In August 2024, Nasdaq submitted a new rule proposal aimed at accelerating the delisting process for companies with shares that trade below $1. Briefly, under the proposal, a company would be suspended from trading on Nasdaq if the company was non-compliant with the $1.00 bid price requirement for more than 360 days. In addition, any company that has effected a reverse stock split within the prior one-year period but becomes non-compliant with the $1.00 minimum bid price requirement would immediately be sent a Delisting Determination without any compliance period. Last week, the SEC approved the proposal.
Under current Nasdaq listing standards, a company with equity securities listed on the Nasdaq Global Select, Global and Capital Markets is required to maintain a closing bid price of at least $1 per share. If the company fails to satisfy the bid price requirement for a period of 30 consecutive business days, the company is promptly notified and automatically given a period of 180 calendar days from the notification to achieve compliance. Subject to certain requirements, including notifying Nasdaq of its intent to cure this deficiency, a company listed on, or that transfers to, the Nasdaq Capital Market may be provided with a second 180-day compliance period. If not, or if the company does not resolve the bid price concern during the second compliance period, Nasdaq will issue a Delisting Determination under Rule 5810, which can be appealed to a Nasdaq Listing Qualifications Hearings Panel. That Panel can provide up to an additional 180 days to regain compliance. The result is the potential for lots of grace time. Under the current rules, “a company may be continuously deficient with the Bid Price Requirement and continue trading on Nasdaq for more than 360 days (but not more than 540 days).”
Of course, there are some exceptions. Under Rule 5810(c)(3)(A)(iii), if a company’s security has a closing bid price of $0.10 or less for 10 consecutive trading days during any bid price compliance period, Nasdaq must issue a Delisting Determination with respect to that security. And under Rule 5810(c)(3)(A)(iv), if a company’s security fails to meet the bid price requirement and the company has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to one, then the company is not eligible for any compliance periods and Nasdaq must issue a Delisting Determination with respect to that security. (See this PubCo.) Finally, under Rule 5810(c)(3)(A), if a company takes a corporate action (most likely, a reverse stock split) to regain compliance with the bid price requirement and, although the reverse split may bring the company into compliance with the minimum bid price requirement, it also, at the same time, leads to non-compliance with another listing rule—particularly, the requirements for the number of publicly held shares and number of public holders—the company will not be granted any additional compliance period for the newly created deficiency; the company will continue to be considered non-compliant with the bid price requirement until the new deficiency is cured and thereafter the company meets the bid price requirement. If the company does not regain compliance with both Nasdaq listing requirements during the compliance period, Nasdaq must issue a Delisting Determination and no additional compliance periods will be available. (See this PubCo post.) Got it?
Based on Nasdaq’s experience with the rules, Nasdaq proposed two changes to the delisting process:
360-day limit. First, Nasdaq believes that providing two consecutive grace periods adding up to 360 days should do it. Under the rules, Nasdaq provides a company with a second bid price compliance period “if the company reviewed its circumstances and notified Nasdaq that it intends to cure the bid price deficiency by effecting a reverse stock split within the second 180-day compliance period.” But in these circumstances, if the company does not achieve compliance in that second period and then appeals to the Hearings Panel, Nasdaq no longer considers it appropriate for a company to continue to trade on Nasdaq during the pendency of the Hearings Panel review process. Accordingly, where a company that was afforded the second 180-day compliance period but failed to regain compliance during that period, Nasdaq proposed to amend Rule 5815 to remove the stay provision in these situations so that the company’s securities would be suspended from trading on Nasdaq during the pendency of the Hearings Panel’s review. (Generally, regaining compliance means meeting the applicable standard for a minimum of 10 consecutive business days.) While a suspended company could still appeal the Delisting Determination to a Hearings Panel, its securities would trade in the OTC market while that appeal is pending. The Hearings Panel would still have authority to provide exceptions.
Excessive reverse splits. In the proposal, Nasdaq indicated that the automatic 180-day period to achieve compliance with the bid price requirement was “designed to allow adequate time for a company facing temporary business issues, a temporary decrease in the market value of its securities, or temporary market conditions to regain compliance with the Bid Price Requirement.” However, Nasdaq has “observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits,” which Nasdaq believes is “often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on Nasdaq for investor protection reasons.” Often, Nasdaq observes, these challenges are not temporary, as these companies continue to waver between compliance and non-compliance. In addition, “a pattern of recurring bid price non-compliance can be a leading indicator of other listing compliance concerns.”
Nasdaq has observed the continuation, for some companies, of the pattern of “effecting consecutive reverse stock splits, which are often accompanied by dilutive issuances of securities.” To address this issue, Nasdaq proposed to amend its listing rules to provide that, “if a company’s security fails to meet the bid price requirement and the company has effected a reverse stock split over the prior one-year period,” the company would not be eligible for any compliance period specified in Nasdaq Rule 5810(c)(3)(A) and the Listing Qualifications Department will issue a Delisting Determination under Rule 5810 with respect to that security. According to Nasdaq, this change will apply to a company even if the company was in compliance with the bid price requirement at the time of its prior reverse stock split.
The SEC found the proposed rule change to be consistent with the requirements of the Exchange Act and related rules applicable to a national securities exchange. The development and enforcement of meaningful listing standards “help ensure that exchange-listed companies will have sufficient public float, investor base, and trading interest to provide the depth and liquidity to promote fair and orderly markets. Meaningful listing standards also are important given investor expectations regarding the nature of securities that have achieved an exchange listing, and the role of an exchange in overseeing its market and assuring compliance with its listing standards.” While public comments on the proposal were mixed—for example, some objected that further study was required to determine whether most reverse splits were really due to “deep financial or operational distress”—the SEC concluded that the Nasdaq proposal was “reasonably designed to enhance its continued listing standards, thereby protecting investors and the public interest.” In instances where companies have notified Nasdaq of their intent to cure the bid price deficiency and they receive a second 180-day compliance period, but still fail to achieve compliance, “it is consistent with investor protection to prohibit such companies from continuing to trade on the Exchange during any appeal of delisting when they have already failed to cure a bid price deficiency for 360 days.”
In addition, with respect to the aspect of the proposal regarding reverse stock splits, the SEC concluded that it was “appropriately targeted to those securities that are more likely to have serious recurrent issues in regaining and maintaining compliance with the Bid Price Requirement.” According to the SEC, the “proposal reasonably balances the intent of the delisting process with the need to prevent companies from taking advantage of the delisting process for an extended period of time despite indications of serious difficulties within such companies that are likely to put continued downward pressure on the stock price, contrary to the goal of protecting investors and the public interest under the Exchange Act.” And for both components of the proposal, “any affected companies would be able to seek review of their Delisting Determinations from the Hearings Panel,” thus maintaining a fair procedure for affected companies to appeal their Delisting Determinations.
