In August, the SEC posted a proposed Nasdaq rule change that would establish listing standards related to notification and disclosure of reverse stock splits. According to the Nasdaq proposal, the volume of reverse splits processed by Nasdaq has increased substantially from 94 in 2020, 31 in 2021and 196 in 2022 to 164 reverse splits—just as of June 23, 2023. In most cases, Nasdaq observed, the purpose of the reverse splits was to comply with Nasdaq’s $1 minimum bid price requirement to remain on the Capital Market tier. In light of this increased volume, Nasdaq proposed amendments to its listing rules to “enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets.” Failure to comply could result in a trading halt. Last week, the SEC approved the proposed rule change. It’s worth noting that, as a corollary to the new reverse split listing standards, Nasdaq has also submitted to the SEC a separate rule proposal to adopt a new regulatory halt procedure specific to securities in the process of a reverse split.
New listing standards related to reverse splits. Under prior Nasdaq listing rules, a reverse stock split was identified as a “Substitution Listing Event,” which required notification to Nasdaq no later than 15 calendar days prior to implementation of the event. Although there was no requirement for public disclosure specific to reverse splits, companies were required to make “prompt disclosure” of “any material information that would reasonably be expected to affect the value of its securities or influence investors’ decisions,” which, Nasdaq stated, included reverse stock splits.
Under the rule change, Nasdaq is adding new Rules 5250(b)(4), 5250(e)(7), and IM-5250-3 (which basically repeats the requirements of Rules 5250(b)(4) and (e)(7)), and is updating the information that a company must disclose to Nasdaq about a reverse split. More specifically, Nasdaq is deleting the reference to a reverse split as a “Substitution Listing Event,” and instead, under new rule 5250(e)(7), requiring companies conducting reverse splits to notify Nasdaq by submitting a completed Company Event Notification Form no later than 12:00 p.m. ET five business days prior to the proposed market effective date. The Form will include information such as the split ratio, the effective date of the split, new CUSIP number, and the dates of board approval, shareholder approval and DTC eligibility. Notably, the Form submitted must include all the information required, as well as a draft of the public disclosure required by Rule 5250(b)(4) (as discussed below).
Listing Rule 5250(b)(4) will require companies to provide public notice of a reverse split, using a Reg FD-compliant method, no later than 12:00 p.m. ET at least two business days prior to the proposed market effective date. As with other news, prior notice of this disclosure must be made to the MarketWatch Department through the electronic disclosure submission system available at http://www.nasdaq.net, except in emergency situations, as described in IM-5250-1, when notification may instead be provided by telephone or fax. Nasdaq has indicated that it will not process the reverse split unless the requirements set forth in proposed Rules 5250(b)(4) and 5250(e)(7) have been timely satisfied. Moreover, “if a company takes legal action to effect a reverse stock split notwithstanding its failure to timely satisfy these requirements, or provides incomplete or inaccurate information about the timing or ratio of the reverse stock split in its public disclosure,” Nasdaq will halt trading in the stock.
Nasdaq believes the amendments will “provide additional transparency and clarity to companies and market participants.” The amendments will also help ensure that Nasdaq has complete information to process the reverse stock split on a timely basis. And, by shortening the deadline for notification from 15 calendar days to five business days, “Nasdaq believes that companies will be able to provide complete information in a single submission of the form, which they often cannot do today,” in light of delays in receipt of required information or changes in market conditions requiring modification of the split ratio. The requirement to submit a draft of the proposed public disclosure will “help ensure that the information disseminated to the market by the company aligns with Nasdaq’s announcement, including the split ratio and market effective date.” Under the amendments, Nasdaq will publish an announcement through the Nasdaq Trader website one and two business days prior to the market effective date, allowing market participants adequate notice to update their systems. In addition, the requirement under Rule 5250(b)(4) to make public disclosure two business days before the market effective date will also help ensure that sufficient notice is provided to market participants.
The SEC determined that the proposed rule changes were consistent with the requirements of the Act and the related rules and regulations applicable to a national securities exchange. The SEC found that the proposal was reasonably designed to address recent reverse split market activity by providing additional transparency about reverse splits to investors through public disclosure, thus allowing them to better manage investment decisions. The SEC agreed with Nasdaq that shortening the timeframe for notification “should help to reduce the possibility of errors and allow companies to provide more complete and accurate information about a reverse stock split in a single submission to Nasdaq,” which should also benefit investors. The SEC also believed that the other changes to proposed “Rule 5250(e)(7) and to the Company Notification Form appear to be reasonable additions to address Nasdaq’s and market participants’ concerns about having adequate, accurate, and complete information in a timely manner about reverse stock splits.” In addition, SEC agreed that, by providing the public with at least one additional business day of notice, the risk that investors and brokers inadvertently miss the public announcement of the reverse stock split or fail to process the event in their systems will be reduced. Accordingly, the SEC approved the Nasdaq listing rule change.
Proposal re trading halts. While these amendments pertain to notification and disclosure, Nasdaq has also submitted a separate rule filing proposing a new regulatory halt procedure specific to the pre-market trading and opening of a Nasdaq-listed security undergoing a reverse stock split. Current Rule 4120 does not specifically identify reverse splits in its enumerated circumstances in which Nasdaq may halt trading in a security. The proposal would amend Rule 4120 (Limit Up-Limit Down and Trading Halts) and Rule 4753 (Nasdaq Halt Cross) ) to set forth specific requirements for halting and resuming trading in a security that is subject to a reverse stock split.
Nasdaq believes that, with the increase in reverse splits, the proposed amendments would help to better detect errors that might result from “market participants’ processing of the reverse stock split, including incorrect adjustment or entry of orders” before trading in the stock begins. Nasdaq believes it is “appropriate to impose a regulatory halt, which would prohibit pre-market trading immediately after a reverse stock split and open trading in such securities using the Nasdaq Halt Cross process (for determining price) set forth in Rule 4753.” Under proposed Rule 4120(a)(14), a trading halt due to a reverse stock split would be mandatory; Nasdaq indicates that it “expects to initiate the halt at 7:50 p.m., prior to the close of post-market trading at 8:00 p.m. on the day immediately before the split is effective, and resume trading at 9:00 a.m. on the day the split is effective.”