SEC, NASDAQ, NYSE Finally Do, Er, "Something" To Combat Reverse Merger Abuse...

The SEC is a joke, a mockery of a regulatory agency, mandated with (among other things), investor protection and ensuring fair, transparent, and fraud-free capital markets.  It has failed, quite fantastically in these tasks, especially in the (latter part of the) past decade, chronicled by myself and others with great frequency and depth.

Thus, it is little if any surprise that when it came time do something about the fantastic frequency and magnitude of fraud in the (largely Chinese) reverse-merger industry, the "fix" the SEC and the exchanges have come up with to stem RM market abuse really isn't a fix at all. Rather, the "solution" to the problem is simply to put a speed bump or two on the road to U.S. reverse-merger listing:

"Under the new rules, Nasdaq, NYSE, and NYSE Amex will impose more stringent listing requirements for companies that become public through a reverse merger. Specifically, the new rules would prohibit a reverse merger company from applying to list until:

  • The company has completed a one-year “seasoning period” by trading in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange following the reverse merger, and filed all required reports with the Commission, including audited financial statements.
  • The company maintains the requisite minimum share price for a sustained period, and for at least 30 of the 60 trading days, immediately prior to its listing application and the exchange’s decision to list.

Under the rules, the reverse merger company generally would be exempt from these special requirements if it is listing in connection with a substantial firm commitment underwritten public offering, or the reverse merger occurred long ago so that at least four annual reports with audited financial information have been filed with the SEC."

First,the "minimum price" is $4/share.  Four. Dollars. Arbitrary much?  And only for 30 out of 60 days prior to its listing application?  There's enough bankers/other parties involved in many of these companies they should easily be able to keep the price propped-up for that period,hell, I don't see anything in the new rules that prohibits them using reverse stock splits to do so! "What? Our stock is only at $1.50/share on the OTCBB/TVX?  time for a 10:1 reverse split!"

Second, the requirement that these firms be listed on another "regulated" exchange like, oh, I dunno, London AIM or Toronto Venture Exchange,is a similarly arbitrary and ineffective means of keeping shady reverse-merger companies from gaining a U.S. listing.  For example, the TVX mentions in its listing pamphlet (pdf):

"TMX Group’s equity exchanges have a long history of listing companies
through a reverse merger transaction. This is particularly true for companies
listing on TSX Venture Exchange, where 44%of companies that went public
in 2010 chose a reverse merger listing. A reverse merger allows a private company
to vend into a TSX Venture-listed company or shell.for your company in
current market conditions."

So,without going into too much detail, essentially all the SEC/NYSE/NASDAQ rule changes are going to do is force (shady) reverse-merger cos to list on other "regulatory-lite" exchanges or OTCBB for a year before they can switch their listing to the big, prestigious, transparent, and fair U.S. markets.  All of this despite comments submitted to the SEC calling for far greater measures (pdf), emphasis mine:

"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."

You've gotta be freaking kidding me.  Even for the SEC (and the exchanges, which make $ from all of these listings), this is pathetic, no, its beyond pathetic, they've essentially done nothing, despite knowing exactly what they should have done, were they to actually "prevent fraud and manipulation, and protect investors and the public interest!"

This is good news for the throngs of investment bankers, advisors, promoters, and lawyers involved in the reverse-merger industry - as well as the U.S. exchanges, who will likely still get their listing (etc) fees, just a little later - and, of course, the (sometimes shady) firms that seek to list in the U.S. in such a manner.  I suppose the alternative exchanges are also thanking the SEC since they should see some increased revenue from these new rules, but, if our experience here is any indication, they very-well may see some increased scrutiny as well (although I'm not so sure on that last point as the number of shady mining/resource companies listed on the Toronto Venture Exchange alone is staggering, yet somehow fly below almost all investors'/analysts'/regulators' radar).

This is not such great news for, well, everyone else, except those of us who enjoy identifying/analyzing and/or shorting potentially/likely fraudulent firms.

So, for those concerned the pipeline has dried up; fear not, its just shifted and slowed up a bit.  For those concerned our federal securities regulators aren't doing enough to protect investors, I encourage you put in a phone call/letter or email to Mary Schapiro and let her know just how pathetic the efforts of her "reformed" Commission truly are.

 

by Jordan S. Terry, Founder & Managing Director of Stone Street Advisors LLC