Nasdaq is proposing a rule change to modify the initial listing requirements related to liquidity. More specifically, Nasdaq is proposing to change Listing Rules 5405 and 5505 to require that a company seeking to list on the Nasdaq Global Market or Nasdaq Capital Market in connection with an IPO or uplist to Nasdaq from the OTC in connection with a public offering “satisfy the applicable minimum Market Value of Unrestricted Publicly Held Shares (“MVUPHS”) requirement solely from the proceeds of the offering.” That would mean that previously issued shares registered for resale would no longer be counted as unrestricted publicly held shares in the calculation of MVUPHS. Comments on the proposal are being solicited.
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For initial listing on the Nasdaq Global Market and the Nasdaq Capital Market, Nasdaq Listing Rules specify the required minimums of MVUPHS as calculated under specified different standards. Unrestricted Publicly Held Shares (UPHS) are shares that are not held by an officer, director or 10% shareholder of the company and not subject to resale restrictions of any kind. Currently, for a company listing in connection with a public offering, in calculating MVUPHS, in addition to the primary shares being sold in the offering, shares that were previously issued but registered for resale and not held by an officer, director or 10% shareholder, are counted as UPHS.
According to Nasdaq, the “MVUHPS standard is one of the core liquidity requirements within the Nasdaq listing rules. Like the other liquidity requirements, it is meant to ensure that there is sufficient liquidity to provide price discovery and support an efficient and orderly market for the company’s securities.” However, Nasdaq has observed that companies that include these resale shares to meet the applicable MVUPHS requirement “have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the offering. Nasdaq believes that the Resale Shares may not contribute to liquidity to the same degree as the shares sold in the public offering.” Nasdaq believes that it would be appropriate to address that issue by excluding resale shares from the calculation of MVUHPS in connection with public offerings. As a result, Nasdaq is proposing to modify the two Listing Rules (5405(b) and 5505(b)) to provide that a company listing in connection with an IPO, “including through the issuance of American Depository Receipts, must satisfy the applicable MVUPHS requirement for each initial listing standard for primary equity securities with the proceeds of that offering.” Nasdaq “believes that this proposed change will help ensure that the initial pool of liquidity available for trading meets or exceeds the minimum applicable MVUHPS requirement.”
Likewise, Nasdaq is proposing to apply a similar requirement to companies trading in the OTC market that qualify for listing based on an offering (as opposed to qualifying based on a minimum daily trading volume). The offering alternative for listing from the OTC requires that the company list in connection with a firm commitment underwritten public offering of at least $4 million. With the offering alternative, Nasdaq indicates, ” the liquidity characteristics of the prior trading will change and reflect the offering, just like in an IPO, and shares in the offering will be the primary source of liquidity upon listing”; the offering will serve “as the primary source of price discovery in the same way the offering does in an IPO.” Accordingly, Nasdaq proposes to modify the firm commitment offering alternative in Listing Rules 5405(a)(4) and 5505(a)(5) to require that the company satisfy the applicable MVUPHS requirements with only the proceeds from the offering. In addition, Nasdaq proposes to) to increase the size of the required public offering for this alternative “from $4 million to $5 million for Capital Market applicants and $8 million for Global Market applicants to align with the minimum MVUHPS requirement for each market. If the company qualifies under a different standard, instead of the income standard, the minimum raise instead would have to satisfy the MVUPHS requirement of the applicable standard.” Nasdaq observes that ”failure to align these requirements could allow a company to begin trading on the OTC market and then uplist to Nasdaq a short time later with an offering that does not satisfy the proposed new requirements for companies listed in connection with an IPO.”
