Earlier this year, the SEC approved a Nasdaq proposal to revise its initial listing standards to improve liquidity in the market. (See this PubCo post.) As amended, the initial criteria for listing on any Nasdaq tier were revised to exclude “restricted securities” from the calculations of the required minimum number of publicly held shares, market value of publicly held shares and round lot holders, given that restricted securities are not freely transferable and are generally illiquid. Nasdaq also added new definitions for “restricted securities,” “unrestricted publicly held shares” and “unrestricted securities.” As a result of these changes, only securities that are “freely transferable” are included as publicly held shares for purposes of satisfying the initial listing criteria. No changes were proposed to the continued listing requirements at that time. Now, however, Nasdaq has proposed to address the comparable liquidity issue for listed companies.
In contrast to the initial listing standards, however, the new proposal would provide for a process that is triggered upon the occurrence of certain events. The rule would come into play only “when Nasdaq observes unusual trading characteristics in a security or a company announces an event that may cause a contraction in the number of unrestricted publicly held shares.” In those circumstances, the new Rule would permit Nasdaq to halt trading in the security and ask the company to provide information about the number of unrestricted publicly held shares and, potentially, to provide a plan to increase liquidity. Companies would not be required to report unrestricted publicly held shares to Nasdaq on an ongoing basis.
Currently, for continued listing, a company is required to maintain a minimum number of publicly held shares (i.e., shares not held directly or indirectly by an officer, a director or more than 10% beneficial owner); restricted securities are not excluded from the calculation under the continued listing standards, and Nasdaq is not proposing to exclude them (other than, as discussed below, in connection with the potential application of more stringent criteria in this specific circumstance). While companies that are now applying for listing must satisfy the revised initial listing requirements (which Nasdaq believes will lead to improved trading), companies that were not required to meet the current initial listing requirements could still have restricted securities counted in their public float. What’s more, listed companies may enter into transactions that decrease the number of unrestricted securities. As a result, listed companies could experience liquidity issues, which could affect trading frequency, promote volatility and increase the potential for manipulation. Nasdaq is concerned that the new initial listing standards do not address these issues, and believes that changes are needed.
Accordingly, Nasdaq is proposing to adopt new Rule 5120, which would authorize Nasdaq to request information from a company regarding the number of “unrestricted publicly held shares” (as defined in Rule 5005(a)(45) and (46)) when Nasdaq observes unusual trading characteristics of a security (such as volume, price movements, spread and the presence or absence of any news) or if a company announces an event that may cause a contraction in the number of unrestricted publicly held (such as reverse stock splits, tender offers, stock buybacks, or the entry into contractual agreements such as standstills or lockups). Under Rule 4120(a)(5), Nasdaq may also halt trading in the security in connection with its request.
If, in response to Nasdaq’s request, the information provided (or otherwise discovered by Nasdaq) shows that “the number of Unrestricted Publicly Held Shares is below the applicable Publicly Held Shares requirement for continued listing of the security, Nasdaq generally will use its authority under Rule 5101 to apply more stringent criteria and request a plan to increase the number of Unrestricted Publicly Held Shares to an amount that is higher than the applicable Publicly Held Shares requirement.” [Emphasis added.] Nasdaq is also proposing to add new subsection (vii) to Rule 5810(c)(2)(A) to provide that, when Nasdaq requests a plan in this context, it must generally be provided within 45 calendar days of the date of the request.