Sunday, August 12, 2007

Should an Omega 5 company undergo a reverse merger?

Financing a green tech company in the wellness industry is quite a challenge.
Astia - formerly the Women's Technology Cluster - is a community of experts committed to building women leaders and accelerating the funding and growth of high-potential, women-led technology start-ups. They will help you sort out the possibilities.
One such posibility is to undergo a reverse merge, where the non- traded company Omega 5 company will merge into a public shell. NASDAQ has responded to this "back door" entry, which seems to be legitimate on its face, by imposing listing prerequisites.
NASDAQ Rule 4340(a) provides: An issuer must apply for initial listing [following] in connection with a transaction whereby the issuer combines with a non-Nasdaq entity, resulting in a change of control of the issuer and potentially allowing the non-Nasdaq entity to obtain a Nasdaq Listing (for purposes of this rule, such a transaction is referred to as a ``Reverse Merger'').

In determining whether a Reverse Merger has occurred, Nasdaq shall consider all relevant factors including, but not limited to, changes in the management, board of directors, voting power, ownership, and financial structure of the issuer.

Nasdaq shall also consider the nature of the businesses and the relative size of the Nasdaq issuer and non-Nasdaq entity. The issuer must submit an application for the post-transaction entity with sufficient time to allow Nasdaq to complete its review before the transaction is completed. If the issuer's application for initial listing has not been approved prior to consummation of the transaction, Nasdaq will issue a Staff Determination Letter as set forth in Rule 4804 and begin delisting proceedings pursuant to the Rule 4800 Series. This provision, which applies regardless of whether the issuer obtains shareholder approval for the transaction, requires issuers to qualify under the initial listing standards [following] in connection with a Reverse Merger. It is important for issuers to realize that in certain instances, the conversion of a Future Priced Security may implicate this provision. For example, if there is no limit on the number of common shares issuable upon conversion, or if the limit is set high enough, the exercise of conversion rights under a Future Priced Security could result in a Reverse Merger with the holders of the Future Priced Securities. In such event, an issuer may be required to re-apply for initial listing and satisfy all initial listing requirements.

Nasdaq originally adopted this rule in 1993 to address concerns associated with non-Nasdaq entities seeking a ``backdoor listing'' on Nasdaq through a business combination involving a Nasdaq issuer. 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. The rule was amended in 2001 to define ``Reverse Merger'' and to provide clarification regarding the factors used by Nasdaq staff to determine if a transaction should be considered a Reverse Merger.

Among other things, the Reverse Merger rule is intended to allow Nasdaq staff to review the post-transaction entity before the Reverse Merger transaction is consummated, thereby allowing staff to confirm that the post-transaction entity will meet all initial criteria at the time it begins trading. While Nasdaq has historically taken the position that the rule requires companies to comply with the initial listing requirements prior to the consummation of a Reverse Merger, the rule is not clear in that regard. To avoid issuer confusion, simplify compliance, and provide additional transparency, Nasdaq proposes to amend Nasdaq Rule 4340(a) to state that an issuer must apply for initial listing prior to consummating a Reverse Merger transaction.

Nasdaq also proposes to make conforming changes to Nasdaq IM-4350-1, which discusses the Reverse Merger rules.

These are the basis requirements:

Shareholders' equity of at least $4 million, market value of publicly held shares of at least $15 million, market value of all shares of at least $50 million and a minimum bid price of $4, immediately following the Closing in order to remain listed on NASDAQ.

If the Omega 5 company fails to meet such standards immediately following the Closing its shares will be delisted. If the shares are delisted from the NASDAQ Capital Market, trading in the comapny shares could be conducted on an electronic bulletin board established for securities that do not meet the NASDAQ listing requirements, and the shares would be subject to the so-called penny stock rules that impose restrictive sales practice requirements on broker-dealers who sell those securities. Consequently, de-listing, if it occurred, could affect the ability of the public shareholders to sell their shares in the secondary market. The restrictions applicable to shares that are de-listed, as well as the lack of liquidity for shares that are traded on an electronic bulletin board, may adversely affect the market price of such shares.

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