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WSJ, NYSE Seeks to Tighten Rules on Reverse Mergers

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By MICHAEL RAPOPORT

The New York Stock Exchange wants to toughen the standards that "reverse-merger" companies must meet to list on the Big Board, in the wake of accounting questions at many Chinese companies that have gone public via such transactions.

The exchange is proposing a series of "seasoning" requirements that would effectively delay an NYSE listing for reverse-merger companies and set bars they would have to clear to obtain it.

Imposing such requirements on a company "should provide greater assurance that the company's operations and financial reporting are reliable" and would provide more time to scrutinize companies and find any potential problems, the NYSE, a unit of NYSE Euronext, said in its proposal.

NYSE Amex, which has more reverse-merger listings than the NYSE, is proposing similar changes. Both proposals were filed with the Securities and Exchange Commission last week and are subject to SEC approval.

The proposals are in reaction to widespread concern over the use of reverse mergers, in which a private company, often from overseas, merges with a publicly traded U.S. shell company in order to trade in the U.S. and gain access to U.S. capital markets. Supporters of reverse mergers say they make it quicker and less expensive for companies to go public, but critics say they allow companies to avoid the scrutiny of their finances and operations that comes with a traditional initial public offering.

The practice has come under fire this year, as dozens of Chinese companies that have gone public in the U.S. via reverse mergers have encountered questions or allegations about their accounting practices. That has been an embarrassment to U.S. exchanges, since many of those companies have listed only in the past couple of years and apparently encountered little in the way of obstacles to doing so.

The SEC and the exchanges have suspended trading in some companies, and an SEC task force is investigating accounting and disclosure issues surrounding reverse-merger firms. The SEC also issued an alert in June that publicly warned investors about the risks of investing in such companies.

Under the NYSE's proposed tougher standards, reverse-merger companies would have to trade for at least a year in the U.S. over-the-counter market, or on another U.S. exchange or a regulated foreign exchange, before listing on the NYSE. They also would have to maintain a minimum share price of $4 for an extended period, and would have to file audited financial statements and an annual report with the SEC.

In addition, the NYSE would have the discretion to impose more stringent requirements on a particular reverse-merger company if the exchange believes that is warranted, based on factors like an inactive market in a company's securities or weaknesses in its internal controls.

In April, the Nasdaq Stock Market filed its own proposal with the SEC to tighten its listing standards for reverse-merger companies, with a six-month seasoning period and minimum share-price requirements. That proposal is still pending.

Write to Michael Rapoport at [e-mail]