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Listing a Reverse Merger Company on NASDAQ

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NASDAQ has special rules for companies that went public via a reverse merger.

NASDAQ Markets Overview

NASDAQ has three different U.S. markets, the NASDAQ Global Select Market, the NASDAQ Global Market, and the NASDAQ Capital Market. Each of the three markets is designed to accommodate companies of a different size, from largest to smallest in the order presented. Each market has its own distinct set of initial listing requirements, and its own set of continued listing requirements. The initial listing requirements are more stringent than the continued listing requirements; I suspect this reflects NASDAQ’s desire to vet out companies with a marginal track record, while being more lenient once the company receives the NASDAQ listing.

 

The listing requirements for each market are set forth in the Marketplace Rules, beginning in Section 5000. NASDAQ publishes a summary of these rules, titled Initial Listing Guide and Continued Listing Guide. NASDAQ has also organized its FAQ’s into a variety of topics, including Initial Listing and Continue Listing.

NASDAQ Capital Market Initial Listing Requirements

Many times a reverse merger company doesn’t use an underwriter when it goes public, and because it is likely still developing its business, the NASDAQ Capital Market is probably the best fit. Before discussing the special requirements for reverse merger companies, it is helpful to discuss the general initial listing requirements for all companies.

The financial and liquidity requirements for an initial listing on the NASDAQ Capital Market are summarized as follows (companies must meet all of the criteria under at least one of the three standards below):

 

 

Requirements

 

Equity Standard

Market Value of Listed Securities Standard*

 

Net Income

Standard

 

Listing Rules

5505(a)and

5505(b)(1)

5505(a)and

5505(b)(2)

5505(a)and

5505(b)(3)

Stockholders’ Equity $5 million $4 million $4 million

Market Value of Publicly

Held Shares

$15 million $15 million $5 million
Operating History

2 years

Market Value of Listed

Securities

$50 million

Net Income from Continuing Operations (in the latest fiscal year

or in two of the last three fiscal years)

 

 

 

 

 

 

$750,000

Publicly Held Shares 1 million 1 million 1 million

Shareholders

(round lot holders)

300

300

300

Market Makers

3

3

3

Bid Price

OR Closing Price**

$4

 

$3

$4

 

$2

$4

 

$3

 

* Companies qualifying solely under the Market Value Standard must meet the $50 million Market Value of Listed Securities and the applicable bid price requirement for 90 consecutive trading days before applying.

** To qualify under the closing price alternative, a company must have: (i) average annual revenues of $6 million for three years, or (ii) net tangible assets of $5 million, or (iii) net tangible assets of $2 million and a 3 year operating history, in addition to satisfying the other financial and liquidity requirements listed above.

In addition to the financial and liquidity requirements, a company applying for an initial listing, regardless of which NASDAQ market it is applying to, must meet the following corporate governance requirements:

 

Corporate Governance Requirement

 

Description

Listing

Rule

Distribution of Annual or Interim Reports The company must make its annual and interim reports available to shareholders, either by mail or electronically through the company’s website.  

5250(d)

Independent Directors The company’s board of directors is required to have a majority of independent directors. 5605(b)
Audit Committee The company is required to have an audit committee consisting solely of independent directors who also satisfy the requirements of SEC Rule 10A-3 and who can read and understand fundamental financial statements. The audit committee must have at least three members. One

member of the audit committee must have experience that results in the individual’s financial sophistication.

5605(c)
Compensation of

Executive Officers

Independent directors must determine the compensation of the chief executive officer and other executive officers. 5605(d)

Nomination of

Directors

Independent directors must select or recommend nominees for directors. 5605(e)
Code of Conduct The company must adopt a code of conduct applicable to all directors, officers and employees.

5610

Annual Meetings The company is required to hold an annual meeting of shareholders no later than one year after the end of its fiscal year.  
Solicitation of Proxies The company is required to solicit proxies for all shareholder meetings.  

Quorum

The company must provide for a quorum of not less than

33 1/3% of the outstanding shares of it voting stock for any meeting of the holders of its common stock.

5620(c)
Conflict of Interest The company must conduct appropriate review and oversight of all related party transactions for potential conflict of interest situations.

5630

Shareholder Approval The company is required to obtain shareholder approval of certain issuances of securities, including:

• Acquisitions where the issuance equals 20% or more of the pre-transaction outstanding shares, or 5% or more of the pre-transaction outstanding shares when a related party has a 5% or greater interest in the acquisition target

• Issuances resulting in a change of control

• Equity compensation

• Private placements where the issuance equals 20% or more of the pre-transaction outstanding shares at a price less than the greater of book or market value.

5635

Voting Rights Corporate actions or issuances cannot disparately reduce or restrict the voting rights of existing shareholders.

5640

 

 

Initial Listing Requirements for Reverse Merger Companies

Section 5110(c) of the Marketplace Rules covers reverse merger companies applying for an initial listing. This section states:

(c) Reverse Mergers

(1) A Company that is formed by a Reverse Merger (a “Reverse Merger Company”) shall be eligible to submit an application for initial listing only if the combined entity has, immediately preceding the filing of the initial listing application:

(A) 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 filing with the Commission or Other Regulatory Authority of all required information about the transaction, including audited financial statements for the combined entity; and

(B) maintained a closing price of $4 per share or higher for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days.

(2) In addition to satisfying all of Nasdaq’s other initial listing requirements, a Reverse Merger Company will only be approved for listing if, at the time of approval, it has:

(A) timely filed all required periodic financial reports with the Commission or Other Regulatory Authority (Forms 10-Q, 10-K or 20-F) for the prior year, including at least one annual report. The annual report must contain audited financial statements for a full fiscal year commencing after filing the information described in paragraph (1)(A) above; and

(B) maintained a closing price of $4 per share or higher for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days prior to approval.

(3) A Reverse Merger Company will not be subject to the requirements of this Rule 5110(c) 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. In addition, a Reverse Merger Company will no longer be subject to the requirements of this Rule 5110(c) once it has satisfied the one-year trading requirement contained in paragraph (1)(A) above and has filed at least four annual reports with the Commission or Other Regulatory Authority containing all required audited financial statements for a full fiscal year commencing after filing the information described in that paragraph. In either case described in this paragraph (3), the Reverse Merger Company must satisfy all applicable requirements for initial listing, including the minimum price requirement and the requirement contained in Rule 5210(e) that the Company not be delinquent in its filing obligation with the Commission or Other Regulatory Authority.

Section (c)(1)(A) requires that the company’s common stock has traded for a full year after the filing of information with the SEC about the reverse merger, including audited financial statements for the combined entity. In most cases, this is the so-called “Super 8-K”, but in some instances, depending on where the issuer is in the reporting cycle, audited financial statements of the combined entity might not be filed until later.

Section (c)(1)(B) requires that the stock’s closing price be at least $4.00 for at least 30 of the last 60 days. Note that this is more stringent than the guidelines set forth in the financial and liquidity requirements table above, which allows a closing price of either $2 or $3 per share.

Section (c)(2)(A) requires that the company meet all three conditions: 1) be current in its SEC filings, 2) has filed at least one annual report and 3) that the annual report contains audited financial statements covering at least one full year that commences after the Super 8-K was filed. In many cases, this requirement will mean that the issuer must wait nearly two years before it is eligible to trade on NASDAQ.

Section (c)(2)(B) requires that the stock price is at least $4 per share at the time of approval, in addition to the requirement of (c)(1)(B), which is at the time of application.

Section (c)(3) provides some relief from these special requirements if the issuer completed a firm-commitment underwriting that resulted in gross proceeds of at least $40 million.

Conclusion

A company that goes public via a reverse merger is subject to a higher set of listing standards than issuers that go public through other methods. In particular, it is possible that the issuer, and its shareholders, may have to wait longer than anticipated, in some cases nearly two years, before listing.

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Brian A. Lebrecht
Shareholder and Director


Mr. Lebrecht assists various clients primarily in the areas of public company disclosure, corporate finance, and mergers and acquisitions, including private placements, public and private offerings, Securities and Exchange Commission and Blue Sky compliance and reporting requirements, asset and stock purchases, and general corporate practice. Prior to joining Clyde Snow, Brian was President of The Lebrecht Group for 12 years.


Education



  • Juris Doctor, University of San Diego (1995)

  • M.B.A., University of San Diego (1995)

  • Bachelor of Science: Business Administration, University of San Diego (1991)


Court Admissions



  • U.S. District Court: District of Utah

  • U.S. District Court: Southern District of California


Awards and Honors



  • Best Lawyers in America, Mergers & Acquisitions, (2006 - 2013)

  • Approved by Utah Supreme Court as a Mentor for New Lawyer Training Program, (2009)


Professional Affiliations



  • Board Member, Juan Diego Catholic High School, (2009 to 2011)

  • Chairperson, Securities Law Section of the Utah State Bar, (2009)

  • Elected Officer, Securities Law Section of the Utah State Bar, (2007 - 2008)