Self-Regulatory Organizations; New York Stock Exchange LLC; Notice and Order Granting Accelerated Approval to Proposed Rule Change, as Modified by Amendment No. 2, Amending Sections 102.01 and 103.01 of the Exchange's Listed Company Manual Adopting Additional Listing Requirements for Companies Applying to List After Consummation of a “Reverse Merger” With a Shell Company, 70795-70799 [2011-29439]

Download as PDF Federal Register / Vol. 76, No. 220 / Tuesday, November 15, 2011 / Notices intent of the original rule proposal. In addition, the Commission believes it is in the public interest for NYSE Amex 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. VII. Conclusion It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR–NYSEAmex– 2011–55), 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.38 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–29440 Filed 11–14–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65709; File No. SR–NYSE– 2011–38] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice and Order Granting Accelerated Approval to Proposed Rule Change, as Modified by Amendment No. 2, Amending Sections 102.01 and 103.01 of the Exchange’s Listed Company Manual Adopting Additional Listing Requirements for Companies Applying to List After Consummation of a ‘‘Reverse Merger’’ With a Shell Company mstockstill on DSK4VPTVN1PROD with NOTICES November 8, 2011. I. Introduction On July 22, 2011, New York Stock Exchange LLC (‘‘NYSE’’ 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 adopting 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’’). The proposed rule change was published for comment in the Federal Register on August 10, 2011.3 On September 21, 2011, the Commission extended the time period in which to 38 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 65034 (August 4, 2011), 76 FR 49513 (‘‘Notice’’). 1 15 VerDate Mar<15>2010 19:06 Nov 14, 2011 Jkt 226001 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 November 8, 2011.4 The Commission received one comment letter on the proposal.5 NYSE filed Amendment No. 1 to the proposed rule change on November 4, 2011, which was later withdrawn.6 NYSE filed Amendment No. 2 to the proposed rule change on November 8, 2011.7 This order approves the proposed rule change, as modified by Amendment No. 2, on an accelerated basis. II. Description of the Original Proposal The Exchange proposes to adopt more stringent listing requirements for companies that become public through a Reverse Merger, to address significant regulatory concerns including accounting fraud allegations that have arisen with respect to Reverse Merger companies. In its filing, the Exchange 4 See Securities Exchange Act Release No. 65368 (September 21, 2011), 76 FR 59756 (September 27, 2011). 5 See Letter to Elizabeth M. Murphy, Secretary, Commission, from James Davidson, Hermes Equity Ownership Services Limited dated August 31, 2011 (‘‘Hermes Letter’’). In addition, the Commission received five comment letters on a substantially similar proposal by Nasdaq. (See Securities Exchange Act Release No. 64633 (June 8, 2011), 76 FR 34781 (June 14, 2011) (SR–NASDAQ–2011– 073)). The comment letters received on the Nasdaq filing are: Letter from David Feldman, Partner, Richardson and Patel LLP dated August 20, 2011 (‘‘Feldman Letter’’); Letter to Elizabeth M. Murphy, Secretary, Commission, from WestPark Capital, Inc. dated September 2, 2011 (‘‘WestPark Letter’’); 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’’). One of the comment letters submitted on the Nasdaq filing specifically referenced this proposal by NYSE. However, the Commission believes all of the filings submitted on the Nasdaq filing are applicable to this filing. Since the comment letters received on the Nasdaq filing either specifically reference the NYSE filing, or discuss issues directly related to this filing, the Commission has included them in its discussions of this filing. 6 Amendment No. 1, dated November 4, 2011, was withdrawn on November 8, 2011. 7 See Amendment No. 2, dated November 8, 2011. Amendment No. 2 replaces Amendment No. 1 in its entirety. In Amendment No. 2, NYSE made several changes to the proposed rule change. The changes proposed by NYSE include: (i) Amending the proposed price requirement to make is applicable for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days; (ii) 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; and (iii) other additional changes to clarify the rule and harmonize it with a similar proposal by Nasdaq. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 70795 noted that the Commission has taken direct action against Reverse Merger companies. In addition, the Exchange noted that the Commission has suspended trading in, and revoked the securities registration of, a number of Reverse Merger companies.8 The Exchange also stated that the Commission recently brought an enforcement proceeding against an audit firm relating to its work for Reverse Merger companies 9 and issued a bulletin on the risks of investing in Reverse Merger companies, noting potential market and regulatory risks related to investing in such companies.10 In response to the concerns noted above, the Exchange proposed to adopt additional listing requirements for Reverse Merger companies.11 Specifically, NYSE proposed to prohibit a Reverse Merger company from applying to list until the combined entity has traded in the U.S. over-thecounter market, on another national securities exchange, or on a regulated foreign exchange, for at least one year following the filing of all required information about the Reverse Merger transaction, including audited financial statements, with the Commission. The Reverse Merger company would also be required to timely file 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 all required information about the Reverse Merger transaction and satisfying the one-year trading requirement. Further, NYSE proposed to require that the Reverse Merger company maintain on 8 See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry, dated April 27, 2011 (‘‘Schapiro Letter’’), at pages 3–4. 9 See Schapiro Letter at page 4. 10 See ‘‘Investor Bulletin: Reverse Mergers’’ 2011– 123. 11 In addition to the specific additional listing requirements contained in the proposal, the Exchange included language in the proposed rule that states that the Exchange may ‘‘in its discretion impose more stringent requirements than those set forth above if the Exchange believes it is 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 are not subject to transfer restrictions, if the Reverse Merger Company has not had a Securities Act registration statement or other filing subjected to a comprehensive review by the Commission, or if the Reverse Merger Company has disclosed that it has material weaknesses in its internal controls which have been identified by management and/or the Reverse Merger Company’s independent auditor and has not yet implemented an appropriate corrective action plan.’’ E:\FR\FM\15NON1.SGM 15NON1 70796 Federal Register / Vol. 76, No. 220 / Tuesday, November 15, 2011 / Notices both an absolute and an average basis for a sustained period a minimum stock price of $4 both immediately preceding the filing of the initial listing application and the company’s listing on the Exchange. Finally, the Exchange proposed an exception from the requirements of the rule if the Reverse Merger company is listing in connection with an initial firm commitment underwritten public offering where the proceeds to the company are sufficient on a stand-alone basis to meet the aggregate market value of publicly-held shares requirement set forth in Section 102.01B of the Exchange’s Listed Company Manual (‘‘Manual’’).12 mstockstill on DSK4VPTVN1PROD with NOTICES III. Comment Summary As stated previously, the Commission received only one comment letter on the proposal.13 However, a related proposal by Nasdaq received five comment letters,14 one of which specifically discusses the NYSE proposal.15 The Commission is treating all six comment letters as being applicable to the NYSE filing since the NYSE and Nasdaq filing address the same substantive issues.16 Two of the commenters objected broadly to the proposed additional listing requirements for Reverse Merger companies,17 while four commenters suggested discrete changes to the proposal.18 One commenter who objected broadly to Nasdaq’s related 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.’’ 19 The commenter further noted, in response to Nasdaq’s justifications for the proposed rule change, that virtually all of the suggestions of wrongdoing involve 12 The Commission notes that Section 102.01B of the Manual would require a company to demonstrate an aggregate market value of publiclyheld shares of $40 million for companies that list either at the time of their initial public offerings or as a result of spin-offs or under the affiliated company standard or, for companies that list at the time of their initial firm commitment underwritten public offering and $100 million for other companies. 13 See Hermes Letter. 14 See Feldman Letter; WestPark Letter; Locke Lord Letter; New York Global Group Letter; and Donohoe Letter. 15 See Locke Lord Letter. 16 In instituting disapproval proceedings for the Nasdaq proposal, the Commission stated that the NYSE and NYSE Amex had filed similar proposals designed to address the same concerns as the Nasdaq proposal. 17 See Feldman Letter and New York Global Group Letter. 18 See Hermes Letter; WestPark Letter; Donohoe Letter; and Locke Lord Letter. 19 See Feldman Letter. VerDate Mar<15>2010 19:06 Nov 14, 2011 Jkt 226001 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 a review of regulatory histories and financial arrangements with promoters, and refrain from listing companies where the issues are great. In any event, the commenter recommends an exception 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 suggested it be eliminated.20 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.21 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.22 Based on its research, the 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.23 The commenter that specifically commented on the NYSE proposed rule change was supportive of the changes proposed but also stated that more stringent listing requirements are necessary to reduce the risk of fraud and other regulatory concerns that can occur when companies seek to list on an exchange quickly and inexpensively through a Reverse Merger with a shell company.24 This commenter believed that ‘‘further tests’’ should be introduced that go beyond the proposed seasoning period, but did not offer any specific suggestions. A fourth 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.25 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.26 This commenter also recommended that an exchange should 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.27 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.28 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.29 In addition, this commenter expressed support for an underwritten public offering exception, regardless of size, from the proposed rule’s additional listing requirement.30 24 See 25 See Hermes Letter. WestPark Letter. 26 Id. 20 Id. 21 See New York Global Group Letter. 22 Id. 23 Id. As noted above, the comment letter refers specifically to Nasdaq, but applies equally to the NYSE proposal. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 27 Id. As noted above, this comment letter was specifically addressed to Nasdaq, but applies equally to the NYSE proposal. 28 See Donohoe Letter. 29 Id. 30 Id. E:\FR\FM\15NON1.SGM 15NON1 Federal Register / Vol. 76, No. 220 / Tuesday, November 15, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES A sixth 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.31 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.32 IV. NYSE Amendment No. 2 and Response to Comments In Amendment No. 2, NYSE proposed several changes to more effectively align its proposal with that of Nasdaq. NYSE amended its proposal to require that a Reverse Merger company ‘‘maintain a closing stock price of $4 or higher for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days prior to the filing of the initial listing application’’ and prior to listing. In addition, NYSE amended the requirement that a Reverse Merger company provide all required reports to clarify that such reports must include ‘‘all required’’ audited financial statements. Amendment No. 2 also proposes a new exception to the Reverse Merger rules and clarifies that all other listing requirements are applicable to all Reverse Merger companies, even those Reverse Merger companies that can take advantage of either of the two exceptions being proposed under the new rules. As noted above, as proposed, the rule provides that a Reverse Merger company would not be subject to the requirements of the rule if, in connection with the listing, it completes a firm commitment underwritten public offering where the proceeds to the company will be sufficient on a standalone basis to meet the aggregated market value of publicly-held shares requirement for Initial Firm Commitment Underwritten Public Offerings as set forth in Section 102.01B and the offering is occurring subsequent to or concurrently with the Reverse Merger.33 Amendment No. 2 additionally proposes that the Reverse Merger company would not be subject to the requirement that it maintain a closing stock price of $4 or higher for at least 30 of the most recent 60 days prior to each of the filing of the initial listing application and the date of the Reverse Merger company’s listing, if it has 31 See Locke Lord Letter. 32 Id. 33 See note 12, supra. VerDate Mar<15>2010 19:06 Nov 14, 2011 Jkt 226001 satisfied the one-year trading requirement 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 required information.34 The amended rule language states that a Reverse Merger company must comply with all applicable listing requirements. Applicable listing standards include, but are not limited to, the corporate governance requirements set forth in Section 303A of the Manual and the applicable distribution, stock price and market value requirements of Sections 102.01A, 102.01B and 303A of the Manual. In either case, the language makes clear that companies that fall under the exceptions must also comply with all other listing requirements. Finally, NYSE made several technical changes in Amendment No. 2, including those to conform its language more closely to that of the Nasdaq proposal. On November 7, 2011, NYSE responded to the comments received on the proposal.35 One commenter expressed concern that the NYSE proposal might not provide investors with sufficient protections in relation to listed Reverse Merger companies and noted and welcomed the NYSE’s ability to exercise its discretion to apply additional or more stringent criteria to a Reverse Merger company. In response, NYSE noted that the same discretion is included in the NYSE Amex proposal. The NYSE further noted that it does not believe that it is necessary at this time to adopt any additional general requirements for all companies that would be considered for listing under the proposed rules. The Exchange also stated that the proposed approach, in its belief, strikes an appropriate balance by providing discretionary authority to the Exchange to apply additional or more stringent criteria,36 while also providing transparency as to the factors that would prompt the imposition of such criteria. NYSE believes that it is appropriate to apply those new requirements for a period of time, while closely monitoring the performance of Reverse Merger companies that list under the new rules. 34 Amendment No. 2 also proposes that, to be eligible for this exception, such companies be required to (i) Comply with the stock price requirement of Section 102.01B of the Manual at the time of the filing of the initial listing application and the date of the Reverse Merger company’s listing and (ii) not be delinquent in its filing obligations with the Commission. 35 See Email from John Carey, Chief Counsel, NYSE Regulation Inc., to Sharon Lawson, Senior Special Counsel, Commission and David Michehl, Special Counsel, Commission dated November 7, 2011. 36 See supra, note 11. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 70797 If at any time it becomes apparent that there are significant continuing investor protection or regulatory concerns associated with the listing of Reverse Merger companies, NYSE will consider the desirability of adopting additional more stringent requirements. NYSE noted that the Commission received two negative comment letters in relation to the NYSE Amex filing.37 Both commenters supported the proposed rule’s exception for Reverse Merger companies listing in conjunction with an underwritten public offering, but argued that the transaction size requirement should either be eliminated from the proposal or set at a far lower level. The Exchange believes that the substantial offering size requirement provides a significant regulatory benefit. One of the commenters argued that the requirement that a Reverse Merger Company must trade in another market for at least a year prior to listing is unnecessary. As noted in the filing, significant regulatory concerns have arisen with respect to a number of reverse merger companies in recent times. NYSE believes that a ‘‘seasoning’’ period prior to listing should provide greater 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 will also provide time for regulatory and market scrutiny of the company, and for any concerns that would preclude listing eligibility to be identified. NYSE believes that the elimination of the one year trading requirement would significantly weaken the value of the seasoning period in that less scrutiny would generally be present. The other commenter argued that the rule should not apply to a Reverse Merger company which resulted from a merger between an operating company and a new shell company with no prior business operations. Based on the Exchange’s experience with the listing of Reverse Merger companies, the Exchange believes that it is appropriate to apply the proposed rules to all Reverse Merger companies, regardless of whether the shell company into which the operating company merged had ever had any previous business operations. 37 The Commission notes that the two comment letters submitted on the NYSE Amex filing are substantially similar to two of the letters filed on the Nasdaq proposal. See Feldman Letter and Westpark Letter. E:\FR\FM\15NON1.SGM 15NON1 70798 Federal Register / Vol. 76, No. 220 / Tuesday, November 15, 2011 / Notices V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing and whether Amendment No. 2 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–NYSE–2011–38 on the subject line. mstockstill on DSK4VPTVN1PROD with NOTICES 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–NYSE–2011–38. 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 (https://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 NYSE. 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–NYSE–2011–38, and should be submitted on or before December 6, 2011. VI. Discussion and Commission Findings The Commission has carefully reviewed the proposed rule change, as modified by Amendment No. 2, and VerDate Mar<15>2010 19:06 Nov 14, 2011 Jkt 226001 finds that it is consistent with the requirements of the Act and the rule and regulations thereunder applicable to a national securities exchange,38 and, in particular, Section 6(b)(5) of the Act,39 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. 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. NYSE 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, Nasdaq and NYSE Amex filed similar proposals for the same reasons.40 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 38 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). 39 15 U.S.C. 78f(b)(5). 40 See Securities Exchange Act Release No. 65633 (August 4, 2011), 76 FR 49513 (August 10, 2011) and Securities Exchange Act Release No. 65033 (August 4, 2011), 76 FR 49522. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 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. 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 required audited financial statements following the Reverse Merger transaction before it is eligible to list on NYSE. 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. 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 NYSE 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 E:\FR\FM\15NON1.SGM 15NON1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 220 / Tuesday, November 15, 2011 / Notices 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,41 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. 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, the execution of a consent to service of process in the U.S. by foreign controlling persons, and additional more stringent standards in addition to the proposed seasoning period. Although there may be merit in these or 41 The Commission notes that several commenters supported an exception for issuers with underwritten public offerings. See WestPark Letter; Donohoe Letter; and Locke Lord Letter. VerDate Mar<15>2010 19:06 Nov 14, 2011 Jkt 226001 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. 2 were clarifying in nature and designed to make its proposal consistent with the proposals submitted by Nasdaq and NYSE Amex. For the reasons discussed above, the Commission believes that NYSE’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,42 for approving the proposed rule change, as modified by Amendment No. 2, 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. 2 harmonize the proposed rule change with similar proposals by Nasdaq 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 NYSE 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. It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR–NYSE–2011– 38), 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.43 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–29439 Filed 11–14–11; 8:45 am] BILLING CODE 8011–01–P 42 15 43 17 PO 00000 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00097 Fmt 4703 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 1 15 U.S.C. 78s(b)(1). 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’’). 2 17 VII. Conclusion Sfmt 4703 70799 E:\FR\FM\15NON1.SGM 15NON1

Agencies

[Federal Register Volume 76, Number 220 (Tuesday, November 15, 2011)]
[Notices]
[Pages 70795-70799]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29439]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65709; File No. SR-NYSE-2011-38]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice and Order Granting Accelerated Approval to Proposed Rule Change, 
as Modified by Amendment No. 2, Amending Sections 102.01 and 103.01 of 
the Exchange's Listed Company Manual 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 July 22, 2011, New York Stock Exchange LLC (``NYSE'' 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 adopting 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''). The proposed rule change was 
published for comment in the Federal Register on August 10, 2011.\3\ On 
September 21, 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 November 8, 2011.\4\ The Commission 
received one comment letter on the proposal.\5\ NYSE filed Amendment 
No. 1 to the proposed rule change on November 4, 2011, which was later 
withdrawn.\6\ NYSE filed Amendment No. 2 to the proposed rule change on 
November 8, 2011.\7\ This order approves the proposed rule change, as 
modified by Amendment No. 2, on an accelerated basis.
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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. 65034 (August 4, 
2011), 76 FR 49513 (``Notice'').
    \4\ See Securities Exchange Act Release No. 65368 (September 21, 
2011), 76 FR 59756 (September 27, 2011).
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from James Davidson, Hermes Equity Ownership Services Limited dated 
August 31, 2011 (``Hermes Letter''). In addition, the Commission 
received five comment letters on a substantially similar proposal by 
Nasdaq. (See Securities Exchange Act Release No. 64633 (June 8, 
2011), 76 FR 34781 (June 14, 2011) (SR-NASDAQ-2011-073)). The 
comment letters received on the Nasdaq filing are: Letter from David 
Feldman, Partner, Richardson and Patel LLP dated August 20, 2011 
(``Feldman Letter''); Letter to Elizabeth M. Murphy, Secretary, 
Commission, from WestPark Capital, Inc. dated September 2, 2011 
(``WestPark Letter''); 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''). One of the comment letters submitted on the 
Nasdaq filing specifically referenced this proposal by NYSE. 
However, the Commission believes all of the filings submitted on the 
Nasdaq filing are applicable to this filing. Since the comment 
letters received on the Nasdaq filing either specifically reference 
the NYSE filing, or discuss issues directly related to this filing, 
the Commission has included them in its discussions of this filing.
    \6\ Amendment No. 1, dated November 4, 2011, was withdrawn on 
November 8, 2011.
    \7\ See Amendment No. 2, dated November 8, 2011. Amendment No. 2 
replaces Amendment No. 1 in its entirety. In Amendment No. 2, NYSE 
made several changes to the proposed rule change. The changes 
proposed by NYSE include: (i) Amending the proposed price 
requirement to make is applicable for a sustained period of time, 
but in no event for less than 30 of the most recent 60 trading days; 
(ii) 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; and (iii) other 
additional changes to clarify the rule and harmonize it with a 
similar proposal by Nasdaq.
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II. Description of the Original Proposal

    The Exchange proposes to adopt more stringent listing requirements 
for companies that become public through a Reverse Merger, to address 
significant regulatory concerns including accounting fraud allegations 
that have arisen with respect to Reverse Merger companies. In its 
filing, the Exchange noted that the Commission has taken direct action 
against Reverse Merger companies. In addition, the Exchange noted that 
the Commission has suspended trading in, and revoked the securities 
registration of, a number of Reverse Merger companies.\8\ The Exchange 
also stated that the Commission recently brought an enforcement 
proceeding against an audit firm relating to its work for Reverse 
Merger companies \9\ and issued a bulletin on the risks of investing in 
Reverse Merger companies, noting potential market and regulatory risks 
related to investing in such companies.\10\
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    \8\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry, 
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
    \9\ See Schapiro Letter at page 4.
    \10\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
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    In response to the concerns noted above, the Exchange proposed to 
adopt additional listing requirements for Reverse Merger companies.\11\ 
Specifically, NYSE 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 
regulated foreign exchange, for at least one year following the filing 
of all required information about the Reverse Merger transaction, 
including audited financial statements, with the Commission. The 
Reverse Merger company would also be required to timely file 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 all required 
information about the Reverse Merger transaction and satisfying the 
one-year trading requirement. Further, NYSE proposed to require that 
the Reverse Merger company maintain on

[[Page 70796]]

both an absolute and an average basis for a sustained period a minimum 
stock price of $4 both immediately preceding the filing of the initial 
listing application and the company's listing on the Exchange. Finally, 
the Exchange proposed an exception from the requirements of the rule if 
the Reverse Merger company is listing in connection with an initial 
firm commitment underwritten public offering where the proceeds to the 
company are sufficient on a stand-alone basis to meet the aggregate 
market value of publicly-held shares requirement set forth in Section 
102.01B of the Exchange's Listed Company Manual (``Manual'').\12\
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    \11\ In addition to the specific additional listing requirements 
contained in the proposal, the Exchange included language in the 
proposed rule that states that the Exchange may ``in its discretion 
impose more stringent requirements than those set forth above if the 
Exchange believes it is 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 are not 
subject to transfer restrictions, if the Reverse Merger Company has 
not had a Securities Act registration statement or other filing 
subjected to a comprehensive review by the Commission, or if the 
Reverse Merger Company has disclosed that it has material weaknesses 
in its internal controls which have been identified by management 
and/or the Reverse Merger Company's independent auditor and has not 
yet implemented an appropriate corrective action plan.''
    \12\ The Commission notes that Section 102.01B of the Manual 
would require a company to demonstrate an aggregate market value of 
publicly-held shares of $40 million for companies that list either 
at the time of their initial public offerings or as a result of 
spin-offs or under the affiliated company standard or, for companies 
that list at the time of their initial firm commitment underwritten 
public offering and $100 million for other companies.
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III. Comment Summary

    As stated previously, the Commission received only one comment 
letter on the proposal.\13\ However, a related proposal by Nasdaq 
received five comment letters,\14\ one of which specifically discusses 
the NYSE proposal.\15\ The Commission is treating all six comment 
letters as being applicable to the NYSE filing since the NYSE and 
Nasdaq filing address the same substantive issues.\16\ Two of the 
commenters objected broadly to the proposed additional listing 
requirements for Reverse Merger companies,\17\ while four commenters 
suggested discrete changes to the proposal.\18\
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    \13\ See Hermes Letter.
    \14\ See Feldman Letter; WestPark Letter; Locke Lord Letter; New 
York Global Group Letter; and Donohoe Letter.
    \15\ See Locke Lord Letter.
    \16\ In instituting disapproval proceedings for the Nasdaq 
proposal, the Commission stated that the NYSE and NYSE Amex had 
filed similar proposals designed to address the same concerns as the 
Nasdaq proposal.
    \17\ See Feldman Letter and New York Global Group Letter.
    \18\ See Hermes Letter; WestPark Letter; Donohoe Letter; and 
Locke Lord Letter.
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    One commenter who objected broadly to Nasdaq's related 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.'' \19\ 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 a review of regulatory 
histories and financial arrangements with promoters, and refrain from 
listing companies where the issues are great. In any event, the 
commenter recommends an exception 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 suggested it be 
eliminated.\20\
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    \19\ See Feldman Letter.
    \20\ 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.\21\ 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.\22\ Based on its research, 
the 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.\23\
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    \21\ See New York Global Group Letter.
    \22\ Id.
    \23\ Id. As noted above, the comment letter refers specifically 
to Nasdaq, but applies equally to the NYSE proposal.
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    The commenter that specifically commented on the NYSE proposed rule 
change was supportive of the changes proposed but also stated that more 
stringent listing requirements are necessary to reduce the risk of 
fraud and other regulatory concerns that can occur when companies seek 
to list on an exchange quickly and inexpensively through a Reverse 
Merger with a shell company.\24\ This commenter believed that ``further 
tests'' should be introduced that go beyond the proposed seasoning 
period, but did not offer any specific suggestions.
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    \24\ See Hermes Letter.
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    A fourth 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.\25\ 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.\26\ This commenter also recommended that an exchange should 
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.\27\
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    \25\ See WestPark Letter.
    \26\ Id.
    \27\ Id. As noted above, this comment letter was specifically 
addressed to Nasdaq, but applies equally to the NYSE proposal.
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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.\28\ 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.\29\ In addition, this commenter expressed 
support for an underwritten public offering exception, regardless of 
size, from the proposed rule's additional listing requirement.\30\
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    \28\ See Donohoe Letter.
    \29\ Id.
    \30\ Id.

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[[Page 70797]]

    A sixth 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.\31\ 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.\32\
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    \31\ See Locke Lord Letter.
    \32\ Id.
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IV. NYSE Amendment No. 2 and Response to Comments

    In Amendment No. 2, NYSE proposed several changes to more 
effectively align its proposal with that of Nasdaq. NYSE amended its 
proposal to require that a Reverse Merger company ``maintain a closing 
stock price of $4 or higher for a sustained period of time, but in no 
event for less than 30 of the most recent 60 trading days prior to the 
filing of the initial listing application'' and prior to listing. In 
addition, NYSE amended the requirement that a Reverse Merger company 
provide all required reports to clarify that such reports must include 
``all required'' audited financial statements.
    Amendment No. 2 also proposes a new exception to the Reverse Merger 
rules and clarifies that all other listing requirements are applicable 
to all Reverse Merger companies, even those Reverse Merger companies 
that can take advantage of either of the two exceptions being proposed 
under the new rules. As noted above, as proposed, the rule provides 
that a Reverse Merger company would not be subject to the requirements 
of the rule if, in connection with the listing, it completes a firm 
commitment underwritten public offering where the proceeds to the 
company will be sufficient on a stand-alone basis to meet the 
aggregated market value of publicly-held shares requirement for Initial 
Firm Commitment Underwritten Public Offerings as set forth in Section 
102.01B and the offering is occurring subsequent to or concurrently 
with the Reverse Merger.\33\ Amendment No. 2 additionally proposes that 
the Reverse Merger company would not be subject to the requirement that 
it maintain a closing stock price of $4 or higher for at least 30 of 
the most recent 60 days prior to each of the filing of the initial 
listing application and the date of the Reverse Merger company's 
listing, if it has satisfied the one-year trading requirement 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 required information.\34\ The amended 
rule language states that a Reverse Merger company must comply with all 
applicable listing requirements. Applicable listing standards include, 
but are not limited to, the corporate governance requirements set forth 
in Section 303A of the Manual and the applicable distribution, stock 
price and market value requirements of Sections 102.01A, 102.01B and 
303A of the Manual. In either case, the language makes clear that 
companies that fall under the exceptions must also comply with all 
other listing requirements.
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    \33\ See note 12, supra.
    \34\ Amendment No. 2 also proposes that, to be eligible for this 
exception, such companies be required to (i) Comply with the stock 
price requirement of Section 102.01B of the Manual at the time of 
the filing of the initial listing application and the date of the 
Reverse Merger company's listing and (ii) not be delinquent in its 
filing obligations with the Commission.
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    Finally, NYSE made several technical changes in Amendment No. 2, 
including those to conform its language more closely to that of the 
Nasdaq proposal.
    On November 7, 2011, NYSE responded to the comments received on the 
proposal.\35\ One commenter expressed concern that the NYSE proposal 
might not provide investors with sufficient protections in relation to 
listed Reverse Merger companies and noted and welcomed the NYSE's 
ability to exercise its discretion to apply additional or more 
stringent criteria to a Reverse Merger company. In response, NYSE noted 
that the same discretion is included in the NYSE Amex proposal. The 
NYSE further noted that it does not believe that it is necessary at 
this time to adopt any additional general requirements for all 
companies that would be considered for listing under the proposed 
rules. The Exchange also stated that the proposed approach, in its 
belief, strikes an appropriate balance by providing discretionary 
authority to the Exchange to apply additional or more stringent 
criteria,\36\ while also providing transparency as to the factors that 
would prompt the imposition of such criteria. NYSE believes that it is 
appropriate to apply those new requirements for a period of time, while 
closely monitoring the performance of Reverse Merger companies that 
list under the new rules. If at any time it becomes apparent that there 
are significant continuing investor protection or regulatory concerns 
associated with the listing of Reverse Merger companies, NYSE will 
consider the desirability of adopting additional more stringent 
requirements.
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    \35\ See Email from John Carey, Chief Counsel, NYSE Regulation 
Inc., to Sharon Lawson, Senior Special Counsel, Commission and David 
Michehl, Special Counsel, Commission dated November 7, 2011.
    \36\ See supra, note 11.
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    NYSE noted that the Commission received two negative comment 
letters in relation to the NYSE Amex filing.\37\ Both commenters 
supported the proposed rule's exception for Reverse Merger companies 
listing in conjunction with an underwritten public offering, but argued 
that the transaction size requirement should either be eliminated from 
the proposal or set at a far lower level. The Exchange believes that 
the substantial offering size requirement provides a significant 
regulatory benefit. One of the commenters argued that the requirement 
that a Reverse Merger Company must trade in another market for at least 
a year prior to listing is unnecessary. As noted in the filing, 
significant regulatory concerns have arisen with respect to a number of 
reverse merger companies in recent times. NYSE believes that a 
``seasoning'' period prior to listing should provide greater 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 will also provide time for regulatory and market 
scrutiny of the company, and for any concerns that would preclude 
listing eligibility to be identified. NYSE believes that the 
elimination of the one year trading requirement would significantly 
weaken the value of the seasoning period in that less scrutiny would 
generally be present. The other commenter argued that the rule should 
not apply to a Reverse Merger company which resulted from a merger 
between an operating company and a new shell company with no prior 
business operations. Based on the Exchange's experience with the 
listing of Reverse Merger companies, the Exchange believes that it is 
appropriate to apply the proposed rules to all Reverse Merger 
companies, regardless of whether the shell company into which the 
operating company merged had ever had any previous business operations.
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    \37\ The Commission notes that the two comment letters submitted 
on the NYSE Amex filing are substantially similar to two of the 
letters filed on the Nasdaq proposal. See Feldman Letter and 
Westpark Letter.

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[[Page 70798]]

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing and whether Amendment No. 2 is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2011-38 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-NYSE-2011-38. 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 (https://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 NYSE. 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-NYSE-2011-38, and should be submitted on or before December 6, 2011.

VI. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, as 
modified by Amendment No. 2, and finds that it is consistent with the 
requirements of the Act and the rule and regulations thereunder 
applicable to a national securities exchange,\38\ and, in particular, 
Section 6(b)(5) of the Act,\39\ 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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    \38\ 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).
    \39\ 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.
    NYSE 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, Nasdaq and NYSE Amex filed 
similar proposals for the same reasons.\40\ 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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    \40\ See Securities Exchange Act Release No. 65633 (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 all required 
audited financial statements following the Reverse Merger transaction 
before it is eligible to list on NYSE. 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.
    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 NYSE 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

[[Page 70799]]

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,\41\ 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.
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    \41\ 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, the execution of a consent to 
service of process in the U.S. by foreign controlling persons, and 
additional more stringent standards in addition to the proposed 
seasoning period. 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. 2 were clarifying in nature and designed 
to make its proposal consistent with the proposals submitted by Nasdaq 
and NYSE Amex.
    For the reasons discussed above, the Commission believes that 
NYSE'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,\42\ for approving the proposed rule change, as modified by 
Amendment No. 2, 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. 2 harmonize the proposed rule change with similar 
proposals by Nasdaq 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 NYSE 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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    \42\ 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-NYSE-2011-38), 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.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-29439 Filed 11-14-11; 8:45 am]
BILLING CODE 8011-01-P
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