Throughout 2024, Nasdaq has been revising the procedures for companies dealing with low stock prices, with a focus on cutting down on what they deem to be cheap, risky stocks trading on their exchange. Here is what you need to know.
Penny stocks: Amendment to modify bid price compliance process
Proposal date: August 6, 2024
Status: The comment period is currently open. The Securities and Exchange Commission (SEC) published the notice to solicit comments on the proposed rule changes on August 19, 2024, and will decide to approve or reject the rule changes by November 21, 2024.
TL;DR: A listed company failing to maintain a $1 bid price for more than 360 days will face an immediate trading suspension, even if it appeals Nasdaq’s decision to delist the company. Any company that has effected a reverse stock split within the past year but falls below the $1 minimum bid price will be immediately delisted.
In-depth
Under current Nasdaq listing rules, if a listed company’s minimum bid price falls below $1 for 30 consecutive business days, it will receive a delisting notification from Nasdaq. The company is given 180 calendar days from such notification to achieve compliance by trading at or above $1 for a minimum of 10 consecutive business days during this 180-day period. If a company fails to regain compliance during those 180 days, it can have another 180 days to comply, as long as it meets all other applicable standards for initial listing at the end of the first compliance period.
If a company fails to cure the minimum bid price requirement in the second 180-day compliance period, Nasdaq provides a delisting determination, but companies can appeal to a Nasdaq Listing Qualifications Hearings Panel. The company’s securities would continue to trade on Nasdaq during the pendency of the appeal under the current rules, which effectively extends the compliance period up to another 180 days. As a result, companies can have up to 540 days to cure a failure to meet the minimum bid price requirement without its securities being suspended or delisted from trading on Nasdaq. Even so, Nasdaq has the discretion to delist any securities with a closing bid price of $0.10 or less for 10 consecutive trading days during any compliance period.
On August 6, 2024, Nasdaq proposed new rules that mandate the immediate suspension of trading on Nasdaq of any common stock that fails to meet the minimum bid price requirement for 360 days. Companies may still appeal to a hearings panel, which may extend their cure period for a third 180-day period, but the security will be suspended from trading on Nasdaq during such appeal period. Once suspended, a company’s securities would trade on the OTC markets while its appeal is pending.
Additionally, Nasdaq proposed that any company not in compliance with the minimum bid price requirement that has effected a reverse stock split within the prior one-year period will be immediately delisted (subject to appeal).
Bloomberg reports that AI and biotech startups are most at risk of delisting under the proposed rules, and that nearly 40% of companies trading under $1 are in the health sector. As of August 21, 2024, there were 430 stocks listed below $1, according to Bloomberg. On the same date in 2021, there were 72.
Minimum bid price compliance and reverse stock splits
Proposal date: July 3, 2024
Status: The SEC approved the proposal (as amended by Nasdaq’s Amendment No. 2), on October 7, 2024.
TL;DR: If a company’s reverse stock split results in some other noncompliance, the company will be deemed noncompliant with the bid price requirement until both the new deficiency is cured, and the company maintains a $1 bid price for a minimum of 10 consecutive business days.
In-depth
Back in July 2024, Nasdaq proposed another rule change relating to bid price compliance periods for situations where a company, by taking actions to regain compliance with the minimum bid price requirement, violates another continued listing requirement. In particular, Nasdaq identified reverse stock splits, noting that companies implementing a reverse split could be in danger of falling below the requirements for the number of public record holders and number of publicly held shares.
For example, if Company A has 1,600,000 publicly held shares and effects a reverse stock split at a 1-to-4 ratio in order to regain compliance with the $1 minimum bid price requirement, its publicly held shares would drop to 400,000. Thus, while Company A cured its violation of the minimum bid price rule, it is now in violation of the listing standard requiring at least 500,000 unrestricted publicly held shares. Under current Nasdaq rules, this new violation would trigger a new deficiency process with a new time period within which Company A would be permitted to seek to regain compliance.
Under the proposal, if a company’s reverse stock split results in some other noncompliance, the company would be deemed noncompliant with the bid price requirement until both (i) the new deficiency is cured, and (ii) the company maintains a $1.00 bid price for a minimum of 10 consecutive business days, unless Nasdaq staff exercises its discretion to extend this ten-day period as provided in Rule 5810(c)(3)(H). If the company does not demonstrate compliance with (i) and (ii) during the compliance period(s) applicable to the initial bid price deficiency, Nasdaq will issue a Staff Delisting Determination Letter.
And one more on reverse stock splits: Notification and disclosure
Proposal date: March 1, 2024
Status: In effect.
TL;DR: You have two business days to publicly disclose a reverse stock split, and you’ll have to notify Nasdaq five business days before the effective date of the split. This rule is already effective, so hopefully you’re already doing this.
In-depth
Back in November 2023, Nasdaq amended Listing Rule 5250 to require listed companies to:
- Provide public disclosure of a reverse stock split using a Regulation FD-compliant method no later than 12:00 pm ET at least two business days before the proposed effective date of the reverse stock split. (Prior to this rule change, companies could make such public disclosure the day before the split.)
- Additionally, prior to the release of this information, provide notice of such disclosure to Nasdaq’s MarketWatch Department, at least 10 minutes prior to public announcement, if the public release of the material information is made between 7:00 am and 8:00 pm ET.
- Notify Nasdaq about certain details of the reverse stock split no later than 12:00 pm ET five business days prior to the anticipated effective date.
Nasdaq will not process the reverse stock split if a company fails to satisfy these requirements.
Subsequently, in March 2024, Nasdaq filed an additional rule change in which it updated the Company Event Notification Form. The changes to this form clarified that the company must have already obtained a new CUSIP number and that CUSIP number must be made eligible by DTC before the submission of the form. There were also some minor wording changes to clarify that shareholder approval must be obtained (not just planned) before the form can be submitted. Prior to this latest amendment, it was possible for a reverse stock split to be effective within two days of a stockholder meeting approving the split. These new clarifications establish a slightly longer delay – five days instead of two – between the stockholder meeting and market effective date of the split.
Standards of review for the Listing and Hearing Review Council
Proposal date: July 3, 2024
Status: The comment period ended on August 13, 2024. The proposed amendments will become effective immediately upon SEC approval. Current rules will apply to any matters already pending when the proposed rule change becomes effective.
TL;DR: This is a proposal to adopt two new standards of review for appeals of the hearings panel, generally meant to “limit frivolous and baseless appeals.”
In-depth
Upon receipt of a staff delisting determination or a public reprimand letter, or when its application for initial listing is denied, a company may request that a hearings panel review the matter. After reviewing the written record and holding an oral hearing, if one is requested, a hearings panel will issue a decision, which is reviewed by the Nasdaq Listing and Hearing Review Council, either on appeal by the company or on its own initiative. Nasdaq’s listing rules currently do not specify a standard of review that applies when the listing council reviews hearings panel decisions. This proposed amendment to Rule 5820 would codify these standards of review as outlined below.
For review of appeals of hearings panel decisions before the listing council:The listing council should not substitute its judgment for that of the hearings panel. It must affirm the panel decision unless it determines that:
- The specific grounds on which the decision is based did not exist, as a matter of fact;
- The decision is inconsistent with law or Nasdaq rules; or.
- There exist extraordinary circumstances that warrant reversal, modification, or remand, consistent with the public interest and protection of investors – these must be events outside of the company’s control or events indicating widespread difficulties among similarly situated companies where delisting would pose an unnecessary burden on investors and the market.
For review of hearings panel decisions by the listing council: If the listing council calls a matter for review, the proposed standard would provide for a de novo review and the listing council can consider circumstances that did not exist when the hearings panel made its decision.
This proposal is aimed at reducing the number of requests for review that are intended to serve as a de facto additional extension period for the company to demonstrate compliance and limit such review to events that are truly outside the company’s control.
Suspension and delisting rules for SPACs
Proposal date: July 8, 2024
Status: This will become effective on October 7, 2024.
TL;DR: A special purpose acquisition company (SPAC) failure to (1) complete a business combination within 36 months of the effectiveness of its IPO registration statement, or (2) meet the initial listing requirements after the business combination will result in immediate suspension and delisting.
In-depth
Nasdaq can suspend trading of a SPAC if it determines that the SPAC failed to do either of the following:
- Complete one or more business combinations satisfying the requirements set forth in Listing Rule IM-5101-2(b) within 36 months of the effectiveness of its IPO registration statement.
- Meet the initial listing requirements following a business combination. (However, the SPAC can request a hearing by the Hearings Panel to review such decision.)
Currently, a request for a hearing will stay the suspension and delisting of a SPAC pending the issuance of a written panel decision. Nasdaq found that SPACs often use this additional time afforded them by this stay to regain compliance, either by completing the business combination or by using the benefits of being listed on Nasdaq to achieve compliance with the initial listing requirements it initially failed to satisfy. This amendment would remove the stay of suspension provision for SPACs that fail to meet the requirements such that their securities would be suspended from trading during the pendency of the hearings panel’s review. And the hearings panel’s review of these issues is limited only to the question of whether the Nasdaq staff made a factual error – i.e., that the SPAC never failed to satisfy the two requirements. The hearings panel may no longer consider facts indicating that the company regained compliance since the delisting determination, nor may the hearings panel grant an exception allowing the company additional time to regain compliance.
