SEC Tightens Rules for ‘Reverse Merger’ Listings
WASHINGTON—New rules for major U.S. exchanges promise to make it harder for foreign companies to enter the U.S. market via “reverse mergers.”
The Securities and Exchange Commission on Wednesday said it approved tougher new exchange rules for companies that enter the U.S. market through so-called reverse mergers, arrangements that allow a company to avoid the regulatory scrutiny that comes with an initial public offering.
Reverse mergers have come into the spotlight in recent months amid high-profile accounting problems at some companies that have come public in the U.S. via this route. Advocates of reverse mergers tout them as a quicker, less-expensive way for companies to go public, but critics say the process enables companies to avoid the scrutiny of their finances and operations that comes with a traditional initial public offering.
The SEC has suspended trading in more than a dozen reverse-merger companies because of lack of current, accurate information about the companies. In particular, Chinese companies that enter the U.S. market through reverse mergers have also drawn scrutiny. The SEC has suspended trading in at least six Chinese reverse-merger companies this year.
The new rules at the Nasdaq Stock Market, New York Stock Exchange and NYSE Amex could make it harder for foreign companies to enter the U.S. market by buying existing U.S. public shell companies in order to attain a public listing and sell shares to U.S. investors.
“Placing heightened requirements on reverse merger companies before they can become listed on an exchange will provide greater protections for investors,” SEC Chairman Mary Schapiro said in a statement.
The SEC said that the three exchanges “will impose more stringent listing requirements for companies that become public through a reverse merger.”
The new rules prohibit a reverse-merger company from listing until the company has been in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange for at least a year. The SEC said the company also must file all required reports, including audited financial statements, with the commission. The company also must maintain a requisite minimum share price for 30 of 60 trading days immediately prior to listing.