What is Rule 15c211 and Reverse Merger.
A rule 15c211 is a section of the U.S. Securities and Exchange Commission that deals with the reporting of information by public companies to the SEC when they merge with, or are acquired by a foreign company. A reverse merger is where shares already issued to investors (privately) are converted into publicly traded stock shares in order to bring the company under regulation and oversight by the SEC
The purpose of these sections is to ensure transparency about important corporate decisions for public companies and investors, as well as provide more information about emerging markets. The regulation allows foreign countries that are not members of the EU to trade on the US stock exchanges as long as they comply with these rules.
The original sections of 15c2-11 have been in place since August 2002. An amendment, requiring information about ultimate beneficial owners, came into effect in December 2011. There are also sections about "significant business combinations" and "reportable transactions". In order for a company to be subject to Rule 15c2-11 it must be listed on an OTC Bulletin Board and have a class of securities registered under section 12 of the Exchange Act or be required to file reports under Section 15(d) of the Exchange Act and have consolidated assets in excess of $10 million.
In order to engage in a reverse merger with a foreign company, the following conditions must be met:
The purpose of this standard is to prevent leakage of confidential information about the company and its operations. In order for a company to engage in a reverse merger, it must not have any material, non-public information that would be different from that of public companies. Material information is defined as trade secrets or other information whose disclosure would adversely affect the value of the shares of an investment because it would cause financial loss or legal liability. This condition also prohibits disclosure about other companies or executives who might work for the target company.
This condition aims to prevent the fraudulent use of public companies. This condition states that the company must be incorporated in a country whose laws allow investment by private individuals. In addition, the soliciting company must make it clear that it is not a public company and that its shares cannot be purchased on a stock exchange or through any other regulated market.
The SEC ruled in 2003 that reverse merger transactions through which shell companies have issued securities in order to acquire publicly-traded shell companies are not permitted under the section.
If a company engages in a reverse merger and is issued foreign securities, then it has to file certain reports about its operations with the SEC. These include:
This condition requires that companies that engage in reverse mergers file reports to the SEC on any acquisition of control by the acquiring company. This includes all acquisitions of control regardless of whether or not they are made directly from the acquirer to another public company or indirectly through an investment in its securities.
If a company does not comply with these reporting requirements, then it may face penalties such as being fined up to $5 million and being barred from listing on an OTC Bulletin Board for up to 5 years.
The effectiveness of the Rule 15c211 was questioned when the SEC discovered that many companies have been manipulating the system. One way this is done is through reverse merger laundering. This occurs when a Chinese company that has weak corporate governance issues acquires a domestic Chinese company which has substantial assets and operations. Disclosures on the domestic company are minimal since they are already publicly traded in China, while the new company is able to utilize Rule 15c211 in order to trade on US stock exchanges and thereby obtain a higher market value.
Along with corporate activities, there has been an increase in mining activities in China by private companies as well as manufacturing operations by Hong Kong or Taiwan companies entering into joint ventures with these private Chinese companies. By claiming they are from the US, these corporations are able to utilize US securities laws along with other securities that might be traded in the US.
This may allow for US and Chinese companies to obtain a small amount of liquidity by trading large amounts of their shares in China's stock market. This then allows them to gain liquidity without having to directly establish a subsidiary in the United States. However, many of these companies do not develop enough capital or have sufficient information about their operations, so that they are unable to withstand SEC scrutiny.
The main focus when determining whether a company is eligible for SEC approval is the country where it is incorporated and located. The SEC will only review a company if it is incorporated in the United States or has a principal place of business in the US. The laws of the country must respect those of the US and comply with all provisions of the law. If these conditions are not met, then the transaction would be illegal, and therefore not eligible for SEC approval.
In order to obtain this approval companies must provide significant information about its operations as well as significant information on any potential control or influence persons and their backgrounds. The information provided on control persons will include their backgrounds and their ability to acquire shares of an existing public company through a reverse merger. This does not include information regarding financial backing or management affiliations.
A reverse merger transaction is new for China and also for the US. Therefore, these companies create a situation of high risk where investors are likely to lose their assets. This could result from difficulties in gaining compliance and the lack of corporate information available to the public.
The Financial Industry Regulatory Authority (FINRA) has discussed whether reverse mergers would undermine its regulation. FINRA may mandate that companies register with it if they engage in reverse mergers in the future
Because reverse mergers involve existing publicly traded securities, the possibility of fraud by Chinese companies that engage in this process has been an issue. However, in March 2010, the SEC decided that it will not consider reverse mergers to be securities under the Securities Act of 1933. This ruling was reached as a result of a case filed against the agency by Chinese mining company Zijin Mining Group Co., Ltd., for violating US securities laws. These companies were required to disclose their large holdings of stock during their reverse merger into Zijin and had to file reports with SEC after it merged with another Chinese mining company. As part of these filing requirements, Zijin disclosed the ownership structure and financial information about the acquired company at the time they merged with them.
Conclusion: Understanding the risks involved in reverse mergers is crucial for investors. Investors can make educated decisions and be aware of the risks involved in this type of merger such as fraud, lack of corporate information, and legal problems with SEC.
The "Stingy" Dividend
A dividend, as a financial instrument, can be described as a payment made by a company to its shareholders on a regular basis. The payment is usually paid out in cash or stock derived from profits.
Dividends are in the nature of an investment and are considered to be an indication that prices will continue to increase in value.