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SEC Makes It More Difficult for Companies to Go Public Through a Reverse Merger

New standard issued by the FASB expected to simplify goodwill impairment testing and reduce costs

On November 9, 2011, the securities regulators tightened the listing requirements for companies to become public through a reverse merger. The new rules prohibit a company that undergoes a reverse merger from being listing on a major U.S. stock exchange (NASDAQ, OMX, NYSE, Euronext and NYSE AMEX) until it has submitted audited financials to the SEC, maintained a minimum trading price for 30 of the 60 days prior to the filing and traded their stock in the over-the-counter market or another regulated exchange for a minimum of a year.

These changes are primarily the result of recent accounting irregularities found in China-based companies listed on U.S exchanges. Investigations by the SEC led to the halting or suspension of trading of more than 35 overseas companies and regulators are hoping that the more stringent requirements will provide greater protection for investors in U.S. markets.

Companies will generally be exempt from these new rules if 1) the reverse merger took place before the new rules were implemented and the company has filed at least four annual audited reports with the SEC or 2) if it is listed in connection with a substantial underwritten public offering.