Dmitrij Harder: Seasoning Rules and Reverse Mergers

Feb. 6, 2013 - PRLog -- Reverse mergers are a popular means of going public for small and foreign companies that do not meet the requirements for trading on the three major exchanges in the U.S. In a reverse merger, a public company is acquired by a private company which then enables the acquiring company to trade publicly while avoiding the higher costs and many of the regulatory requirements of going public via an initial public offering.

The loophole found in the lax reporting requirements allowed many companies, with a high percentage of them originating in China, to go public via reverse mergers with listed companies gave them the legitimacy of trading on a major exchange in U.S. This practice found its way on to regulatory radar screens when, according to filings, a quarter of securities fraud class action suits in the first half of 2011 targeted Chinese companies that had started trading publicly via reverse mergers. In 2010, over 40% of the same types of lawsuits involved Chinese companies.

The rising wave of lawsuits targeting companies that had allegedly defrauded investors after reverse mergers led the Securities and Exchange Commission (SEC) in late 2011 to put in a series of more stringent requirements that must be met prior to trading on the major exchanges in the U.S.

These requirements include:

* Seasoning – The new regulations require that companies going public using a reverse merger trade for at least one year after completion of the reverse merger on an over the counter market in the U.S. Examples of these markets are the Pink Sheets and Bulletin Board. Another option would be for the company to trade on a regulated foreign stock exchange for the same period of time.
* The filing of financial statements, the 8k Form (for U.S. companies), the 20F Form (for foreign companies) and other information as required by the SEC
* A share price that stays at a “sustained level” prior to filing of and approval for listing on an exchange - The NYSE and NASDAQ require that shares must trade above $4 for 30 out of 60 trading days prior to each action while the AMEX sets that benchmark at $2 to $3, depending on other conditions.

Generally speaking, reverse merger companies now need to meet the requirements that the rest of the companies must meet prior to trading on listed exchanges. For more information on the new rules for reverse merger companies, contact the Dmitrij Harder team at: http://solvogroupinc.com/