Reminder: The FTC Safeguards Rule Compliance Date is June 9. Because the IPO markets have been so difficult for smaller capitalization issuers during the past four years, the proposals for enhanced listing standards will discourage these companies from pursuing reverse mergers, the only other practical way for them to obtain the benefits of public listed stock to expand their businesses. Foreign private issuers are required by the SEC to file an annual report six months after the end of the fiscal year but not quarterly reports; NASDAQ further requires, under Listing Rule 5250(c)(2) that a company file on Form 6-K an interim report including balance sheets and income statements for the first half of the fiscal year within six months after the end of the second quarter. In the absence of the SEC scrutiny and underwriter due diligence present in underwritten public offerings, NASDAQ has proposed a rule that will require that the company operate and trade as a public company for a significant amount of time. Listing Rules; Nasdaq Trader; Rules and Regulation; Rulebook Advanced Search; Market Regulation - US. Nasdaq routinely required Reverse Merger companies to file with the SEC at least one Form 10-K with audited financial statements covering periods subsequent to the reverse merger and would typically discount any stock price where only a small percentage of the company's shares were freely tradable. Tax Advice Disclosure: To ensure compliance with the Internal Revenue Service regulations governing the issuance of advice on Federal tax issues, we advise you that any tax advice in this communication (and any attachments) is not written with the intent that it be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code. In the meantime, Congress appears poised to pass the Small Business Capital Formation Act which is designed to make it easier for small businesses to obtain public capital by, among other things, increasing the threshold for offerings exempted from SEC registration under Regulation A from $5 million to $50 million. inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial or continued listing on Nasdaq. Based on such review, and in accordance with the Rule 5800 Series, Nasdaq may take any appropriate action, including placing together with any affiliate of such Shareholder or any person with whom such shareholder is acting as a "group" (as such term is used in Sections 13(d) and 14(d) of the Act), may exercise such conversion rights. In November, the Securities and Exchange Commission approved new rules (the "New Reverse Merger Rules") that make it more difficult for companies that have effected a "reverse merger" (also known as a "reverse takeover") to go public and meet the required listing standards of the three major U.S. exchanges - the NYSE, NYSE Amex and NASDAQ. The SEC's approval of the exchanges' additional listing requirements for Reverse Merger companies reflects a dichotomy within the SEC where the Division of Enforcement has actively sought out accounting fraud among smaller public companies since last summer while the Division of Corporation Finance has sought to address Congress' desire to encourage small business capital formation. We expect that this matter will be clarified in the final rule. whether the company had publicly announced a plan to begin operating activities or generate revenues, including through a near-term acquisition or transaction. How Does Climate Change Create Financial Risk? Alcohol BeverageBanking/LenderCOVID-19Consumer FinanceCredit UnionData PrivacyEminent DomainEmployee BenefitsFirm NewsFranchisingGovernment Contracts/DefenseHealth CareLabor & EmploymentManufacturing & DistributionMunicipalitiesReal EstateTaxTitle Insurance, Copyright 1999-2023 Kaufman & Canoles, P.C. The most immediate effect of the Reverse Merger Rule is to require that a reverse merger company demonstrate that it is ready to operate as a public company before NASDAQ will accept its application. Almost all of these companies became public companies in the US by completing a reverse merger, a transaction by which an existing public company (which often engages in little to no active business) acquires all of the equity of another company in return for a negotiated percentage of the public companys stock. four annual reports with the Commission or Other Regulatory Authority containing all required audited financial statements for a full fiscal year commencing after filing the information described in that paragraph. While a number of strong public companies have listed by methods other than firm commitment offerings (Googles Dutch auction offering for example) and while underwriters and other experts have liability without regard to whether a public offering is structured as a firm commitment offering the market tends to see firm commitment offerings as involving significant due diligence. [t]here have been widespread allegations of fraudulent behavior by Reverse Merger companies, leading to oncerns that their financial statements cannot be relied upon;, it appeared that promoters and others intended to manipulate prices of Reverse Merger companies securities higher to help meet Nasdaqs initial listing bid price requirement; and, companies have gifted stock to artificially satisfy Nasdaqs public holder listing requirement.. More specifically, the SEC indicated that the one-year seasoning requirement for Reverse Merger companies before listing on a national securities exchange is reasonably designed to address concerns that the potential for accounting fraud and other regulatory issues is more pronounced for Reverse Merger companies, and that the additional initial listing requirements will assure that a Reverse Merger company has produced and filed with the SEC at least one full year of audited financial statements following the Reverse Merger transaction, which will improve the reliability of those reported results. Although the changes to the listing criteria affect all tiers of the Nasdaq Stock Market, this article will primarily focus on the Nasdaq Capital Market (the Nasdaq CM). A Company may establish a limit (set no lower than 10% of the shares sold in the IPO) as to the maximum number of shares with respect to which any Shareholder, restrictions on or additional requirements for listing, or denying listing of a security, if Nasdaq determines that there have been violations or evasions of such corporate governance standards. During this six-month period, the stock must trade on the over-the-counter market, another national securities exchange, or on a listed foreign market. The pink sheets would not meet this requirement. the transaction is completed. Reverse merger transactions are treated as share acquisitions for tax purposes[7]and are typically structured as a reverse triangular merger, as follows: authority under Rule 5101, the Listing Qualifications Department shall issue a Staff Delisting Determination under Rule 5810(c)(1), and in all circumstances where an Adjudicatory Body (as defined in Rule 5805) exercises such authority, the use of the authority (2) In addition to satisfying all of Nasdaq's other initial listing requirements, a Reverse Merger Company will only be approved for listing if, at the time of approval, it has: (A) timely filed all required periodic financial reports with the Commission or Other Regulatory Authority (Forms 10-Q, 10-K or 20-F) for the prior year, including at least one annual report. Factors that would be considered include: A reverse merger company would not have to comply with the requirements of Section 102.01F of the Manual if it was listing on the NYSE in connection with an initial firm commitment underwritten public offering (as defined in Section 102.01B of the Manual). . Now at least 50 percent of a companys round lot holders must each hold unrestricted securities with a market value of at least $2,500. Regulatory Information. A Company must apply for initial listing in connection with a transaction whereby the Company combines with a non-Nasdaq entity, resulting in a change of control of the Company and potentially allowing the non-Nasdaq entity to obtain Merger contingency - Some companies enter into merger agreements but require that the party being acquired have at least a certain stock price level. The Reverse Merger Rule would apply to NASDAQ listing applications for all companies that are formed by a combination between a private operating company and a public shell company, other than listing applications in connection with a firm commitment, underwritten public offering.. The rulemaking follows many months (even . Following each business combination, Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Under the Nasdaq proposal, Nasdaq would treat as a reverse merger any transaction whereby an operating company becomes public by combining with a public shell, whether through a reverse merger, exchange offer or otherwise. Greenberg Traurig's Securities Litigation Practice is one of the largest in the United States. 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By sending confidential or sensitive e-mail messages which are not encrypted you accept the risks of such uncertainty and possible lack of confidentiality over the Internet. The new rules also have the potential of tainting even traditional IPOs by smaller companies that raise less than $40 million in gross proceeds. Listing Rules; Nasdaq Trader; Rules and Regulation; Rulebook Advanced Search; Market Regulation - US. Background to the Rule Changes. but in no event for less than 30 of the most recent 60 trading days. (3), the Reverse Merger Company must satisfy all applicable requirements for initial listing, including the minimum price requirement and the requirement contained in Rule 5210(e) that the Company not be delinquent in its filing obligation with the Commission Workplace Strategies Watercooler 2023: All Things ADA, LOA, FMLA, and Health Care Fraud and Labor Unrest Top Todays Docket SCOTUS Today, Fair Work Act Changes - Important Changes Approaching. Companies tend to have relatively thin trading shortly after completion of a reverse merger into a shell corporation. Under the proposal made by Nasdaq and approved by the SEC, Nasdaq would treat as a reverse merger any transaction whereby an operating company becomes a Securities Exchange Act of 1934 (Exchange Act)-reporting company by combining (directly or indirectly) with a shell company which is an Exchange Act reporting company, whether through a reverse . While we understand that the Reverse Merger Rule will likely make it more difficult for some smaller Chinese companies to have their stock listed on NASDAQ, we view the Reverse Merger Rule as a long-term positive for Chinese companies looking to list their stock in the United States. Change of Control, Bankruptcy and Liquidation, and Reverse Mergers, Nasdaq's US Listing Center is powered by ExACT. After the merger, the former shareholders of the private company typically own a majority (or even a supermajority) of the public company's shares. Nasdaq may use such discretion to deny initial listing, apply additional or more (35) "Reverse Merger" means any transaction whereby an operating company becomes an Exchange Act reporting company by combining, either directly or indirectly, with a shell company which is an Exchange Act reporting company, 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 To further Companies' understanding of Rule 5101, Nasdaq has adopted this Interpretive Material as a non-exclusive description of the circumstances in which the Rule is generally invoked. Internal controls put in place to help the formerly-private company meet its new obligations as a public company will have several months to take hold and improve the companys reporting quality. Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Rule 5110(c) to Permit a Reverse Merger Company to Qualify for Initial Listing Under Any Applicable Listing Standard After Satisfying the Required Seasoning Period The NYSE and NYSE Amex have not yet proposed similar rules. Company will be at least $40 million. Greg Kramer practices in the areas of securities law, M&A and alternative lending and serves as co-chair of Haynes and Boone, LLPs New York Capital Markets and Securities Practice Group. National Law Review, Volume I, Number 322, Public Services, Infrastructure, Transportation. This website uses cookies to ensure you get the best experience on our website. Restricted securities are defined as securities that are subject to resale restrictions for any reason, including, but not limited to, securities: (1) acquired directly or indirectly from the issuer or an affiliate of the issuer in unregistered offerings such as private placements or Regulation D offerings; (2) acquired through an employee stock benefit plan or as compensation for professional services; (3) acquired in reliance on Regulation S, which cannot be resold within the United States; (4) subject to a lockup agreement or a similar contractual restriction; or (5) considered restricted securities under Rule 144. Although the Reverse Merger Rule by its terms does not apply to firm commitment, underwritten offerings, companies would be wise not to read too much into that distinction. A reverse merger into a shell corporation even though the securities meet enumerated... 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