Nasdaq Revisits Listing Requirements (Again): Proposing Simpler Paths to Going and Staying Public

Under Nasdaq Rule 5110(c), a security issued by a company formed by “Reverse Merger” has to satisfy “seasoning” conditions before being able to trade on the exchange, which means that the combined entity must trade for at least one year on the US OTC market, on another national securities exchange or on a regulated foreign exchange, and timely file all required periodic financial reports for the prior year, including at least one annual report, before being listed on Nasdaq.

Under Nasdaq Rule 5005(a)(39), the term “Reverse Merger” is a transaction where an operating company becomes an Exchange Act reporting company by combining with a publicly traded shell company. The “seasoning” requirement is intended to prevent a private operating company from immediate access to public markets without the vetting that typically occurs in connection with an initial public offering (IPO). Currently, and like other exchanges, Nasdaq’s definition of “Reverse Merger” excludes the acquisition of an operating company by a listed SPAC, as well as companies that list in connection with a firm commitment underwritten public offering with gross proceeds of at least $40 million.

The SPAC exception was premised on the fact that Nasdaq initially listed the SPAC knowing it would seek to conduct a de-SPAC deal, and that SPAC investors would have the benefit of additional disclosure and redemption possibilities at the time of the de-SPAC. As Nasdaq noted in its recent proposal, “it would be inconsistent to require the company to delist and trade in the OTC market at the time it completes the very transaction it was formed to pursue.” Nasdaq noted in its proposal that the SEC treats a de-SPAC transaction as the functional equivalent of an IPO and the proposed registration statement requirement provides investor protection.

In light of all this, Nasdaq is proposing to amend the definition of “Reverse Merger” in two ways:

• For any de-SPAC company to be excluded from the “Reverse Merger” definition and avoid “seasoning” requirements, the de-SPAC company must be listing upon effectiveness of a 1933 Act registration statement.
• The exclusion would no longer distinguish between de-SPAC transactions with listed SPACs versus OTC SPACs.

The net effect is that the seasoning requirements wouldn’t apply to any de-SPAC transactions where the company is listing upon effectiveness of a 1933 Act registration statement. A de-SPAC involving an OTC-traded SPAC would undergo the same review as one with a listed SPAC – equivalent to the scrutiny of a traditional IPO.

If approved, this will be a meaningful rule change for SPACs that have been delisted and continue to trade in the OTC market. Last year – as we discussed in this September 2024 CapitalXchange post –  Nasdaq adopted a rule that allows the exchange to suspend trading of a SPAC if it fails to complete a business combination within 36 months of its IPO or fails to meet initial listing requirements following the de-SPAC deal, without any stay for the SPAC to regain compliance. That’s one reason it’s not too surprising that OTC SPACs have increased in number in recent years, which is a factor that led Nasdaq to propose these changes.

The uptick in OTC SPACs is also a factor in Nasdaq’s proposal to exempt OTC de-SPAC companies from minimum average daily trading volume requirements that currently apply to all companies uplisting from the OTC. These initial liquidity requirements are found in Rules 5315(e)(4), 5405(a)(4) and 5505(a)(5) of the Nasdaq Global Select, Global and Capital Markets, respectively. They are intended to ensure that uplisted companies will have sufficient investor base and trading interest to provide liquidity for an orderly market.

Nasdaq believes that de-SPAC transactions are very different from uplistings, in ways that cause the volume requirement to be unhelpful in determining whether the post-combination company will trade well once listed. Unlike operating companies, where the volume of trading typically is based on revenues, future cash flow expectations, business activities and other metrics, investor interest in a SPAC is based primarily on the value of cash held in trust, which Nasdaq believes is irrelevant to establishing the legitimacy of the SPAC market price. Nasdaq also noted in its proposing release that because the investor base in the SPAC often changes significantly at the time of the de-SPAC, a de-SPAC transaction more closely resembles an IPO than an uplisting.   

Although OTC-trading SPACs will be excluded from the volume requirement at the time of their application, the post business combination company will be required to satisfy all of Nasdaq’s other initial listing standards, as would any IPO or other new listing.

Acknowledging the potential advantages of blockchain recordkeeping – and harkening back to its origins ushering the market from paper stock certificates and physical trades to digital quotes and trades – Nasdaq has proposed changes to its equity rules that, if approved, would allow member firms and investors to choose to trade equity securities and ETPs on the exchange in either traditional or tokenized form. Nasdaq’s goal is to integrate digital assets into its current infrastructure and systems so that they trade under existing regulatory frameworks. The proposal explains:

• The traditional form is a digital representation of ownership and rights, but without utilizing distributed ledger (blockchain) technology.
• The tokenized form is a digital representation of ownership and rights, utilizing blockchain technology.

In other words, for purposes of this proposal, the difference between a traditional security and a tokenized security is its recordkeeping technology. Under Nasdaq’s proposal, tokenized securities would still represent the same store of value as their traditional counterparts. The tokenized and traditional securities would be fungible with each other, sharing the same CUSIP and the same material rights and benefits. Among other things, they both would convey an equity interest in an underlying company and represent identical rights to:

• Receive any dividends that the company issues to its shareholders.
• Exercise any voting rights that shareholders are due.
• Receive a share of the residual assets of the company upon liquidation.

On the flip side, Nasdaq will not treat tokenized instruments to be equivalent to their traditional counterparts if they do not convey identical rights, in whole or in material part, or share the same CUSIP. Instead, the exchange would treat those instruments as distinct – e.g., derivative securities or American depositary receipts (ADRs).

One of the motivating factors behind the proposal is to avoid a fractured market, where different versions of the same assets trade on different and incompatible platforms and are subject to different rules. The proposal notes that “tokenized” stocks are already trading in Europe – in a manner that raises investor concerns. That’s because the tokenized “equities” are not providing investors with actual shares. Instead, the investors are receiving digitally tradable rights to traditional digital shares that the platforms themselves purchase and hold in their own accounts, which do not have voting rights or the rights to corporate assets upon liquidation. Nasdaq questions whether investors understand that they are only receiving the right to realize appreciation and depreciation in the value of the shares.

As far as mechanics for Nasdaq’s approach, once an investor selects whether they want to settle an equity or ETP trade in tokenized form or traditional digital form, Nasdaq will communicate the instruction to the Depository Trust Corporation (DTC), which is the existing clearinghouse for most trades. DTC will clear and settle the trade following those instructions, recording the security as either a traditional digital representation or a blockchain-based token. The SEC’s existing rules on fair and orderly trading – such as price discovery, disclosure and best execution – would continue to apply to either format. The format would not affect the priority in which the exchange executes an order, participation in trading sessions, fees, data feeds, settlement times or the proxy distribution process.

The proposal will become effective once DTC establishes the required infrastructure and post-trade settlement services, which it is working to develop. The proposal goes into detail on how the DTC process is expected to work and provides a hypothetical example, but it emphasizes that the processes are still in the development stage. Nasdaq will alert members at least 30 calendar days before the exchange begins accepting tokenized securities for trading.

Nasdaq’s recommendations are based on survey insights and ongoing engagements with listed companies about improving the public company experience. These policy recommendations, if embraced by lawmakers and the SEC, would make it more attractive to be a US publicly traded company and would reopen capital formation opportunities for companies of all sizes. Specifically, Nasdaq recommended:

• Proxy process modernization
  • Improving proxy plumbing
    • Revise rules to foster direct communication between companies and shareholders. Assign the cost of the objecting beneficial owner (OBO) designation to those shareholders whose status forces those costs. Give issuers a say in selecting intermediary providers, allowing for greater accountability and the development of a competitive market for these services. Require OBOs to share the proxy-related costs they impose on companies, creating transparency around the costs and benefits of OBO treatment.
    • Eliminate preliminary proxy requirements for an expanded list of routine matters.
  • Common sense proxy access and shareholder proposal reforms
    • Update proxy rules to prevent repetitive, unsuccessful proposals from reappearing on proxies.Increase the minimum shareholding for a proxy submission to 1% of total shares outstanding and require that a proposal that has previously been defeated twice can only be resubmitted if it achieved at least 30% support in the most recent vote.Extend the period for resubmitting failed proposals from three to five years.
    • Study the topics suitable for shareholder proxies and modify rules to ensure proposals considered at annual meetings are meaningful and material to the business of the company and not related to ordinary business matters.
  • Proxy advisory reform
    • Require proxy advisory firms to register with the SEC, disclose their conflicts of interest and provide issuers with a reasonable amount of time to respond to mistakes in voting recommendations.
• Scaled disclosure relief
  • Reviving scaled disclosure
    • Lengthen availability of emerging growth company status.Harmonize smaller reporting company and nonaccelerated filer definitions.
    • Expand eligibility for well-known seasoned issuer shelf registrations and use of free-writing prospectuses.
  • Streamlining quarterly reporting practices
    • Issuer choice: Standardize guidelines for the quarterly press release to allow that document to replace the Form 10-Q entirely.
    • Offer companies the option to report semiannually instead of quarterly, where quarterly reporting does not offer benefits.
  • Anchoring disclosure requirements in materiality
    • Materiality should be the north star for the importance and relevance of the information, and any disclosure regime should be anchored in this concept.Ensure any climate-related or similar special interest disclosure requirements do not fall under multiple jurisdictions.
    • Extend the current four-day window for cybersecurity disclosures to reflect real-life situations.
  • Right-sizing Regulation S-K disclosures
    • Streamline Reg. S-K, Item 402(v) disclosure requirements to eliminate “Compensation Actually Paid” information and rely on traditional summary compensation for officers.Revise Reg. S-K, Item 105(a)-(b) to only require disclosure of company-specific and/or industry-specific risks and reduce the existing 15-page limit to 10 pages.
    • Except all nonvolitional transactions from the two-business day filing deadline for Section 16(a) reporting.
• Leveling the playing field with smart regulation
  • Ensuring audits remain relevant and affordable
    • Create a specific office, role or committee within the Public Company Accounting Oversight Board (PCAOB) that allows public companies, audit committees, investors and other stakeholders to provide direct feedback on matters that impact them significantly.
    • Implement a comprehensive cost-benefit analysis that measures impact on companies, audit quality and other stakeholders as part of any future proposed rulemakings.
  • Updating short selling disclosures
    • Align the disclosure of short positions with those of long positions.
    • Enhance transparency and accountability around short positions held by publishers of research.
  • Reining in unproductive litigation practices
    • Enact the Litigation Transparency Act to require disclosure of third-party litigation funding agreements.Ease the standard for imposing sanctions on lawyers who bring frivolous lawsuits, limit plaintiff legal fees and tighten the requirements for class action lawsuits.Allow plaintiffs to amend a complaint only once and require proof of actual knowledge of material misstatements or omissions by public companies, as opposed to mere recklessness.Codify the criteria for pleading scienter and loss causation, and clarify the exclusive nature of federal jurisdiction over securities claims.Create a safe harbor for general risk factors applicable to all companies, such as those about the macroeconomy and market factors.Require the loser to pay the legal fees of the winner in securities class action lawsuits.
    • Allow companies to adopt provisions that require shareholders to pursue claims against the company, directors and officers through arbitration.