China Reverse Merger Warning: New Rules Toughen Listing Standards

On November 9, 2011, the SEC approved new rules to toughen listing standards for reverse merger companies and so we issue another warning to Chinese companies considering a China Reverse Merger transaction.

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Currently, reverse merger companies like other operating companies can pay to be listed on an exchange, where investors can purchase and sell shares of the company. In some cases, regulators and auditors have greater difficulty obtaining reliableinformation from reverse merger companies, particularly those based inChina.

In summer 2010, the SEC launched an initiative to determine whether certain companies with foreign operations – including those that were the product of reverse mergers – were accurately reporting their financial results, and to assess the quality of the audits being done by the auditors of these companies. The SEC andU.S.exchanges have in recent months suspended or halted trading in more than 35 companies based overseas citing a lack of current and accurateinformation about the firms and their finances. These included a number of companies that were formed by reverse mergers.

“Placing heightened requirements on reverse merger companies before they can become listed on an exchange will provide greater protections for investors,” said SEC Chairman Mary L. Schapiro.

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 financialinformation have been filed with the SEC.

As always, we continue to advocate that potential China Reverse Merger candidates again rethink their strategy and give serious consideration to our Go Public Direct transaction structure.

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