NYSE Proposes Heightened Listing Requirements for Reverse Merger Companies

August 15, 2011


In the wake of negative publicity from various scandals, trading halts and increased securities litigation related to publicly traded Chinese reverse merger companies, the New York Stock Exchange (“NYSE”) has followed Nasdaq by proposing heightened listing requirements for reverse merger companies. These proposed listing requirements would generally apply to companies formed by combining with a shell company1 that is an SEC reporting company, whether through a reverse merger, exchange offer or otherwise.

Under the proposed rules, a reverse merger company would be ineligible for listing on the NYSE unless the combined entity had, immediately prior to filing its initial listing application:

  • 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) if a domestic issuer, filed with the SEC 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) if a foreign private issuer, filed the information described in (i) above on Form 20-F; 
  • maintained on both an absolute and an average basis for a sustained period a minimum stock price of at least $4 per share; and 
  • timely filed with the SEC 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 SEC of the filing described in the first bullet 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 per share through listing.

A key point is that the NYSE specifically exempts or excludes certain reverse merger companies from its proposed heightened listing requirements. For example, a reverse merger company listing on the NYSE in connection with an Initial Firm Commitment Underwritten Public Offering2 occurring subsequent to, or concurrently with, the reverse merger that generates net proceeds to the company of $40 million or more would be exempt.3 Similarly, companies that qualify for initial listing under the NYSE’s special purpose acquisition company, or “SPAC,” listing standards would be excluded from the NYSE’s definition of a reverse merger company.

These requirements would be in addition to the NYSE’s other listing requirements. Furthermore, the NYSE would retain the discretion to impose even more stringent requirements on a case-by-case basis. Among the factors that might trigger further NYSE scrutiny are: an inactive trading market in the company’s securities; the existence of a low number of publicly held shares that were not subject to transfer restrictions; no filing of an SEC registration statement or other filing subject to review by the SEC; and disclosure of a material weakness or weaknesses in internal controls identified by management or the company’s auditor for which an appropriate corrective action plan had not yet been implemented.

As a comparison, the Nasdaq proposed rules would prohibit a company going public by combining with a public shell from applying to list until six months after the combined entity submits all required information about the transaction, including audited financial statements, to the SEC. Further, the Nasdaq proposed rules would require that the company maintain a $4 per share bid price on at least 30 of the 60 trading days immediately prior to submitting the application. Finally, Nasdaq would not approve any reverse merger company for listing unless it had timely filed its two most recent financial reports with the SEC if it is a domestic issuer (this could be two quarterly filings or a quarterly and an annual filing) or comparable information if it is a foreign private issuer.

The NYSE’s and Nasdaq’s proposed “seasoning” periods for reverse merger companies prior to listing makes it even more apparent that these companies are firmly in the cross-hairs of exchange officials, regulatory officials and policy-makers. It would be prudent for companies, and advisors to companies, looking to go list on the NYSE or Nasdaq to plan ahead and expect heightened listing application review. It is also likely that continued, heightened scrutiny will apply to reverse merger companies already listed on the NYSE and Nasdaq.

1. In determining whether a company is a “shell company,” the NYSE would consider, among other factors: whether the company met the definition of “shell company” in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”); the percentage of its active versus passive assets; whether it generated revenues, and if so, whether the revenues were passively or actively generated; whether its expenses were reasonably related to the generated revenues; how many employees worked in its revenue-generating operations; how long it had been without material business operations; and whether it had publicly announced a plan to begin operating activities or generating revenues, including through a near-term acquisition or transaction.

2. The NYSE proposes defining an “Initial Firm Commitment Underwritten Public Offering” as an offering where (i) a company has a class of common stock registered under the Exchange Act, (ii) such common stock has never been listed on a national securities exchange since the commencement of its current registration under the Exchange Act and (iii) such company is listing in connection with a firm commitment underwritten public offering that is its first firm commitment underwritten public offering of its common stock since the registration of its common stock under the Exchange Act.

3. The prospectus and registration statement covering the offering would need to relate to the combined financial statements and operations of the reverse merger company.