01-6663. Self-Regulatory Organizations; Order Approving Proposed Rule Change by the National Association of Securities Dealers, Inc. to Amend NASD Rule 4330(f) to Require a Nasdaq Issuer to Apply for Initial Inclusion Following a Reverse Merger With ...

March 13, 2001.

I. Introduction

On October 9, 2001, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act),” ^[1] and Rule 19b-4 thereunder,^[2] a proposal to amend paragraph (f) of NASD Rule 4330, “Suspension or Termination of Inclusion of a Security and Exceptions to Inclusion Criteria,” to require a Nasdaq issuer to apply for initial inclusion following a Reverse Merger, as defined below, with a non-Nasdaq entity, and to make conforming changes to IM-4300, “Interpretive Material Regarding Future Priced Securities.” The proposed rule change was published for comment in the Federal Register on February 7, 2001.^[3] No comments were received on the proposal. This order approves the proposed rule change.

II. Description of the Proposed Rule Change

NASD Rule 4330(f) requires a Nasdaq issuer to comply with all applicable initial inclusion requirements under Nasdaq rules if the issuer enters into a merger, consolidation, or other types of acquisition with a non-Nasdaq entity which results in a change of control and either a change in business or a change in the financial structure of the Nasdaq issuer.

Nasdaq notes that it adopted NASD Rule 4330(f) ^[4] in 1993 to address concerns associated with non-Nasdaq entities seeking a “backdoor listing” on Nasdaq through a business combination involving a Nasdaq issuer.^[5] In these combinations, a non-Nasdaq entity purchased a Nasdaq issuer in a transaction that resulted in the non-Nasdaq entity obtaining a Nasdaq listing without qualifying for initial listing or being subject to the background checks and scrutiny normally applied to issuers seeking initial listing.

According to Nasdaq, some issuers and their counsel have expressed uncertainty regarding the circumstances under which NASD Rule 4330(f) is applicable. Therefore, Nasdaq proposes to amend NASD Rule 4330(f) to indicate that an issuer must apply for initial inclusion following a transaction whereby the issuer combines with a non-Nasdaq entity, resulting in a change of control of the Nasdaq issuer ^[6] and the potential for the non-Nasdaq entity to acquire a Nasdaq listing (for purposes of NASD Rule 4330(f), such transaction is referred to as a “Reverse Merger”). To provide further clarification, NASD Rule 4330(f), as amended, sets forth a list of non-exclusive factors which Nasdaq will consider when determining whether a Reverse Merger has occurred. These factors include changes in the management, board of directors, voting power, ownership, and financial structure of the Nasdaq issuer. Nasdaq will also consider the nature of the businesses and the relative size of the Nasdaq issuer and non-Nasdaq entity. Nasdaq believes that these proposed amendments will clarify NASD Rule 4330(f) for issuers while continuing to prevent “backdoor listings” on Nasdaq.

Nasdaq also proposes to make conforming changes to IM-4300.

III. Discussion

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.^[7] In particular, the Commission finds that the proposal is consistent with Section 15A(b)(6) of the Act,^[8] which requires, among other things, that the rules of an association be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

According to Nasdaq, some issuers have expressed uncertainty regarding the applicability of NASD Rule 4330(f) when a Nasdaq issuer combines with a non-Nasdaq entity. To clarify NASD Rule 4330(f), the proposal amends NASD Rule 4330(f) to indicate that issuers must apply for initial inclusion following a Reverse Merger. NASD Rule 4330(f), as amended, provides a non-exclusive list of factors Nasdaq will consider to determine whether a Reverse Merger has occurred.

The Commission believes that the proposal should clarify NASD Rule 4330(f) and provide guidance to issuers concerning the circumstances under which an issuer that combines with a non-Nasdaq entity must apply for initial inclusion. At the same time, the Commission believes that NASD Rule 4330(f), as amended, will continue to protect investors and the public interest by helping to prevent “backdoor listings” on Nasdaq.

The Commission finds that the conforming changes to IM-4300 will make IM-4300 consistent with NASD rule 4330(f), as amended, and provide guidance concerning the circumstances under which the conversion of a Future Priced Security could result in a Reverse Merger.

IV. Conclusion

For the foregoing reasons, the Commission finds that the proposal is consistent with the requirements of the Act and rules and regulations thereunder.

It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,^[9] that the proposed rule change (SR-NASD-01-01) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 43907 (January 30, 2001), 66 FR 9398.

4.  When the Nasdaq adopted the rule, it appeared in Section 3(f) of Part II to Schedule D of the NASD By-Laws.

5.  See Securities Exchange Act Release No. 32264 (May, 4, 1993), 58 FR 27760 (May 11, 1993) (order approving File No. SR-NASD-93-07).

6.  It is not necessary to obtain a majority interest in order for a change of control to occur.

7.  In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

8.  15 U.S.C. 78 o-3(b)(6).

9.  15 U.S.C. 78s(b)(2).

10.  17 CFR 200.30-3(a)(12).