Document ID: SEC-2011-0820-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-06-14T04:00Z

[Federal Register Volume 76, Number 114 (Tuesday, June 14, 2011)]
[Notices]
[Pages 34781-34783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14648]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64633; File No. SR-NASDAQ-2011-073]

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

June 8, 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 May 26, 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 
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 combination with a public 
shell, whether through a reverse merger, exchange offer, or otherwise 
(a ``Reverse Merger'').\3\ Nasdaq will implement the proposed rule for 
applications received after approval.
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    \3\ This proposed rule change replaces a previous filing by 
Nasdaq in order to eliminate the previously proposed exception for a 
Reverse Merger that was also conducting a firm commitment, 
underwritten public offering and to clarify other portions of the 
original proposal. See Securities Exchange Act Release No. 64371 
(April 29, 2011), 76 FR 25730 (May 5, 2011) (SR-NASDAQ-2011-056). 
The Commission notes that SR-NASDAQ-2011-056 was withdrawn on May 
26, 2011.
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    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].\4\
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    \4\ 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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5005. Definitions

    (a) The following is a list of definitions used throughout the 
Nasdaq Listing Rules. This section also lists various terms together 
with references to other rules where they are specifically defined. 
Unless otherwise specified by the Rules, these terms shall have the 
meanings set forth below. Defined terms are capitalized throughout 
the Listing Rules.
    (1)--(34) No change.
    (35) ``Reverse Merger'' means any transaction whereby an 
operating company becomes public by combining with a public shell, 
whether through a reverse merger, exchange offer, or otherwise. 
However, a Reverse Merger does not include the acquisition of an 
operating company by a listed company satisfying the requirements of 
IM-5101-2 or a business combination described in Rule 5110(a). In 
determining whether a Company is a shell, Nasdaq will look to a 
number of factors, including but not limited to: whether the Company 
is considered a ``shell company'' as defined in Rule 12b-2 under the 
Act; what percentage of the Company's assets are active versus 
passive; whether the Company generates revenues, and if so, whether 
the revenues are passively or actively generated; whether the 
Company's expenses are reasonably related to the revenues being 
generated; how many employees support the Company's revenue-
generating business operations; how long the Company has been 
without material business operations; and whether the Company has 
publicly announced a plan to begin operating activities or generate 
revenues, including through a near-term acquisition or transaction.
    (36) ''Round Lot'' or ``Normal Unit of Trading'' means 100 
shares of a security unless, with respect to a particular security, 
Nasdaq determines that a normal unit of trading shall constitute 
other than 100 shares. If a normal unit of trading is other than 100 
shares, a special identifier shall be appended to the Company's 
Nasdaq symbol.
    [(36)] (37) ``Round Lot Holder'' means a holder of a Normal Unit 
of Trading. The number of beneficial holders will be considered in 
addition to holders of record.
    [(37)] (38) ``Shareholder'' means a record or beneficial owner 
of a security listed or applying to list. For purposes of the Rule 
5000 Series, the term ``Shareholder'' includes, for example, a 
limited partner, the owner of a depository receipt, or unit.
    [(38)] (39) ``Substantial Shareholder'' is defined in Rule 
5635(e)(3).
    [(39)] (40) ``Substitution Listing Event'' means: a reverse 
stock split, re-incorporation or a change in the Company's place of 
organization, the formation of a holding company that replaces a 
listed Company, reclassification or exchange of a Company's listed 
shares for another security, the listing of a new class of 
securities in substitution for a previously-listed class of 
securities, or any technical change whereby the Shareholders of the 
original Company receive a share-for-share interest in the new 
Company without any change in their equity position or rights.
    [(40)] (41) ``Total Holders'' means holders of a security that 
includes both beneficial holders and holders of record.

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

    (a)-(b) No change
    (c) Reverse Mergers
    A Company that is formed by a Reverse Merger 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: (i) traded for at least six months in the U.S. over-
the-counter market, on another national securities exchange, or on a 
foreign exchange, following the filing with the Commission or Other 
Regulatory Authority of all required information about the 
transaction, including 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 most recent 60 trading days.
    In addition, such a Company may only be approved for listing if, 
at the time of approval, it has timely filed: (i) in the case of a 
domestic issuer, its most recent two required periodic financial 
reports with the Commission or Other Regulatory Authority (Forms 10-
Q or 10-K) containing at least six months of information about the 
combined entity; or (ii) in the case of a Foreign Private

[[Page 34782]]

Issuer, comparable information as described in (i) above on Forms 6-
K, 20-F or 40-F. In the case of a Foreign Private Issuer, a Form 6-K 
would be considered timely if, consistent with Rule 5250(c)(2), it 
includes an interim balance sheet and income statement, which must 
be presented in English, and is filed no later than six months 
following the end of the applicable quarter.
* * * * *

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

    (a)-(h) No change
    (i) Reverse Mergers
    A security issued by a Company formed through a Reverse Merger 
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.

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.\5\ 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.\6\ 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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    \5\ See, e.g., Beware This Chinese Export, 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.
    \6\ 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.\7\
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    \7\ Even if a company meets these proposed new requirements, 
Nasdaq could still deny listing based on the authority described in 
Rule 5101 to apply additional or more stringent criteria in order to 
maintain the quality of and public confidence in the 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.
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    Specifically, Nasdaq proposes to prohibit a company going public by 
combining with a public shell \8\ from applying to list until six 
months after the combined entity submits all required information about 
the transaction, including audited financial statements, to the SEC.\9\ 
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 unless the company has 
timely filed its two most recent 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 comparable information if it is a 
foreign private issuer.\10\ 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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    \8\ For purposes of this rule, Nasdaq will treat as a 
combination any transaction whereby an operating company becomes 
public by combining with a public shell, whether through a reverse 
merger, exchange offer, or otherwise. However, a Reverse Merger does 
not include the acquisition of an operating company by a listed 
company satisfying the requirements of IM-5101-2 (relating to 
companies whose business plan is to complete one or more 
acquisitions) or a business combination described in Rule 5110(a) 
(relating to a listed company that combines with a non-Nasdaq 
entity, resulting in a change of control of the Company and 
potentially allowing the non-Nasdaq entity to obtain a Nasdaq 
Listing, sometimes called a ``back-door listing''). In these cases, 
FINRA is already reviewing the trading of the listed security and 
Nasdaq is already reviewing the company and the individuals 
associated with it. Additionally, Nasdaq rules require that the 
company re-apply for initial listing and during that process Nasdaq 
would review any newly associated individuals as well as the 
financial information of the combined company. A Reverse Merger 
would also not include a Substitution Listing Event, as defined in 
Rule 5005(a)(39) (proposed to be renumbered as Rule 5005(a)(40), 
such as the formation of a holding company to replace the listed 
company or a merger to facilitate a re-incorporation, because in 
these cases the operating company is already a listed entity.
    \9\ 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). This six month period would not 
begin to run until the complete Form 8-K, meeting the Commission's 
requirements, is filed.
    \10\ Nasdaq's experience has been that Reverse Merger's 
typically involve domestic shells. However, in the event that the 
Reverse Merger involves a shell that is a foreign private issuer, 
the combined entity would have to timely file financial reports for 
the most recent annual period, or a more recent six-month period. 
These reports would have to reflect at least six months of 
information about the post-merger entity and could be an interim 
report on Form 6-K or an annual report on Forms 20-F or 40-F. A Form 
6-K would be considered timely if, consistent with Rule 5250(c)(2), 
it includes an interim balance sheet and income statement, which 
must be presented in English, no later than six months following the 
end of the applicable quarter.
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    Nasdaq believes that this proposal will result in significant 
investor protection benefits. Specifically, a six month seasoning 
requirement will allow the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') and other regulators more time to view trading 
patterns and uncover potentially manipulative trading.\11\ 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

[[Page 34783]]

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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    \11\ FINRA reviews trading of companies trading in the over-the-
counter market in the United States. Foreign regulators and other 
exchanges would similarly have more time to review trading for other 
companies.
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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,\12\ in general and with Section 
6(b)(5) of the Act,\13\ 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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    \12\ 15 U.S.C. 78f.
    \13\ 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 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-2011-073 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-2011-073. 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 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-2011-073, and should be submitted on or before 
July 5, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14648 Filed 6-13-11; 8:45 am]
BILLING CODE 8011-01-P