According to Tim Keating, President of Keating Investments, LLC, “The reverse merger industry has gone through a dramatic transformation over the last three years from infamy to legitimacy”.

So how did this ugly duckling transform itself into a swan? Over the past several years there have been several changes made by the Securities and Exchange Commission (the “SEC”) that actually helped to legitimize the reverse shell merger.

The Over the Counter Bulletin Board (OTCBB) was established in 1990. The SEC mandated the OTCBB as an electronic trading medium that revealed real-time quotes, volume, etc., which is identical to a stock exchange but the securities were not listed on an exchange.

The concept was great, but in reality there were some problems. Initially, the SEC did not require OTCBB companies to report any information on their company or its financials. No reporting, no compliance. Companies were not required to file quarterly (10Q) or annual reports (10K). This led to wide spread stock scams and established a reputation for shells that was less than desirable.

These scam artists were finally eradicated in the late 1990’s when the National Association of Securities and Dealers (the “NASD”) and the SEC took action by requiring all securities trading on the OTCBB to file quarterly and annual reports with the SEC. Now all OTCBB companies had to become “fully reporting” just like NASDAQ, American and NYSE listed companies. The only difference between a stock trading on the OTCBB and NASDAQ was that the OTCBB companies did not meet the exchange listing requirements – earnings, net assets and stock price.

These new rules had a positive effect on the marketplace. Prior to the new rules taking effect there were over 7,000 securities trading on the OTCBB. Afterwards, the number dropped to just over 3,300.

SOX and the OTCBB

The debacles of companies like Enron and WorldCom in the early 2000 led Congress to overreact and pass Sarbanes Oxley (SOX) legislation in 2002. The new rules almost put an end to companies listed on the OTCBB. Though the new stringent rules were designed for compliance purposes for large companies they did not take into account the cost factor for small OTCBB companies. The SEC has extended the start date for certain SOX compliance issues for smaller companies for the past five years. Today it appears that both Congress and the SEC are leaning towards some type of exemption for small public companies. Also, after the new rules were implemented it made it very clear that anyone involved in stock manipulation scam was going to jail. Since then the reputation of the OTCBB has slowly risen into positive territory.

The OTCBB is operated by NASDAQ and the NASD. Today there are approximately 3,300 securities listed on the OTCBB. They must adhere to the same stringent SEC reporting requirements as companies that are listed on an exchange.

Today, reverse mergers have replaced the small IPO. Last year (2006) there were more reverse mergers closed than IPO’s.

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