Logo courtesy Occidental Petroleum website

When, back in July, we last wrote about reverse mergers (a means by which a private company can buy the shell of a defunct public company to gain quick access to public markets) the Securites and Exchange Commission (SEC) had begun an investigation of the process, partly prompted by financial irregularities related to some foreign companies.

 

Then, in early November, the SEC approved a set of more stringent listing requirements that the three major U.S. stock exchanges (Nasdaq, NYSE, NYSE Amex) will impose on reverse merger companies seeking a listing. (If the reverse merger company completed its reverse merger long enough ago so that it had filed four or more audited annual financial reports with the SEC it would be exempt.)

The new rules now stipulate that a reverse merger company must:

  • Trade for a one-year period on a regulated U.S. or foreign exchange after the merger and file all required audited financial statements and reports required by the SEC. This is often called a “seasoning period.”
  • Maintain the market’s requisite minimum share price for at least 30 of 60 trading days prior to its listing application.

Perhaps these new rules will help eliminate the negative stigma often associated with companies that go public via reverse mergers rather than through the typical IPO process. In many cases, particularly for those companies based in foreign countries, investors, regulators and auditors suggest it is more difficult to obtain reliable financial information on reverse merger companies.

But there have been some major reverse merger success stories over the years. According to gopublic.com, oil magnate Armand Hammer invented the reverse merger back in the 1950s by merging Occidental Petroleum with a small shell company (http://gopublic.com/examples-successful-reverse-merger-public-shell.html). Ted Turner also used a reverse merger with Rice Broadcasting, which ultimately became Turner Broadcasting, according to the gopublic.com story.

There are hundreds of reverse merger companies trading today. Here are two chosen at random that are old enough that they will not be affected by the new listing requirements:

Scotts Valley, CA-based VirnetX Holding Corp. (Amex: VHC, http://www.virnetx.com/) is a developer of software and technology for securing real time security solutions over the Internet. VHC had the proverbial hockey stick chart, up as high as $41.77 last summer from $1.95 in November 2009. Market corrections and some major selling in small cap stocks have brought it down. But it is still trading very well. On Dec. 14 it closed at $20.25, down 63 cents on the day

Calabasas, CA-based National Technical Systems * (Nasdaq: NTSC, http://www.nts.com) is a diversified engineering services and testing company that went public through a reverse merger back in 1975. The company operates in a variety of industries in the aerospace and defense, automotive, telecommunications and high technology markets. Its stock traded for $8.35 in January 2011 but is now bouncing up off its low of the year of $4.02 in early November. On Dec. 14 it closed at $4.63, up 5 cents on the day.
 
* Denotes a client of Allen & Caron Inc., publisher of this blog

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