Last Friday, the SEC asked for comments on a proposal from NASDAQ to change the rules for listing reverse mergers. Under the proposed rules, a reverse merger could apply for a NASDAQ listing if it meets two conditions:
1) Traded for at least six months (OTC or another U.S. or foreign exchange) following the filing of audited financial statements for the combined entity.
2) Maintain a bid price of at least $4 per share for 30 of the 60 preceding days.
NASDAQ calls these “seasoning” requirements. NASDAQ indicates that the requirements should discourage inappropriate behavior on the part of companies, promoters, and others. The six-month delay after the audit is done makes certain that at least one report following the annual report is filed prior to listing, giving the auditors two bites at the apple. If a company does a traditional IPO, however, the rules do not apply. Traditional IPOs are audited before they are listed and receive considerable SEC scrutiny. Reverse mergers exist to avoid that scrutiny.
I submitted a comment on the proposed rules indicating my strong support. I think that the rules give companies a chance to prove that they can do what is required of them as a public company. The proposed rules also ensure that the new operations are audited before listing. Naturally, the reverse merger industry is up in arms. I wonder, however, if the proposed rules would have actually delayed any prior NASDAQ listings of reverse mergers.
However, I don’t think that the proposal goes far enough. The reverse merger, or backdoor listing, is popular because it circumvents the filing of the registration statement that is necessary for an IPO. It is a way to avoid SEC oversight before the company is public. As we have learned in China over the past year, if there are any companies that should have SEC oversight before they go public they are reverse merger companies.
I think the SEC needs to change the requirements for reverse mergers to require the filing of a registration statement or similar document before any reverse merger. This, of course, would kill the reverse merger industry, which exists only to avoid such a requirement.