Responding to numerous complaints, especially, regarding companies operating from the People’s Republic of China, the SEC has determined that it will tighten the listing requirements for companies involved in reverse mergers. In particular, these new regulations will effect those companies listed on the Nasdaq, New York Stock Exchange, and the NYSE Amex.
As many know, a reverse merger occurs when a shell company is acquired by a private company, and the two entities merge. The SEC has estimated that since 2007, more than 600 of these “back door registrations” have occurred.
The SEC had determined that obtaining reliable information from these types of entities, has not been easy. In fact, the SEC was forced to suspend trading in many of these reverse merger companies since there was outdated or inaccurate financial information. It is believed that, with these heightened requirements and the necessity to file the information prior to these companies becoming listed, the SEC will provide greater protections to investors.
Now, with the new listing rules, these companies will have to endure a one year trading period in the over the counter market, or other U.S. or foreign regulated exchange after the reverse merger. These companies will also have to provide additional financial and other records to the SEC prior to listing. Further, the company will be required to keep a minimum share price for a period of time of at least 60 trading days before its application and listing are approved. However, certain companies will be exempt from the new rules where the reverse merger companies are listing as part of a firm commitment underwriting, public offering or whose mergers occurred previously and where the company has already filed annual reports with audited financial information.
In sum, the SEC is cracking down on these reverse merger companies because it believes the companies are fraught with fraud. Those wishing to conduct these types of transactions should be advised accordingly.