Document ID: SEC-2011-1756-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-11-15T05:00Z

[Federal Register Volume 76, Number 220 (Tuesday, November 15, 2011)]
[Notices]
[Pages 70799-70803]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29412]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65708; File No. SR-NASDAQ-2011-073]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice and Order Granting Accelerated Approval to Proposed Rule Change, 
as Modified by Amendment No. 1, Adopting Additional Listing 
Requirements for Companies Applying To List After Consummation of a 
``Reverse Merger'' With a Shell Company

November 8, 2011.

I. Introduction

    On May 26, 2011, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt additional listing requirements for a 
company that has become an Act reporting company by combining with a 
public shell, whether through a reverse merger, exchange offer, or 
otherwise (a ``Reverse Merger'').\3\ The proposed rule change was 
published for comment in the Federal Register on June 14, 2011.\4\ On 
July 25, 2011, the Commission extended the time period in which to 
either approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether the proposed rule 
change should be disapproved to September 12, 2011.\5\ The Commission 
received two comment letters on the proposal.\6\ On September 12, 2011, 
the

[[Page 70800]]

Commission issued an order instituting proceedings to determine whether 
to disapprove the proposed rule change.\7\ The Commission received 
three comments in connection with the proceedings to determine whether 
to disapprove the proposed rule change.\8\ Nasdaq filed Amendment No. 1 
to the proposed rule change on November 4, 2011.\9\ This order approves 
the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that this proposed rule change replaced 
a previous proposed rule change filed by Nasdaq regarding additional 
listing standards for Reverse Merger companies, which had included 
an exception for a Reverse Merger company that was listing in 
connection with a substantial firm commitment, underwritten public 
offering. See Securities Exchange Act Release No. 64371 (April 29, 
2011), 76 FR 25730 (May 5, 2011) (SR-NASDAQ-2011-056). Nasdaq 
withdrew SR-NASDAQ-2011-056 on May 26, 2011. The Commission received 
one comment letter on this previous proposal. See Letter from Paul 
Gillis, Visiting Professor of Accounting, Peking University dated 
May 3, 2011 (``Gillis Letter'').
    \4\ See Securities Exchange Act Release No. 64633 (June 8, 
2011), 76 FR 34781 (``Notice'').
    \5\ See Securities Exchange Act Release No. 64956 (July 25, 
2011), 76 FR 45636 (July 29, 2011).
    \6\ See Letter from David Feldman, Partner, Richardson and Patel 
LLP dated August 20, 2011 (``Feldman Letter'') and Letter to 
Elizabeth M. Murphy, Secretary, Commission, from WestPark Capital, 
Inc. dated September 2, 2011 (``WestPark Letter'').
    \7\ See Securities Exchange Act Release No. 65319 (September 12, 
2011), 76 FR 57791 (September 16, 2011) (``Order Instituting 
Disapproval Proceedings''). Among other things, the Commission 
instituted disapproval proceedings to allow the Commission to 
consider the Nasdaq proposal together with proposals by NYSE and 
NYSE Amex to enhance their respective listing standards for Reverse 
Merger companies that differed in certain material respects from the 
Nasdaq proposal. See Securities Exchange Act Release No. 65034 
(August 4, 2011), 76 FR 49513 (August 10, 2011) (SR-NYSE-2011-38) 
and Securities Exchange Act Release No. 65033 (August 4, 2011), 76 
FR 49522 (August 10, 2011) (SR-NYSEAmex-2011-55).
    \8\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Locke Lord LLP dated October 17, 2011 (``Locke Lord Letter''); 
Letter to Elizabeth M. Murphy, Secretary, Commission, from James N. 
Baxter, Chairman and General Counsel, New York Global Group dated 
October 17, 2011 (``New York Global Group Letter''); and Letter to 
Elizabeth M. Murphy, Secretary, Commission, from David A. Donohoe, 
Jr., Donohoe Advisory Associates LLC dated October 18, 2011 
(``Donohoe Letter'').
    \9\ See Amendment No. 1, dated November 4, 2011. In Amendment 
No. 1, Nasdaq made several changes to the proposed rule change, some 
in response to the comment letters received. The changes proposed by 
Nasdaq include: (i) Lengthening the proposed seasoning period from 
six months to one year; (ii) including an exemption from the rule 
for firm commitment underwritten public offerings that meet a 
substantial size requirement; (iii) added a new exception from 
certain requirements contained in the rule for companies that 
conducted their reverse merger a substantial length of time before 
applying to list; (iv) applying the price requirement using closing 
prices, both prior to submission of the listing application and 
prior to listing, and for a sustained period of time; and (v) other 
additional changes to clarify the rule and harmonize it with a 
similar proposal by NYSE and NYSE Amex.
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II. Description of the Original Proposal

    The Exchange proposes to adopt additional listing requirements for 
companies that become public through a Reverse Merger,\10\ to address 
significant regulatory concerns including accounting fraud allegation 
that have arisen with respect to Reverse Merger companies. In its 
filing, Nasdaq noted, among other things, that there have been 
widespread allegations of fraudulent behavior by Reverse Merger 
companies, leading to concerns that their financial statements cannot 
be relied upon.\11\ Nasdaq also stated that it was aware of situations 
where it appeared that promoters and others intended to manipulate 
prices of Reverse Merger companies' securities higher to help meet 
Nasdaq's initial listing bid price requirement, and where companies 
have gifted stock to artificially satisfy Nasdaq's public holder 
listing requirement.\12\ As a result of these concerns, Nasdaq believes 
certain ``seasoning'' requirements in connection with the listing of 
Reverse Merger companies are appropriate.
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    \10\ For purposes of the Nasdaq proposal, Nasdaq would treat as 
a Reverse Merger any transaction whereby an operating company 
becomes an Act reporting company by combining, either directly or 
indirectly, with a shell company which is an 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 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''). 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.
    \11\ See Notice.
    \12\ Id.
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    Specifically, as originally filed, Nasdaq proposed to prohibit a 
Reverse Merger company from applying to list until the combined entity 
has traded in the U.S. over-the-counter market, on another national 
securities exchange, or on a foreign exchange, for at least six months 
following the filing of all required information about the Reverse 
Merger transaction, including audited financial statements, with the 
Commission. Further, Nasdaq proposed to require that the Reverse Merger 
company maintain a minimum of a $4 bid price on at least 30 of the 60 
trading days immediately prior to submitting the listing application. 
Finally, under the proposed rule, Nasdaq would not approve any Reverse 
Merger company for listing unless the company has timely filed its two 
most recent financial reports with the Commission if it is a domestic 
issuer or comparable information if it is a foreign issuer.

III. Comment Summary

    The Commission received five comment letters on the proposal.\13\ 
Two of the commenters objected broadly to the proposed additional 
listing requirements for Reverse Merger companies,\14\ while three 
commenters suggested discrete changes to the proposal.\15\
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    \13\ See supra notes 6 and 8. See also, note 3 (referencing the 
comment received on Nasdaq's previous proposal).
    \14\ See Feldman Letter and New York Global Group Letter.
    \15\ See WestPark Letter; Donohoe Letter; and Locke Lord Letter.
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    One commenter who objected broadly to the proposal expressed the 
view that it could have a ``chilling effect of discouraging exciting 
growth companies from pursuing all available techniques to obtain the 
benefits of a public listed stock and greater access to capital.'' \16\ 
The commenter further noted, in response to Nasdaq's justifications for 
the proposed rule change, that virtually all of the suggestions of 
wrongdoing involve Chinese companies that completed reverse mergers, 
but that a number of other Chinese companies that completed full 
traditional initial public offerings face the very same allegations, so 
that focusing on the manner in which these companies went public may 
not be appropriate. Rather than imposing a seasoning requirement, the 
commenter suggests Nasdaq review regulatory histories and financial 
arrangements with promoters, and refrain from listing companies where 
the issues are great. In any event, the commenter recommends an 
exemption from the seasoning requirement for a company coming to the 
Exchange with a firm commitment underwritten public offering. In 
addition, the commenter expressed concern that the requirement to 
maintain a $4 trading price for 30 days prior to the listing 
application is unfair, and unrealistic to expect companies to achieve 
in the over-the-counter markets, and suggest it be eliminated.\17\
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    \16\ See Feldman Letter.
    \17\ Id.
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    The other commenter that objected broadly to the proposal believed 
that the proposal would harm capital formation and hinder small 
companies' access to the capital markets.\18\ The commenter expressed 
the view that no objective research or hard data has been published 
that supports the notion that Reverse Merger companies bear additional 
scrutiny, and that the Commission should not approve the proposal until 
an independent and comprehensive study concludes that (i) Exchange 
listed reverse merger companies tend to fail more often than IPO 
companies, thus necessitating the additional scrutiny, (ii) the 
proposed six to twelve month ``seasoning'' for reverse merger companies 
will indeed deter corporate frauds, and (iii) the exchanges do not 
already have sufficient rules in place to discourage corporate frauds 
in both reverse merger and IPO companies.\19\ Based on its research, 
the

[[Page 70801]]

commenter believes that more Chinese companies have been delisted that 
have gone public through an IPO than through a Reverse Merger, and that 
they were delisted more than three years after they became public, 
which is well beyond the seasoning period proposed by Nasdaq.\20\
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    \18\ See New York Global Group Letter.
    \19\ Id.
    \20\ Id.
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    A third commenter expressed support for the proposed rule change's 
objective to protect investors from potential accounting fraud, 
manipulative trading, abusive practices or other inappropriate behavior 
on the part of companies, promoters and others.\21\ The commenter, 
however, recommended that, in order to avoid unnecessary burdens on 
smaller capitalization issuers, the proposed rule change be modified to 
exclude Form 10 share exchange transactions from the reverse merger 
definition, or provide an exception for a reverse merger company 
listing in connection with a firm commitment underwritten public 
offering.\22\ This commenter also recommended that Nasdaq consider 
requiring companies listing on the Exchange to engage a recognized 
independent diligence firm to conduct a forensic audit and issue a 
forensic diligence report prior to approval of the listing 
application.\23\
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    \21\ See WestPark Letter.
    \22\ Id.
    \23\ Id.
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    Another commenter, while it did not believe the Exchange had 
presented a sufficient rationale or data to support the need for a 
Reverse Merger seasoning period, agreed that a reasonable seasoning 
period for Reverse Merger companies could be beneficial, and was of the 
view that the six-month seasoning period proposed by Nasdaq was 
preferable to the one-year seasoning period proposed by NYSE and NYSE 
Amex.\24\ The commenter also believed that Nasdaq's proposed 
requirement that a Reverse Merger company maintain the requisite stock 
price for at least 30 of the 60 trading days immediately preceding the 
filing of the listing application was lacking because, among other 
things, it would not apply to the period during which the listing 
application was under review.\25\ In addition, this commenter expressed 
support for an underwritten public offering exception, regardless of 
size, from the proposed rule's additional listing requirement.\26\
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    \24\ See Donohoe Letter.
    \25\ Id.
    \26\ Id.
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    A fifth commenter also expressed the view that there should be an 
exception where the securities issued in the Reverse Merger were 
registered with the Commission, so that the additional listing 
standards would be directed toward those transactions that have not 
been subjected to full Commission review.\27\ This commenter also 
suggested that, if a Reverse Merger company is controlled by a non-U.S. 
person, the control person should be required to execute a consent to 
service of process in the U.S.\28\
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    \27\ See Locke Lord Letter.
    \28\ Id.
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IV. Nasdaq Amendment No. 1 and Response to Comments

    In Amendment No. 1 Nasdaq made several modifications to the 
proposed rule change and responded to comments received on the 
proposal. Specifically, Nasdaq proposed to extend the trading period 
contemplated in the original filing from six months to one year and 
require that, prior to listing, the company timely file all required 
periodic financial reports for the prior year, including at least one 
annual report. Such annual report must contain audited financial 
statements for a full fiscal year following the filing of all required 
information about the reverse merger transaction. In Nasdaq's view, 
this would allow additional time for FINRA and other regulators to 
review trading patterns and uncover potentially manipulative trading. 
The amendment also seeks to clarify that, during the trading period, 
the foreign exchanges on which trading may take place must be 
``regulated'' foreign exchanges.
    In addition, Amendment No. 1 would supplement the proposed 
additional standard to maintain the minimum $4 price by requiring that 
it be maintained for ``a sustained period,'' as well for at least 30 of 
the most recent 60 trading days, and to apply that requirement to the 
date of listing, as well as to the date of the listing application. 
Nasdaq stated its belief that these changes would clarify its ability 
to consider a longer period of time for purposes of evaluating the 
minimum price requirement, if necessary in light of the security's 
trading volume, frequency of trading, and the trend of the company's 
stock price during the applicable periods.\29\ Nasdaq also changed the 
$4 price reference from the bid price to the closing price.
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    \29\ Nasdaq also noted that the proposed minimum period was 
supported by the Donohoe Letter.
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    Amendment No. 1 also includes two new exceptions from the proposed 
additional listing requirement for Reverse Merger companies. First, a 
Reverse Merger company completing a firm commitment underwritten public 
offering at, or about, the time of listing, where the gross proceeds to 
the company will be at least $40 million, would not be subject to the 
proposed additional listing requirements. Nasdaq noted that such an 
exception was supported by several of the commenters,\30\ and would be 
consistent with the approach proposed by NYSE and NYSE Amex. Second, 
Nasdaq proposed an exception for a Reverse Merger company that has 
filed at least four annual reports with the Commission following the 
one year trading period. Nasdaq stated its belief that it is 
appropriate, after the passage of such a period of more than four 
years, to treat a company that became public through a Reverse Merger 
just like any other company.
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    \30\ See, e.g., WestPark Letter; Donohoe Letter; and Feldman 
Letter. While these commenters indicated a preference for a smaller 
threshold for the exception, Nasdaq stated its belief that the 
proposed $40 million level is appropriate to protect investors and 
the public interest.
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    Finally, Nasdaq proposed several technical changes in Amendment No. 
1, including clarifying that a Reverse Merger is any transaction where 
an operating company becomes an ``Exchange Act reporting company'' 
(rather than a ``public company'' as in the original filing) by 
combining with a shell company which is an Act reporting company, and 
that this could occur ``directly or indirectly.'' \31\
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    \31\ Nasdaq also stated that this definition would include a 
company that engages in a ``Form 10 share exchange transaction.'' 
While the WestPark Letter suggested that such transactions should 
not be included, Nasdaq stated its belief that it is appropriate to 
impose the proposed additional requirements on such a transaction to 
allow review of the trading activity following the Reverse Merger.
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    In Amendment No. 1, Nasdaq noted that any Reverse Merger company 
must also meet all other applicable requirements for listing on 
Nasdaq.\32\ In response to commenters that stated that problems 
frequently occur when companies go public through an IPO or other 
method, and that Reverse Mergers should not be singled out, Nasdaq did 
not believe that the existence of broader concerns should preclude it 
from taking more discrete steps to protect investors from potential 
abuses.\33\ Nasdaq further

[[Page 70802]]

stated that it would continue to review all applicants for potential 
public interest concerns. If Nasdaq observes problems with other types 
of companies, it may seek to adopt additional enhancements to its 
listing standards, or modify these proposed requirements, to address 
those problems.\34\
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    \32\ Nasdaq noted in Amendment No. 1 that these requirements 
include the corporate governance requirements contained in the 
Nasdaq Listing Rule 5600 Series, as well as the applicable 
quantitative and liquidity measures contained in the Rule 5300, 5400 
and 5500 Series governing listing on the Nasdaq Global Select, 
Global, and Capital Markets, respectively.
    \33\ See, e.g., WestPark Letter; Donohoe Letter; and New York 
Global Group Letter. Nasdaq stated that it does not agree with the 
view expressed by some of these commenters that it can adopt 
requirements applicable to Reverse Merger Companies only if it now 
also addresses those other types of companies. Rather, the Exchange 
believes that the proposed rule change is consistent with the Act in 
that it is designed to protect investors and the public interest 
from abuses that Nasdaq has observed in connection with Reverse 
Merger Companies.
    \34\ The Exchange noted that several of the commenters suggested 
additional enhancements or changes that go beyond the scope of this 
proposed rule change. For example, the Locke Lord Letter proposed a 
consent of service requirement for entities controlled by non-U.S. 
residents. The Exchange stated that it does not believe it is 
appropriate to include such a requirement in connection with this 
filing, as the concern identified is not unique to Reverse Merger 
companies and could involve any company controlled by non-U.S. 
residents. Moreover, the Exchange believes that such a requirement 
would be better considered by the Commission in connection with a 
review of the requirements to access the U.S. capital markets. 
Similarly, the Gillis Letter supported the proposed rule, but also 
suggested additional Commission rulemaking, which, Nasdaq stated, is 
beyond its ability to implement.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment No. 1 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-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 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 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 
December 6, 2011.

VI. 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,\35\ and, in particular, Section 6(b)(5) of the Act,\36\ 
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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    \35\ 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).
    \36\ 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.
    Nasdaq 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, NYSE and NYSE Amex filed 
similar proposals for the same reasons.\37\ Among other things, the 
proposals seek 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 proposals also seek 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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    \37\ See Securities Exchange Act Release No. 65034 (August 4, 
2011), 76 FR 49513 (August 10, 2011) and Securities Exchange Act 
Release No. 65033 (August 4, 2011), 76 FR 49522.
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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 audited financial 
statements following the Reverse Merger transaction before it is 
eligible to list on Nasdaq. The Reverse Merger company also must have 
timely filed all required Commission reports since the consummation of 
the Reverse Merger, which should help assure that material information 
about the issuer has 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 have 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

[[Page 70803]]

validity of the financial and other information made available to the 
public.
    Although certain commenters expressed concern that the proposal 
might inhibit capital formation and access by small companies to the 
markets, the Commission notes that the enhanced listing standards apply 
only to the relatively small group of Reverse Merger companies--where 
there have been numerous instances of fraud and other violations of the 
federal securities laws--and merely requires those entities to wait 
until their first annual audited financial statements are produced 
before they become eligible to apply for listing on the Exchange. While 
fraud and other illegal activity may occur with other types of issuers, 
as noted by certain commenters, the Commission does not believe this 
should preclude Nasdaq from taking reasonable steps to address these 
concerns with Reverse Merger companies.
    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 
at or about the time of listing,\38\ 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 satisfaction of the one year trading requirement, 
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.
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    \38\ The Commission notes that several commenters supported an 
exception for issuers with underwritten public offerings. See 
WestPark Letter; Donohoe Letter; and Locke Lord Letter.
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    The Commission notes that certain commenters suggested the Exchange 
impose specific additional requirements on Reverse Merger companies 
that seek an exchange listing, such as the completion of an independent 
forensic diligence report on the issuer, or the execution of a consent 
to service of process in the U.S. by foreign controlling persons. 
Although there may be merit in these or other potential ways to enhance 
listing standards for Reverse Merger companies, the Commission believes 
that the additional listing standards proposed by the Exchange should 
help prevent fraud and manipulation, protect investors and the public 
interest, and are otherwise consistent with the Act.
    The Commission also notes that several of the changes proposed by 
the Exchange in Amendment No. 1 were designed to make its proposal 
consistent with the proposals submitted by NYSE and NYSE Amex. As 
indicated in the Order Instituting Disapproval Proceedings, the 
Commission believes that it is important to assure that the Exchanges 
develop consistent and effective enhancements to their listing 
standards, to best address the serious concerns that have arisen with 
respect to the listing of Reverse Merger companies.
    For the reasons discussed above, the Commission believes that 
Nasdaq'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.
    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\39\ for approving the proposed rule change, as modified by 
Amendment No. 1, prior to the 30th day after the date of publication of 
notice in the Federal Register. As noted above, the changes made in 
Amendment No. 1 harmonize the proposed rule change with similar 
proposals by NYSE and NYSE Amex that have been subject to public 
comment, in addition to providing clarifying language consistent with 
the intent of the original rule proposal. In addition, the Commission 
believes it is in the public interest for Nasdaq to begin applying its 
enhanced listing standards as soon as practicable, in light of the 
serious concerns that have arisen with respect to the listing of 
Reverse Merger companies.
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    \39\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASDAQ-2011-073), as amended, be, and 
hereby is, approved, on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-29412 Filed 11-14-11; 8:45 am]
BILLING CODE 8011-01-P