Document ID: SEC-2012-1404-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2012-08-24T04:00Z

[Federal Register Volume 77, Number 165 (Friday, August 24, 2012)]
[Notices]
[Pages 51602-51604]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20818]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67685; File No. SR-BATS-2012-023]

Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change to Amend BATS Rules 14.2 
and 14.3 To Adopt Additional Listing Requirements for Reverse Merger 
Companies and To Align BATS Rules With the Rules of Other Self-
Regulatory Organizations

August 17, 2012.

I. Introduction

    On June 15, 2012, BATS Exchange, Inc. (``BATS'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to amend BATS Rules 14.2 and 14.3 to adopt additional listing 
requirements for companies that become a reporting company under the 
Exchange Act by combining with a public shell, whether through a 
reverse merger, exchange offer, or otherwise (a ``Reverse Merger'') and 
to align BATS Rules with the rules of other self-regulatory 
organizations. The proposed rule change was published for comment in 
the Federal Register on July 5, 2012.\3\ The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67304 (June 28, 
2012), 77 FR 39781 (``Notice'').
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II. Description of the Proposal

    BATS proposed to adopt more stringent listing requirements for 
operating companies that become Exchange Act reporting companies 
through a Reverse Merger. In a Reverse Merger, an existing public shell 
company merges with a private operating company in a transaction in 
which the shell company is the surviving legal entity.
    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 suspended 
trading in, and revoked the securities registration of, a number of 
Reverse Merger companies.\4\ The Commission also brought an enforcement 
proceeding against an audit firm relating to its work for Reverse 
Merger companies.\5\ 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.\6\
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    \4\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry, 
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
    \5\ See Schapiro Letter at page 4.
    \6\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
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    In light of the well-documented concerns related to some Reverse 
Merger companies described above, BATS stated its belief that 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 stock price of at least $4, but in no event 
for less than 30 of the most recent 60 trading days prior to each of 
the filing of the initial listing application and the date of the 
Reverse Merger company's listing on the Exchange, except that a Reverse 
Merger company that has satisfied the one-year trading requirement 
described in paragraph (1) above and has filed at least four annual 
reports with the Commission which each contain all required audited 
financial statements for a full fiscal year commencing after filing the 
information described in paragraph (1) above will not be subject to 
this price requirement; 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 paragraph (1) above.
    In addition, a Reverse Merger company would be required to maintain 
on both an absolute and an average basis a minimum stock price of at 
least $4 through listing.
    BATS stated that requiring a ``seasoning'' period prior to listing 
for Reverse Merger companies should provide great 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 would also provide time for regulatory and market scrutiny of 
the company and for any concerns that would preclude listing 
eligibility to be identified.
    BATS stated its belief that the proposed rule change would increase 
transparency to issuers and market participants with respect to the 
factors considered by the Exchange in assessing Reverse Merger 
companies for listing and should generally reduce the risk of 
regulatory concerns with respect to these companies being discovered 
after listing. BATS further noted that, while it believes that 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 the proposal amending BATS Rules 14.2(c) and 
14.3(b)(9) (which will both be applicable to Reverse Merger companies 
which qualify to list under BATS Rules) and as defined above, a Reverse 
Merger would mean any transaction whereby an operating company became 
an Exchange Act reporting company by combining either directly or 
indirectly 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 BATS Rule 14.2(b) (the Exchange's standard for companies 
whose business plan is to complete one or more acquisitions). In 
determining whether a company was a shell company, BATS would consider, 
among other factors:

[[Page 51603]]

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 generates 
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 Reverse Merger company 
would be required to comply with one of the initial listing standards 
set forth in BATS Rule 14.4 or 14.5 and the stock price and market 
value requirements of BATS Rule 14.8 or 14.9, as appropriate. Proposed 
Rules 14.2(c)(3) and 14.3(b)(9) would supplement and not replace any 
applicable requirements of Chapter XIV of BATS Rules. In addition to 
the otherwise applicable requirements of BATS Rules, a Reverse Merger 
company would be eligible to submit an application for an initial 
listing only if it meets the additional criteria specified above.
    BATS would continue to have the discretion to impose more stringent 
requirements than those set forth above if the Exchange believed that 
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.
    BATS further stated that any Reverse Merger company would have to 
comply with all listing standards set forth in BATS Rules, including 
corporate governance standards. BATS also noted that it would monitor 
the compliance with applicable BATS Rules by any Reverse Merger company 
and would investigate any issues that indicate that a Reverse Merger 
company is non-compliant with BATS Rules.
    A Reverse Merger company would not be subject to the requirements 
of proposed BATS Rules 14.2(c)(3) and 14.3(b)(9) if, in connection with 
its listing, it completes a firm commitment underwritten public 
offering where the gross proceeds to the Reverse Merger company will be 
at least $40 million.\7\ In that case, the Reverse Merger company would 
only need to meet the initial listing standards. BATS stated that it 
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 or any other company listing in conjunction 
with an initial firm commitment underwritten public offering, so it 
would be inequitable to subject them to more stringent requirements.
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    \7\ 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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    BATS further noted that the proposal is based on and consistent 
with recent Commission approvals of analogous rules for the New York 
Stock Exchange LLC (``NYSE''), NYSE Amex LLC (``AMEX'') and the NASDAQ 
Stock Market LLC (``Nasdaq'').\8\
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    \8\ See Securities Exchange Act Release Nos. 65709 (November 8, 
2011), 76 FR 70795 (November 15, 2011) (File No. SR-NYSE-2011-38); 
65710 (November 8, 2011), 76 FR 70790 (November 15, 2011) (File No. 
SR-NYSEAmex-2011-55); 65708 (November 8, 2011), 76 FR 70799 
(November 15, 2011) (File No. SR-NASDAQ-2011-073).
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rule and regulations thereunder applicable to a national securities 
exchange,\9\ and, in particular, Section 6(b)(5) of the Act,\10\ which, 
among other things, requires that the rules of a national securities 
exchange be 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.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The development and enforcement of meaningful listing standards for 
an exchange is of substantial importance to financial markets and the 
investing public. Among other things, listing standards provide the 
means for an exchange to screen issuers that seek to become listed, and 
to provide listed status only to those that are bona fide companies 
with sufficient public float, investor base, and trading interest 
likely to generate depth and liquidity sufficient to promote fair and 
orderly markets. Meaningful listing standards also are important given 
investor expectations regarding the nature of securities that have 
achieved an exchange listing, and the role of an exchange in overseeing 
its market and assuring compliance with its listing standards.
    BATS proposed to make more rigorous its listing standards for 
Reverse Merger companies, given the significant regulatory concerns, 
including accounting fraud allegations, that have recently arisen with 
respect to these companies. As noted above, the Commission previously 
approved similar filings by Nasdaq, NYSE and NYSE Amex.\11\ The 
proposal, and those previously filed by Nasdaq, NYSE and NYSE Amex, 
among other things, are intended 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. The current proposal 
is also intended to address concerns that some might attempt to meet 
the minimum price test required for exchange listing through a quick 
manipulative scheme in the securities of a Reverse Merger company, by 
requiring that minimum price to be sustained for a meaningful period of 
time.
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    \11\ See supra note 8.
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    The Commission believes the proposed one-year seasoning requirement 
for Reverse Merger companies that seek to list on the Exchange is 
reasonably designed to address concerns that the potential for 
accounting fraud and other regulatory issues is more pronounced for 
this type of issuer. As discussed above, these additional listing 
requirements will assure that a Reverse Merger company has produced and 
filed with the Commission at least one full year of all

[[Page 51604]]

required audited financial statements following the Reverse Merger 
transaction before it is eligible to list on BATS. The Reverse Merger 
company also must have filed all required Commission reports since the 
consummation of the Reverse Merger, which should help assure that 
material information about the issuer have been filed with the 
Commission and that the issuer has a demonstrated track record of 
meeting its Commission filing and disclosure obligations. In addition, 
the requirement that the Reverse Merger company has traded for at least 
one year in the over-the-counter market or on another exchange could 
make it more likely that analysts have followed the company for a 
sufficient period of time to provide an additional check on the 
validity of the financial and other information made available to the 
public.
    The Commission also believes the proposed requirement for a Reverse 
Merger company to maintain the specified minimum share price for a 
sustained period, and for at least 30 of the most recent 60 trading 
days, prior to the date of the initial listing application and the date 
of listing, is reasonably designed to address concerns that the 
potential for manipulation of the security to meet the minimum price 
requirements is more pronounced for this type of issuer. By requiring 
that minimum price to be maintained for a meaningful period of time, 
the proposal should make it more difficult for a manipulative scheme to 
be successfully used to meet the Exchange's minimum share price 
requirements.
    In addition, the Commission believes that the proposed exceptions 
to the enhanced listing requirements for Reverse Merger companies that 
(1) complete a substantial firm commitment underwritten public offering 
in connection with its listing, or (2) have filed at least four annual 
reports containing all required audited financial statements with the 
Commission following the filing of all required information about the 
Reverse Merger transaction, and satisfying the one-year trading 
requirement, reasonably accommodate issuers that may present a lower 
risk of fraud or other illegal activity. The Commission believes it is 
reasonable for the Exchange to conclude that, although formed through a 
Reverse Merger, an issuer that (1) undergoes the due diligence and 
vetting required in connection with a sizeable underwritten public 
offering, or (2) has prepared and filed with the Commission four years 
of all required audited financial statements following the Reverse 
Merger, presents less risk and warrants the same treatment as issuers 
that were not formed through a Reverse Merger. Nevertheless, the 
Commission expects the Exchange to monitor any issuers that qualify for 
these exceptions and, if fraud or other abuses are detected, to propose 
appropriate changes to its listing standards.
    For the reasons discussed above, the Commission believes that 
BATS's proposal will further the purposes of Section 6(b)(5) of the Act 
by, among other things, helping prevent fraud and manipulation 
associated with Reverse Merger companies, and protecting investors and 
the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-BATS-2012-023) is approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20818 Filed 8-23-12; 8:45 am]
BILLING CODE 8011-01-P