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SEC Warns on Reverse Merger Stocks

In its bulletin on reverse mergers Thursday, the agency noted the recent enforcement actions it has taken against a handful of companies, most of which were micro-cap or "penny" stocks trading on the over-the-counter markets. Most reverse mergers begin life on the over-the-counter markets. The SEC has suspended trading in shares of six companies and revoked the registrations of several others.

The most dangerous potential frauds, experts say, are the companies that have graduated from penny-stock status to the major exchanges. As such, the Nasdaq Stock Market in April applied to the SEC in order to institute rules that would make it more difficult for reverse-merger companies to list on its exchanges.

The application document released by Nasdaq noted that it had unearthed cases of apparent manipulation in the stocks of reverse-merger companies that had applied to the exchange for a listing. In these instances, according to Nasdaq, "it appeared that promoters and others intended to manipulate prices higher to satisfy Nasdaq's initial listing bid price requirement." In other cases, companies have "gifted stock to artificially satisfy the 300 round lot public holder requirement."

-- Written by Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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