Self-Regulatory Organizations; BATS Exchange, Inc.; Order Granting Approval of a Proposed Rule Change to Amend BATS Rules 14.2 and 14.3 To Adopt Additional Listing Requirements for Reverse Merger Companies and To Align BATS Rules With the Rules of Other Self-Regulatory Organizations, 51602-51604 [2012-20818]
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<![CDATA[
51602
Federal Register / Vol. 77, No. 165 / Friday, August 24, 2012 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–20822 Filed 8–23–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67685; File No. SR–BATS–
2012–023]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Order Granting
Approval of a Proposed Rule Change
to Amend BATS Rules 14.2 and 14.3 To
Adopt Additional Listing Requirements
for Reverse Merger Companies and To
Align BATS Rules With the Rules of
Other Self-Regulatory Organizations
August 17, 2012.
I. Introduction
On June 15, 2012, BATS Exchange,
Inc. (‘‘BATS’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend BATS
Rules 14.2 and 14.3 to adopt additional
listing requirements for companies that
become a reporting company under the
Exchange Act by combining with a
public shell, whether through a reverse
merger, exchange offer, or otherwise (a
‘‘Reverse Merger’’) and to align BATS
Rules with the rules of other selfregulatory organizations. The proposed
rule change was published for comment
in the Federal Register on July 5, 2012.3
The Commission received no comments
on the proposed rule change. This order
approves the proposed rule change.
erowe on DSK2VPTVN1PROD with
II. Description of the Proposal
BATS proposed to adopt more
stringent listing requirements for
operating companies that become
Exchange Act reporting companies
through a Reverse Merger. In a Reverse
Merger, an existing public shell
company merges with a private
operating company in a transaction in
which the shell company is the
surviving legal entity.
Significant regulatory concerns,
including accounting fraud allegations,
have arisen with respect to a number of
Reverse Merger companies in recent
7 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 67304
(June 28, 2012), 77 FR 39781 (‘‘Notice’’).
VerDate Mar<15>2010
15:22 Aug 23, 2012
Jkt 226001
times. The Commission has taken direct
action against Reverse Merger
companies. During 2011, the
Commission suspended trading in, and
revoked the securities registration of, a
number of Reverse Merger companies.4
The Commission also brought an
enforcement proceeding against an audit
firm relating to its work for Reverse
Merger companies.5 In addition, the
Commission issued a bulletin on the
risks of investing in Reverse Merger
companies, noting potential market and
regulatory risks related to investing in
Reverse Merger companies.6
In light of the well-documented
concerns related to some Reverse
Merger companies described above,
BATS stated its belief that it is
appropriate to codify in its rules specific
requirements with respect to the initial
listing qualification of Reverse Merger
companies. As proposed, a Reverse
Merger company would not be eligible
for listing unless the combined entity
had, immediately preceding the filing of
the initial listing application:
(1) Traded for at least one year in the
U.S. over-the-counter market, on
another national securities exchange, or
on a regulated foreign exchange
following the consummation of the
Reverse Merger and (i) in the case of a
domestic issuer, filed with the
Commission a form 8–K including all of
the information required by Item 2.01(f)
of Form 8–K, including all required
audited financial statements; or (ii) in
the case of a foreign private issuer, filed
the information described in (i) above
on Form 20–F;
(2) Maintained on both an absolute
and an average basis for a sustained
period a minimum stock price of at least
$4, but in no event for less than 30 of
the most recent 60 trading days prior to
each of the filing of the initial listing
application and the date of the Reverse
Merger company’s listing on the
Exchange, except that a Reverse Merger
company that has satisfied the one-year
trading requirement described in
paragraph (1) above and has filed at
least four annual reports with the
Commission which each contain all
required audited financial statements
for a full fiscal year commencing after
filing the information described in
paragraph (1) above will not be subject
to this price requirement; and
(3) Timely filed with the Commission
all required reports since the
consummation of the Reverse Merger,
4 See Letter from Mary L. Schapiro to Hon. Patrick
T. McHenry, dated April 27, 2011 (‘‘Schapiro
Letter’’), at pages 3–4.
5 See Schapiro Letter at page 4.
6 See ‘‘Investor Bulletin: Reverse Mergers’’ 2011–
123.
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
including the filing of at least one
annual report containing audited
financial statements for a full fiscal year
commencing on a date after the date of
filing with the Commission of the filing
described in paragraph (1) above.
In addition, a Reverse Merger
company would be required to maintain
on both an absolute and an average basis
a minimum stock price of at least $4
through listing.
BATS stated that requiring a
‘‘seasoning’’ period prior to listing for
Reverse Merger companies should
provide great assurance that the
company’s operations and financial
reporting are reliable, and will also
provide time for its independent auditor
to detect any potential irregularities, as
well as for the company to identify and
implement enhancements to address
any internal control weaknesses. The
seasoning period would also provide
time for regulatory and market scrutiny
of the company and for any concerns
that would preclude listing eligibility to
be identified.
BATS stated its belief that the
proposed rule change would increase
transparency to issuers and market
participants with respect to the factors
considered by the Exchange in assessing
Reverse Merger companies for listing
and should generally reduce the risk of
regulatory concerns with respect to
these companies being discovered after
listing. BATS further noted that, while
it believes that the proposed
requirements would be a meaningful
additional safeguard, it is not possible to
guarantee that a Reverse Merger
company (or any other listed company)
is not engaged in undetected accounting
fraud or subject to other concealed and
undisclosed legal or regulatory
problems.
For purposes of the proposal
amending BATS Rules 14.2(c) and
14.3(b)(9) (which will both be
applicable to Reverse Merger companies
which qualify to list under BATS Rules)
and as defined above, a Reverse Merger
would mean any transaction whereby an
operating company became an Exchange
Act reporting company by combining
either directly or indirectly with a shell
company that was an Exchange Act
reporting company, whether through a
Reverse Merger, exchange offer, or
otherwise. However, a Reverse Merger
would not include the acquisition of an
operating company by a listed company
that qualified for initial listing under
BATS Rule 14.2(b) (the Exchange’s
standard for companies whose business
plan is to complete one or more
acquisitions). In determining whether a
company was a shell company, BATS
would consider, among other factors:
E:\FR\FM\24AUN1.SGM
24AUN1
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Federal Register / Vol. 77, No. 165 / Friday, August 24, 2012 / Notices
whether the company was considered a
‘‘shell company’’ as defined in Rule
12b–2 under the Exchange Act; what
percentage of the company’s assets were
active versus passive; whether the
company generates revenues, and if so,
whether the revenues were passively or
actively generated; whether the
company’s expenses were reasonably
related to the revenues being generated;
how many employees worked in the
company’s revenue-generating business
operations; how long the company had
been without material business
operations; and whether the company
had publicly announced a plan to begin
operating activities or generate
revenues, including through a near-term
acquisition or transaction.
In order to qualify for initial listing,
a Reverse Merger company would be
required to comply with one of the
initial listing standards set forth in
BATS Rule 14.4 or 14.5 and the stock
price and market value requirements of
BATS Rule 14.8 or 14.9, as appropriate.
Proposed Rules 14.2(c)(3) and 14.3(b)(9)
would supplement and not replace any
applicable requirements of Chapter XIV
of BATS Rules. In addition to the
otherwise applicable requirements of
BATS Rules, a Reverse Merger company
would be eligible to submit an
application for an initial listing only if
it meets the additional criteria specified
above.
BATS would continue to have the
discretion to impose more stringent
requirements than those set forth above
if the Exchange believed that it was
warranted in the case of a particular
Reverse Merger company, based on,
among other things, an inactive trading
market in the Reverse Merger company’s
securities, the existence of a low
number of publicly held shares that
were not subject to transfer restrictions,
if the Reverse Merger company had not
had a Securities Act registration
statement or other filing subjected to a
comprehensive review by the
Commission, or if the Reverse Merger
company had disclosed that it had
material weaknesses in its internal
controls which had been identified by
management and/or the Reverse Merger
company’s independent auditor and had
not yet implemented an appropriate
corrective action plan.
BATS further stated that any Reverse
Merger company would have to comply
with all listing standards set forth in
BATS Rules, including corporate
governance standards. BATS also noted
that it would monitor the compliance
with applicable BATS Rules by any
Reverse Merger company and would
investigate any issues that indicate that
VerDate Mar<15>2010
15:22 Aug 23, 2012
Jkt 226001
a Reverse Merger company is noncompliant with BATS Rules.
A Reverse Merger company would not
be subject to the requirements of
proposed BATS Rules 14.2(c)(3) and
14.3(b)(9) if, in connection with its
listing, it completes a firm commitment
underwritten public offering where the
gross proceeds to the Reverse Merger
company will be at least $40 million.7
In that case, the Reverse Merger
company would only need to meet the
initial listing standards. BATS stated
that it believes that it is appropriate to
exempt Reverse Merger companies from
the proposed rule where they are listing
in conjunction with a sizable offering, as
those companies would be subject to the
same Commission review and due
diligence by underwriters as a company
listing in conjunction with its IPO or
any other company listing in
conjunction with an initial firm
commitment underwritten public
offering, so it would be inequitable to
subject them to more stringent
requirements.
BATS further noted that the proposal
is based on and consistent with recent
Commission approvals of analogous
rules for the New York Stock Exchange
LLC (‘‘NYSE’’), NYSE Amex LLC
(‘‘AMEX’’) and the NASDAQ Stock
Market LLC (‘‘Nasdaq’’).8
III. Discussion and Commission
Findings
The Commission has carefully
reviewed the proposed rule change and
finds that it is consistent with the
requirements of the Act and the rule and
regulations thereunder applicable to a
national securities exchange,9 and, in
particular, Section 6(b)(5) of the Act,10
which, among other things, requires that
the rules of a national securities
exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
7 The prospectus and registration statement
covering the offering would thus need to relate to
the combined financial statements and operations
of the Reverse Merger Company.
8 See Securities Exchange Act Release Nos. 65709
(November 8, 2011), 76 FR 70795 (November 15,
2011) (File No. SR–NYSE–2011–38); 65710
(November 8, 2011), 76 FR 70790 (November 15,
2011) (File No. SR–NYSEAmex–2011–55); 65708
(November 8, 2011), 76 FR 70799 (November 15,
2011) (File No. SR–NASDAQ–2011–073).
9 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
10 15 U.S.C. 78f(b)(5).
PO 00000
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51603
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.
BATS proposed to make more
rigorous its listing standards for Reverse
Merger companies, given the significant
regulatory concerns, including
accounting fraud allegations, that have
recently arisen with respect to these
companies. As noted above, the
Commission previously approved
similar filings by Nasdaq, NYSE and
NYSE Amex.11 The proposal, and those
previously filed by Nasdaq, NYSE and
NYSE Amex, among other things, are
intended to improve the reliability of
the reported financial results of Reverse
Merger companies by requiring a prelisting ‘‘seasoning period’’ during which
the post-merger public company would
have produced financial and other
information in connection with its
required Commission filings. The
current proposal is also intended to
address concerns that some might
attempt to meet the minimum price test
required for exchange listing through a
quick manipulative scheme in the
securities of a Reverse Merger company,
by requiring that minimum price to be
sustained for a meaningful period of
time.
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
11 See
E:\FR\FM\24AUN1.SGM
supra note 8.
24AUN1
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51604
Federal Register / Vol. 77, No. 165 / Friday, August 24, 2012 / Notices
required audited financial statements
following the Reverse Merger
transaction before it is eligible to list on
BATS. The Reverse Merger company
also must have filed all required
Commission reports since the
consummation of the Reverse Merger,
which should help assure that material
information about the issuer have been
filed with the Commission and that the
issuer has a demonstrated track record
of meeting its Commission filing and
disclosure obligations. In addition, the
requirement that the Reverse Merger
company has traded for at least one year
in the over-the-counter market or on
another exchange could make it more
likely that analysts have followed the
company for a sufficient period of time
to provide an additional check on the
validity of the financial and other
information made available to the
public.
The Commission also believes the
proposed requirement for a Reverse
Merger company to maintain the
specified minimum share price for a
sustained period, and for at least 30 of
the most recent 60 trading days, prior to
the date of the initial listing application
and the date of listing, is reasonably
designed to address concerns that the
potential for manipulation of the
security to meet the minimum price
requirements is more pronounced for
this type of issuer. By requiring that
minimum price to be maintained for a
meaningful period of time, the proposal
should make it more difficult for a
manipulative scheme to be successfully
used to meet the Exchange’s minimum
share price requirements.
In addition, the Commission believes
that the proposed exceptions to the
enhanced listing requirements for
Reverse Merger companies that (1)
complete a substantial firm commitment
underwritten public offering in
connection with its listing, or (2) have
filed at least four annual reports
containing all required audited financial
statements with the Commission
following the filing of all required
information about the Reverse Merger
transaction, and satisfying the one-year
trading requirement, reasonably
accommodate issuers that may present a
lower risk of fraud or other illegal
activity. The Commission believes it is
reasonable for the Exchange to conclude
that, although formed through a Reverse
Merger, an issuer that (1) undergoes the
due diligence and vetting required in
connection with a sizeable underwritten
public offering, or (2) has prepared and
filed with the Commission four years of
all required audited financial statements
following the Reverse Merger, presents
less risk and warrants the same
VerDate Mar<15>2010
15:22 Aug 23, 2012
Jkt 226001
treatment as issuers that were not
formed through a Reverse Merger.
Nevertheless, the Commission expects
the Exchange to monitor any issuers that
qualify for these exceptions and, if fraud
or other abuses are detected, to propose
appropriate changes to its listing
standards.
For the reasons discussed above, the
Commission believes that BATS’s
proposal will further the purposes of
Section 6(b)(5) of the Act by, among
other things, helping prevent fraud and
manipulation associated with Reverse
Merger companies, and protecting
investors and the public interest.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–BATS–2012–
023) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–20818 Filed 8–23–12; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice 7990]
Certification Related to the Khmer
Rouge Tribunal
Pursuant to the authority vested in me
under Section 7044(c) of the Department
of State, Foreign Operations, and
Related Programs Appropriations Act,
2012 (Division I, Pub. L. 112–74)
(SFOAA) and Delegation of Authority
245–1, I hereby certify that that the
United Nations and Government of
Cambodia are taking credible steps to
address allegations of corruption and
mismanagement within the
Extraordinary Chambers in the Courts of
Cambodia (also known as the ‘‘Khmer
Rouge Tribunal’’).
This Certification shall be published
in the Federal Register, and sent, along
with related Memorandum of
Justification, to the appropriate
committees of the Congress.
12 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00094
Fmt 4703
Sfmt 4703
Dated: August 13, 2012.
Thomas R. Nides,
Deputy Secretary for Management and
Resources.
Section 7044(c) of the Department of
State, Foreign Operations
Appropriations Act, 2012 (Div. I,
Pub. L. 112–74)
Funding for the Extraordinary
Chambers in the Courts of Cambodia
Sec. 7044(c) Cambodia.—Funds made
available in this Act for a United States
contribution to a Khmer Rouge tribunal
may only be made available if the
Secretary of State certifies to the
Committees on Appropriations that the
United Nations and the Government of
Cambodia are taking credible steps to
address allegations of corruption and
mismanagement within the tribunal.
Memorandum of Justification for
Certification Related to the Khmer
Rouge Tribunal Under Section 7044(C)
Of the Department of State, Foreign
Operations and Related Programs
Appropriations Act, 2012
Section 7044(c) of the Department of
State, Foreign Operations and Related
Program Appropriations Act, 2012 (Div.
I Pub. L. 112–74), provides that funds
appropriated by that act for a United
States contribution to the Extraordinary
Chambers in the Courts of Cambodia
(ECCC, also known as the Khmer Rouge
Tribunal) may only be made available if
the Secretary of State certifies to the
Committees on Appropriations that the
United Nations (UN) and Royal
Government of Cambodia (RGC) are
taking credible steps to address
allegations of corruption and
mismanagement within the ECCC.
Deputy Secretary Nides has signed the
certification pursuant to State
Department Delegation of Authority
245–1.
Background
The ECCC, which began operations in
2006, was established as a national
court with UN assistance to bring to
justice senior leaders and those most
responsible for the deaths of as many as
two million Cambodians under the
Khmer Rouge regime, which was in
power from April 17, 1975 until January
6, 1979. In 2010, the ECCC completed
its first case (Case 001), convicting
Kaing Guek Eav (aka ‘‘Duch’’), former
chief of the Tuol Sleng torture center, of
crimes against humanity and war
crimes, and sentenced him to 35 years
in prison. Duch’s trial was the first
attempt in three decades to hold a
Khmer Rouge official accountable for
that era’s atrocities and was a milestone
in the history of Cambodian justice. In
E:\FR\FM\24AUN1.SGM
24AUN1
]]>Agencies
[Federal Register Volume 77, Number 165 (Friday, August 24, 2012)]
[Notices]
[Pages 51602-51604]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20818]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67685; File No. SR-BATS-2012-023]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change to Amend BATS Rules 14.2
and 14.3 To Adopt Additional Listing Requirements for Reverse Merger
Companies and To Align BATS Rules With the Rules of Other Self-
Regulatory Organizations
August 17, 2012.
I. Introduction
On June 15, 2012, BATS Exchange, Inc. (``BATS'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to amend BATS Rules 14.2 and 14.3 to adopt additional listing
requirements for companies that become a reporting company under the
Exchange Act by combining with a public shell, whether through a
reverse merger, exchange offer, or otherwise (a ``Reverse Merger'') and
to align BATS Rules with the rules of other self-regulatory
organizations. The proposed rule change was published for comment in
the Federal Register on July 5, 2012.\3\ The Commission received no
comments on the proposed rule change. This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 67304 (June 28,
2012), 77 FR 39781 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
BATS proposed to adopt more stringent listing requirements for
operating companies that become Exchange Act reporting companies
through a Reverse Merger. In a Reverse Merger, an existing public shell
company merges with a private operating company in a transaction in
which the shell company is the surviving legal entity.
Significant regulatory concerns, including accounting fraud
allegations, have arisen with respect to a number of Reverse Merger
companies in recent times. The Commission has taken direct action
against Reverse Merger companies. During 2011, the Commission suspended
trading in, and revoked the securities registration of, a number of
Reverse Merger companies.\4\ The Commission also brought an enforcement
proceeding against an audit firm relating to its work for Reverse
Merger companies.\5\ In addition, the Commission issued a bulletin on
the risks of investing in Reverse Merger companies, noting potential
market and regulatory risks related to investing in Reverse Merger
companies.\6\
---------------------------------------------------------------------------
\4\ See Letter from Mary L. Schapiro to Hon. Patrick T. McHenry,
dated April 27, 2011 (``Schapiro Letter''), at pages 3-4.
\5\ See Schapiro Letter at page 4.
\6\ See ``Investor Bulletin: Reverse Mergers'' 2011-123.
---------------------------------------------------------------------------
In light of the well-documented concerns related to some Reverse
Merger companies described above, BATS stated its belief that it is
appropriate to codify in its rules specific requirements with respect
to the initial listing qualification of Reverse Merger companies. As
proposed, a Reverse Merger company would not be eligible for listing
unless the combined entity had, immediately preceding the filing of the
initial listing application:
(1) Traded for at least one year in the U.S. over-the-counter
market, on another national securities exchange, or on a regulated
foreign exchange following the consummation of the Reverse Merger and
(i) in the case of a domestic issuer, filed with the Commission a form
8-K including all of the information required by Item 2.01(f) of Form
8-K, including all required audited financial statements; or (ii) in
the case of a foreign private issuer, filed the information described
in (i) above on Form 20-F;
(2) Maintained on both an absolute and an average basis for a
sustained period a minimum stock price of at least $4, but in no event
for less than 30 of the most recent 60 trading days prior to each of
the filing of the initial listing application and the date of the
Reverse Merger company's listing on the Exchange, except that a Reverse
Merger company that has satisfied the one-year trading requirement
described in paragraph (1) above and has filed at least four annual
reports with the Commission which each contain all required audited
financial statements for a full fiscal year commencing after filing the
information described in paragraph (1) above will not be subject to
this price requirement; and
(3) Timely filed with the Commission all required reports since the
consummation of the Reverse Merger, including the filing of at least
one annual report containing audited financial statements for a full
fiscal year commencing on a date after the date of filing with the
Commission of the filing described in paragraph (1) above.
In addition, a Reverse Merger company would be required to maintain
on both an absolute and an average basis a minimum stock price of at
least $4 through listing.
BATS stated that requiring a ``seasoning'' period prior to listing
for Reverse Merger companies should provide great assurance that the
company's operations and financial reporting are reliable, and will
also provide time for its independent auditor to detect any potential
irregularities, as well as for the company to identify and implement
enhancements to address any internal control weaknesses. The seasoning
period would also provide time for regulatory and market scrutiny of
the company and for any concerns that would preclude listing
eligibility to be identified.
BATS stated its belief that the proposed rule change would increase
transparency to issuers and market participants with respect to the
factors considered by the Exchange in assessing Reverse Merger
companies for listing and should generally reduce the risk of
regulatory concerns with respect to these companies being discovered
after listing. BATS further noted that, while it believes that the
proposed requirements would be a meaningful additional safeguard, it is
not possible to guarantee that a Reverse Merger company (or any other
listed company) is not engaged in undetected accounting fraud or
subject to other concealed and undisclosed legal or regulatory
problems.
For purposes of the proposal amending BATS Rules 14.2(c) and
14.3(b)(9) (which will both be applicable to Reverse Merger companies
which qualify to list under BATS Rules) and as defined above, a Reverse
Merger would mean any transaction whereby an operating company became
an Exchange Act reporting company by combining either directly or
indirectly with a shell company that was an Exchange Act reporting
company, whether through a Reverse Merger, exchange offer, or
otherwise. However, a Reverse Merger would not include the acquisition
of an operating company by a listed company that qualified for initial
listing under BATS Rule 14.2(b) (the Exchange's standard for companies
whose business plan is to complete one or more acquisitions). In
determining whether a company was a shell company, BATS would consider,
among other factors:
[[Page 51603]]
whether the company was considered a ``shell company'' as defined in
Rule 12b-2 under the Exchange Act; what percentage of the company's
assets were active versus passive; whether the company generates
revenues, and if so, whether the revenues were passively or actively
generated; whether the company's expenses were reasonably related to
the revenues being generated; how many employees worked in the
company's revenue-generating business operations; how long the company
had been without material business operations; and whether the company
had publicly announced a plan to begin operating activities or generate
revenues, including through a near-term acquisition or transaction.
In order to qualify for initial listing, a Reverse Merger company
would be required to comply with one of the initial listing standards
set forth in BATS Rule 14.4 or 14.5 and the stock price and market
value requirements of BATS Rule 14.8 or 14.9, as appropriate. Proposed
Rules 14.2(c)(3) and 14.3(b)(9) would supplement and not replace any
applicable requirements of Chapter XIV of BATS Rules. In addition to
the otherwise applicable requirements of BATS Rules, a Reverse Merger
company would be eligible to submit an application for an initial
listing only if it meets the additional criteria specified above.
BATS would continue to have the discretion to impose more stringent
requirements than those set forth above if the Exchange believed that
it was warranted in the case of a particular Reverse Merger company,
based on, among other things, an inactive trading market in the Reverse
Merger company's securities, the existence of a low number of publicly
held shares that were not subject to transfer restrictions, if the
Reverse Merger company had not had a Securities Act registration
statement or other filing subjected to a comprehensive review by the
Commission, or if the Reverse Merger company had disclosed that it had
material weaknesses in its internal controls which had been identified
by management and/or the Reverse Merger company's independent auditor
and had not yet implemented an appropriate corrective action plan.
BATS further stated that any Reverse Merger company would have to
comply with all listing standards set forth in BATS Rules, including
corporate governance standards. BATS also noted that it would monitor
the compliance with applicable BATS Rules by any Reverse Merger company
and would investigate any issues that indicate that a Reverse Merger
company is non-compliant with BATS Rules.
A Reverse Merger company would not be subject to the requirements
of proposed BATS Rules 14.2(c)(3) and 14.3(b)(9) if, in connection with
its listing, it completes a firm commitment underwritten public
offering where the gross proceeds to the Reverse Merger company will be
at least $40 million.\7\ In that case, the Reverse Merger company would
only need to meet the initial listing standards. BATS stated that it
believes that it is appropriate to exempt Reverse Merger companies from
the proposed rule where they are listing in conjunction with a sizable
offering, as those companies would be subject to the same Commission
review and due diligence by underwriters as a company listing in
conjunction with its IPO or any other company listing in conjunction
with an initial firm commitment underwritten public offering, so it
would be inequitable to subject them to more stringent requirements.
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\7\ The prospectus and registration statement covering the
offering would thus need to relate to the combined financial
statements and operations of the Reverse Merger Company.
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BATS further noted that the proposal is based on and consistent
with recent Commission approvals of analogous rules for the New York
Stock Exchange LLC (``NYSE''), NYSE Amex LLC (``AMEX'') and the NASDAQ
Stock Market LLC (``Nasdaq'').\8\
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\8\ See Securities Exchange Act Release Nos. 65709 (November 8,
2011), 76 FR 70795 (November 15, 2011) (File No. SR-NYSE-2011-38);
65710 (November 8, 2011), 76 FR 70790 (November 15, 2011) (File No.
SR-NYSEAmex-2011-55); 65708 (November 8, 2011), 76 FR 70799
(November 15, 2011) (File No. SR-NASDAQ-2011-073).
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III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of the Act and the
rule and regulations thereunder applicable to a national securities
exchange,\9\ and, in particular, Section 6(b)(5) of the Act,\10\ which,
among other things, requires that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
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\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
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The development and enforcement of meaningful listing standards for
an exchange is of substantial importance to financial markets and the
investing public. Among other things, listing standards provide the
means for an exchange to screen issuers that seek to become listed, and
to provide listed status only to those that are bona fide companies
with sufficient public float, investor base, and trading interest
likely to generate depth and liquidity sufficient to promote fair and
orderly markets. Meaningful listing standards also are important given
investor expectations regarding the nature of securities that have
achieved an exchange listing, and the role of an exchange in overseeing
its market and assuring compliance with its listing standards.
BATS proposed to make more rigorous its listing standards for
Reverse Merger companies, given the significant regulatory concerns,
including accounting fraud allegations, that have recently arisen with
respect to these companies. As noted above, the Commission previously
approved similar filings by Nasdaq, NYSE and NYSE Amex.\11\ The
proposal, and those previously filed by Nasdaq, NYSE and NYSE Amex,
among other things, are intended to improve the reliability of the
reported financial results of Reverse Merger companies by requiring a
pre-listing ``seasoning period'' during which the post-merger public
company would have produced financial and other information in
connection with its required Commission filings. The current proposal
is also intended to address concerns that some might attempt to meet
the minimum price test required for exchange listing through a quick
manipulative scheme in the securities of a Reverse Merger company, by
requiring that minimum price to be sustained for a meaningful period of
time.
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\11\ See supra note 8.
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The Commission believes the proposed one-year seasoning requirement
for Reverse Merger companies that seek to list on the Exchange is
reasonably designed to address concerns that the potential for
accounting fraud and other regulatory issues is more pronounced for
this type of issuer. As discussed above, these additional listing
requirements will assure that a Reverse Merger company has produced and
filed with the Commission at least one full year of all
[[Page 51604]]
required audited financial statements following the Reverse Merger
transaction before it is eligible to list on BATS. The Reverse Merger
company also must have filed all required Commission reports since the
consummation of the Reverse Merger, which should help assure that
material information about the issuer have been filed with the
Commission and that the issuer has a demonstrated track record of
meeting its Commission filing and disclosure obligations. In addition,
the requirement that the Reverse Merger company has traded for at least
one year in the over-the-counter market or on another exchange could
make it more likely that analysts have followed the company for a
sufficient period of time to provide an additional check on the
validity of the financial and other information made available to the
public.
The Commission also believes the proposed requirement for a Reverse
Merger company to maintain the specified minimum share price for a
sustained period, and for at least 30 of the most recent 60 trading
days, prior to the date of the initial listing application and the date
of listing, is reasonably designed to address concerns that the
potential for manipulation of the security to meet the minimum price
requirements is more pronounced for this type of issuer. By requiring
that minimum price to be maintained for a meaningful period of time,
the proposal should make it more difficult for a manipulative scheme to
be successfully used to meet the Exchange's minimum share price
requirements.
In addition, the Commission believes that the proposed exceptions
to the enhanced listing requirements for Reverse Merger companies that
(1) complete a substantial firm commitment underwritten public offering
in connection with its listing, or (2) have filed at least four annual
reports containing all required audited financial statements with the
Commission following the filing of all required information about the
Reverse Merger transaction, and satisfying the one-year trading
requirement, reasonably accommodate issuers that may present a lower
risk of fraud or other illegal activity. The Commission believes it is
reasonable for the Exchange to conclude that, although formed through a
Reverse Merger, an issuer that (1) undergoes the due diligence and
vetting required in connection with a sizeable underwritten public
offering, or (2) has prepared and filed with the Commission four years
of all required audited financial statements following the Reverse
Merger, presents less risk and warrants the same treatment as issuers
that were not formed through a Reverse Merger. Nevertheless, the
Commission expects the Exchange to monitor any issuers that qualify for
these exceptions and, if fraud or other abuses are detected, to propose
appropriate changes to its listing standards.
For the reasons discussed above, the Commission believes that
BATS's proposal will further the purposes of Section 6(b)(5) of the Act
by, among other things, helping prevent fraud and manipulation
associated with Reverse Merger companies, and protecting investors and
the public interest.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-BATS-2012-023) is approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20818 Filed 8-23-12; 8:45 am]
BILLING CODE 8011-01-P
