Document ID: SEC-2011-0631-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-05-05T04:00Z

[Federal Register Volume 76, Number 87 (Thursday, May 5, 2011)]
[Notices]
[Pages 25730-25732]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10936]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64371; File No. SR-NASDAQ-2011-056]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change to Adopt Additional Listing 
Requirements for Reverse Mergers

April 29, 2011.
    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 April 18, 2011, The NASDAQ Stock Market LLC (``Nasdaq'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
substantially 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 adopt additional listing requirements for a 
company that has become public through a reverse merger. Nasdaq will 
implement the proposed rule for applications received after approval.
    The text of the proposed rule change is below. Proposed new 
language is in italics; 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://nasdaqomx.cchwallstreet.com.
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5110. Change of Control, Bankruptcy and Liquidation, and Reverse 
Mergers

(a)-(b) No change
(c) Reverse Mergers between a Private Operating Company and a Public 
Shell Company
    A Company that is formed by a combination between a private 
operating company and a public shell company shall be eligible to 
submit an application for initial listing only after the combined 
entity has: (i) Traded for at least six months in the over-the-counter 
market, on another national securities exchange, or on a listed foreign 
market, following the filing with the Commission or Other Regulatory 
Authority of audited financial statements for the combined entity; and 
(ii) maintained a Bid Price of $4 per share or higher on at least 30 of 
the 60 trading days immediately preceding the filing of the initial 
listing application.
    In addition, such a company may only be approved for listing if, 
following the business combination, it has timely filed: (i) In the 
case of a domestic issuer, at least two required periodic financial 
reports with the Commission or Other Regulatory Authority; or (ii) in 
the case of a Foreign Private Issuer, one or more reports including 
financial statements for a period not less than six months.
    This Rule 5110(c) shall not apply if the Company lists in 
connection with a firm commitment, underwritten public offering.
* * * * *

5210. Prerequisites for Applying to List on The Nasdaq Stock Market

(a)-(h) No change
(i) Reverse Mergers between a Private Operating Company and a Public 
Shell Company
    A security issued by a Company formed by a combination between a 
private operating company and a public shell company shall be eligible 
for initial listing only if the conditions set forth in Rule 5110(c) 
are satisfied.
* * * * *

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.

[[Page 25731]]

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

1. Purpose
    In recent months there has been an extraordinary level of public 
attention to listed companies that went public via a reverse merger, 
where an unlisted operating company becomes a public company by merging 
with a public shell.\4\ The financial press, short sellers and others 
have raised allegations of widespread fraudulent behavior by these 
companies, leading to concerns that their financial statements cannot 
be relied upon. Concerns have also been raised that certain individuals 
who aggressively promote these transactions have significant regulatory 
histories or have engaged in transactions that are disproportionately 
beneficial to them at the expense of public shareholders. The Public 
Company Accounting Oversight Board (``PCAOB'') has also identified 
issues with the audits of these companies and, in response, has issued 
Staff Audit Practice Alert No. 6/July 12, 2010 and Staff Research Note 
2011-P1/March 2011, cautioning registered accounting firms to 
follow certain specified auditing practices. The SEC recently took an 
enforcement action based on a firm's audit of a reverse merger 
company.\5\ In addition, Nasdaq is aware of situations where it 
appeared that promoters and others intended to manipulate prices higher 
to satisfy Nasdaq's initial listing bid price requirement and where 
companies have, for example, gifted stock to artificially satisfy the 
300 round lot public holder requirement. Nasdaq does not list companies 
in instances such as these, where it appears the company has achieved 
compliance with a requirement in an inappropriate manner.
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    \4\ See, e.g., Beware This Chinese Expor, Barron's (August 28, 
2010), available at http://online.barrons.com/article/SB50001424052970204304404575449812943183940.html. See also Speech by 
SEC Commissioner by Commissioner Luis A. Aguilar: Facilitating Real 
Capital Formation (April 4, 2011), available at http://www.sec.gov/news/speech/2011/spch040411laa.htm. [sic]
    \5\ In re Moore Stephens Wurth Frazer and Torbet, Order 
Instituting Public Administrative and Cease-and-Desist Proceedings, 
Securities Act Release No. 9166 (December 20, 2010).
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    In response to these concerns, Nasdaq staff has, over the past 
year, adopted heightened review procedures for reverse merger 
applicants. However, Nasdaq also believes that additional requirements 
for listing reverse merger companies are appropriate to discourage 
inappropriate behavior on the part of companies, promoters and others. 
Accordingly, Nasdaq proposes to adopt certain ``seasoning'' 
requirements for reverse mergers.\6\
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    \6\ Reverse merger companies that list on Nasdaq in conjunction 
with a firm commitment underwritten public offering will not be 
subject to the proposed rule. These transactions are more similar to 
IPOs, in that the SEC reviews the registration statement and the 
underwriters and other experts are strictly liable under the federal 
securities laws for any misstatements.
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    Specifically, Nasdaq proposes to prohibit a company going public 
via a reverse merger from applying to list until six months after the 
combined entity submits audited financial statements to the SEC.\7\ 
Further, Nasdaq proposes to require that the company maintain a $4 bid 
price on at least 30 of the 60 trading days immediately prior to 
submitting the application. Finally, under the proposed rule, Nasdaq 
would not approve any reverse merger for listing until the company has 
filed at least two financial reports with the SEC if it is a domestic 
issuer (this could be two quarterly filings or a quarterly and an 
annual filing) or one financial report covering at least a six month 
period if it is a foreign private issuer (this could be an interim 
report on Form 6-K or an annual report on Form 20-F). While most 
companies will satisfy this requirement due to the six month delay 
before they can apply, Nasdaq believes that it is important to assure 
that this requirement be satisfied in all cases.
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    \7\ A company must file a Form 8-K within four days of 
completing a reverse merger. The Form 8-K must contain audited 
financial statements and information comparable to the information 
provided in a Form 10 for the registration of securities. See Form 
8-K Items 2.01, 5.06, and 9.01(c).
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    Nasdaq believes that this proposal will result in significant 
investor protection benefits. Specifically, a six month seasoning 
requirement will allow FINRA more time to view trading patterns and 
uncover potentially manipulative trading.\8\ It will also result in a 
more bona fide shareholder base and assure that the $4 bid price was 
not satisfied through a quick manipulative scheme. Requiring additional 
SEC filings will tend to improve the reliability of the reported 
financial results, since the auditors will have reviewed several 
quarters, at least, of the public company's operating results, as will 
the company's audit committee. To the extent the company had adopted 
new internal controls at the time of the merger, those too will have 
been in place and able to exert a corrective influence over any 
previous flaws in the company's financial reporting process.
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    \8\ The Commission notes that FINRA has regulatory authority 
over transactions in the over-the-counter market.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general and with Section 
6(b)(5) of the Act,\10\ 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 proposed rule change is 
designed to enhance investor protection by imposing additional 
requirements on a category of companies that have raised regulatory 
concerns.
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    \9\ 15 U.S.C. 78f.
    \10\ 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 will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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 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

[[Page 25732]]

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-2011-056 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-NASDAQ-2011-056. 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 website (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 website 
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 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-2011-056, and should be submitted on or before 
May 26, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10936 Filed 5-4-11; 8:45 am]
BILLING CODE 8011-01-P