitate 
compliance should reduce those burdens and that, on balance, 
Nasdaq's proposal is consistent with the requirement of Section 
6(b)(5) of the Act that the rules of an exchange, among other 
things, be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade and, in 
general, to protect investors and the public interest. 77 FR at 
24552.
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    To address concerns about the potential manipulation of lower 
priced stocks to meet the initial listing requirements, securities 
listing under the Alternative Price Requirement are

[[Page 27317]]

generally required to maintain a $2 or $3 closing price for five 
consecutive business days prior to approval for listing, rather than on 
a single day as under the $4 price test, to reduce the risk that 
someone might attempt to manipulate or otherwise artificially inflate 
the closing price in order to allow a security to qualify for 
listing.\13\ Under the proposed rule change, this requirement would be 
further heightened in the case of a Reverse Merger Company, and the 
security would have to maintain the applicable $2 or $3 closing price 
for a sustained period of time, but in no event for less than 30 of the 
most recent 60 trading days prior to its application and approval for 
listing.
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    \13\ A publicly traded company that applies for listing under 
the Market Value of Listed Securities standard in Rule 5505(b)(2) 
would also need to meet the applicable price requirement for 90 
consecutive trading days prior to applying.
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    In addition, if a security listed under the Alternative Price 
Requirement subsequently achieves a $4 closing price over at least five 
consecutive business days, and the issuer and the security satisfy all 
other relevant initial listing criteria, then such security would no 
longer be considered as having listed under the Alternative Price 
Requirement. While this potentially could provide an incentive for 
market participants to manipulate the price of the security in order to 
achieve the $4 closing price and no longer be considered as having 
listed under the Alternative Price Requirement, Nasdaq adopted measures 
designed to address those concerns for any company listed under the 
Alternative Price Requirement, which the Commission concluded should 
help reduce the potential for price manipulation to achieve the $4 
closing price, and in this respect are designed to prevent fraudulent 
and manipulative acts and practices consistent with Section 6(b)(5) of 
the Act. Specifically, Nasdaq will conduct a robust, wholesale review 
of the issuer's compliance with all applicable initial listing 
criteria, including qualitative and quantitative standards, at the time 
the $4 closing price is achieved, and will have a reasonable basis to 
believe that that price was legitimately, and not manipulatively, 
achieved. Nasdaq also applies enhanced surveillance procedures to 
monitor securities listed under the Alternative Price Requirement in 
the period around when they achieve $4, and would no longer be 
considered as having listed under the Alternative Price Requirement, to 
identify anomalous trading that would be indicative of potential price 
manipulation. These measures would also apply to a Reverse Merger 
Company listed under the proposed rule change.
    Accordingly, Nasdaq proposes to remove references within the 
Reverse Merger Rule requiring the security of a Reverse Merger company 
to achieve a $4 minimum bid price and replace those references with a 
requirement that the security satisfy the share price requirement 
applicable to the initial listing standard under which the Reverse 
Merger company is qualifying to list.\14\
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    \14\ Nasdaq rules permit Nasdaq to apply additional or more 
stringent criteria for the initial listing of securities in 
situations where it would be inappropriate to list a Reverse Merger 
company at a reduced price, such as where the company has not 
demonstrated the ability to maintain compliance with the continued 
listing requirements. See Nasdaq Rule 5101.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\16\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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 proposed rule change will allow a Reverse Merger Company 
to satisfy any of the already approved listing requirements for listing 
on Nasdaq and, thereby, eliminate an unnecessary impediment to a free 
and open market and a national market system. A company listing under 
the alternative price requirements of Rule 5505(a)(1)(B), including a 
Reverse Merger Company listing under this proposed rule change, must 
also satisfy additional requirements designed to ensure that the listed 
security would not be considered a penny stock and, following listing 
Nasdaq will monitor the company and publish on its Web site if the 
company no longer satisfies those additional requirements or any of the 
other exclusions from being a penny stock contained in Rule 3a51-1 
under the Securities Act of 1933. In addition, whereas other companies 
listing under the Alternative Price Requirement must satisfy the 
applicable closing price for five consecutive business days, a Reverse 
Merger Company listing under the proposed rule change will be required 
to meet the heightened requirement in the Reverse Merger Rules and must 
satisfy that price for a sustained period of time, but in no event for 
less than 30 of the most recent 60 trading days before it can apply and 
be approved. Further, given that a Reverse Merger Company must satisfy 
a seasoning period, and timely file financial information during that 
period, Nasdaq believes that the proposed change to allow a Reverse 
Merger Company to list under any of the approved listing requirements 
protects investors and the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 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 not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, by eliminating 
a disparity between Nasdaq's rules and those of NYSE MKT, the proposed 
rule change will enhance competition.\17\
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    \17\ Section 101(e) of the NYSE MKT Company Guide permits a 
Reverse Merger Company to list on NYSE MKT upon satisfaction of any 
applicable listing requirement, including those with a $2 or $3 
minimum price.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act.

[[Page 27318]]

If the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or 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-NASDAQ-2017-053 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2017-053. 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 
10:00 a.m. and 3:00 p.m. 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-NASDAQ-2017-053, and should 
be submitted on or before July 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-12265 Filed 6-13-17; 8:45 am]
 BILLING CODE 8011-01-P