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  Listing Council Decision 2018-1
Identification Number 1647
IM-5101-2: Listing of Companies Whose Business Plan is to Complete One or More Acquisitions

Generally, Nasdaq will not permit the initial or continued listing of a Company that has no specific business plan or that has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.

However, in the case of a Company whose business plan is to complete an initial public offering and engage in a merger or acquisition with one or more unidentified companies within a specific period of time, Nasdaq will permit the listing if the Company meets all applicable initial listing requirements, as well as the conditions described below.

(b) Within 36 months of the effectiveness of its IPO registration statement, or such shorter period that the company specifies in its registration statement, the Company must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the deposit account (excluding any deferred underwriters fees and taxes payable on the income earned on the deposit account) at the time of the agreement to enter into the initial combination.

Rule 5110(c): Reverse Mergers

(1) A Company that is formed by a Reverse Merger (a "Reverse Merger Company") shall be eligible to submit an application for initial listing only if the combined entity has, immediately preceding the filing of the initial listing application:

(A) traded for at least one year in the U.S. over-the-counter market, on another national securities exchange, or on a regulated foreign exchange, following the filing with the Commission or Other Regulatory Authority of all required information about the transaction, including audited financial statements for the combined entity...

Rule 5505: Initial Listing of Primary Equity Securities

A Company applying to list its Primary Equity Security on the Capital Market must meet all of the requirements set forth in Rule 5505(a) and at least one of the Standards in Rule 5505(b).

(a) Initial Listing Requirements for Primary Equity Securities:
(3) At least 300 Round Lot Holders

Issue: May a special purpose acquisition company ("SPAC"), which has failed to consummate a business combination within the 36 month time period prescribed by IM-5101-2, nevertheless avoid de-listing because it expects to consummate a reverse merger prior to the expected date when de-listing would become effective?

Determination: Affirm the Hearing Panel decision to suspend and delist the Company.

The Company, which is a SPAC, acknowledged the ruling of the Hearings Panel that it had failed to consummate a business combination with the 36 month period required by IM-5101-2.

The Company's sole argument for asking the Listing Council to overrule the Hearing Panel decision was that the Company believed that it would be meaningless for the Listing Council to proceed with de-listing the Company's securities given that the Company did not expect Nasdaq, as a practical matter, to be able to finalize the de-listing process before the Company consummated its merger. That is, if the Company consummated its reverse merger before its de-listing became final and effective, then the merged entity would qualify for immediate initial listing on Nasdaq and it would not be subject to seasoning requirements. The Listing Council rejected this argument.

The Listing Council stated that it will not excuse a listed company for its self-acknowledged, numerous, and prolonged violations of the Listing Rules simply because the Company plans to take actions that may ultimately moot any practical impact of the punishment that Nasdaq would otherwise impose upon it. To excuse violations under these circumstances, the Council said, would diminish the importance of the Listing Rules and delegitimize the Listing Council and its work to enforce compliance with the Rules. Public confidence in Nasdaq depends upon the legitimacy of Nasdaq's system of self-regulation. The legitimacy of this system, in turn, requires Nasdaq to hold listed companies consistently accountable when they fail to satisfy the requirements of the Listing Rules. Thus, even if the practical impact of de-listing a company's securities from Nasdaq was likely to be minimal or even nil, the Listing Council determined that it must nevertheless order de-listing when the fair administration of the Listing Rules requires the Listing Council to take such action or renders it appropriate.1

That said, the Listing Council disagreed with the Company that de-listing the Company's securities would be pointless and have no practical effect given the imminence of the Company's merger. In light of the history of this matter, the Listing Council said that it lacked confidence in the Company's latest assertions about the likelihood success of and the timing of its plan to consummate its merger. The Listing Council noted that almost a year has passed since the Company first announced its prospective merger, and the transaction had yet to close despite several assurances by the Company that it would do so. Even during the course of this appeal, the Company changed its position as to when it expected to obtain shareholder approval for the merger.

Moreover, even if the Company did consummate the merger as planned, the Listing Council did not believe that Rule 5110 required Staff to initially list the combined entity. Rule 5101 provides Nasdaq with "broad discretionary authority" over the listing of securities on Nasdaq "in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and to protect investors and the public interest." Pursuant to this authority and Nasdaq's Interpretive Material on the application of Rule 5101 (IM-5101-1), Nasdaq may "impose additional or more stringent criteria" to the application of its Rules. Thus, Staff was empowered to determine that because the Company was subject to a pending de-listing decision at the time it executed a reverse merger, the merged entity did not meet the one year prior listing requirement set forth in Rule 5110(c)(1) and must trade over-the-counter for a year prior to initial listing on Nasdaq.

Even if the Listing Council was sympathetic to the Company's plight, the Listing Council noted that it lacked discretionary authority to grant the Company further exceptions from compliance with the Rule 5505. Rule 5505 (the "Public Holder Requirement") a listed company's securities have at least 300 round lot holders. Rule 5820(d)(1) states that the Listing Council may grant an exception for a period not longer than 360 calendar days from the date of the Staff's delisting determination with respect to the deficiency for which the exception is granted; Staff issued its delisting decision for the Company's failure to comply with the Public Holder Requirement in February 2017.

The Listing Council stated that the scope of its authority to grant the Company an exception from the Business Combination Requirement was less certain. Although nothing in the Listing Rules expressly precluded the Listing Council from exercising its discretionary authority to grant exceptions under Rule 5820(d)(1), the nature of IM-5101-2 was such that this limitation could be reasonably implied. The Listing Council agreed with Staff that the Commission seemingly approved the Exchange's rules to list SPACs, in part, because the Exchange assured the Commission that any listed SPACs would face de-listing if they failed to complete a business within 36 months of the effective date of their initial public offering registration statement. See Securities Exchange Act Release No. 34-58228, 73 FR 44794 (July 31, 2008), SR-Nasdaq-2008-013 (July 25, 2008). Even if such a limitation on the Listing Council's authority was not reasonably implied, the Listing Council found good policy reasons for it to refrain from granting SPACs additional time beyond 36 months to complete their business combinations. The Council stated that the inability of a SPAC to execute a business combination, and to do so within the generous three year time period that the Exchange allots to it, strongly indicates that the SPAC is not fit for continued listing on the Exchange. It concluded that the listing of a company's securities for trading on Nasdaq is a mark of distinction that should not be afforded to companies that cannot fulfill in a timely manner even their most basic and fundamental corporate missions.


[1]The Listing Council noted that, on a dubious basis, the Company created the very scenario that it asked the Listing Council to help it to avoid. That is, the Company filed an appeal of the Hearings Panel decision even though it expressly acknowledged in its appeal that it did not dispute the Hearing Panel's determination that the Company is non-compliant with the Listing Rules and therefore subject to de-listing. By the mere act of filing this appeal, the Company set in motion an appellate process whose only possible effect was to delay a final de-listing action by several months. Although the Listing Council encourages listed companies to file legitimate appeals to vindicate their rights under the Listing Rules, the Listing Council is loathe to reward companies that file frivolous appeals in an effort to game the system and to achieve strategic business goals for themselves. The Listing Council stated that it was especially reticent to reward such behavior when it observes that the companies which engage in it were represented by experienced advisors who are well-versed in the Listing Rules and the procedures of this Listing Council.

Publication Date*: 10/15/2018 Mailto Link Identification Number: 1647
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