In December of last year, Nasdaq proposed a rule change to modify the initial listing requirements related to liquidity. More specifically, Nasdaq proposed 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 to 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. The proposal was amended in February of this year. The SEC has now approved the amended proposal on an accelerated basis.
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” 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.) More specifically, for initial listing on the Nasdaq Global Market, a company must have a minimum MVUPHS of $8 million under the Income Standard, $18 million under the Equity Standard, and $20 million under either the Market Value or Total Assets/Total Revenue Standards. For initial listing on the Nasdaq Capital Market, a company must have a minimum MVUPHS of $5 million under the Net Income Standard, and $15 million under either the Equity or Market Value of Listed Securities Standard. In addition, to qualify for initial listing on those two markets, a company trading on the OTC must “currently satisfy either a minimum daily trading volume on the OTC market of 2,000 shares over the past 30 trading days with trading occurring in at least 50% of those days (the “ADV Requirement”) or, alternatively, list in connection with a firm commitment underwritten public offering of at least $4 million.” 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 unrestricted publicly held shares.
Nasdaq has previously explained that 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 conduct an IPO and 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.” According to Nasdaq, the “resale shares may not contribute to liquidity to the same degree as the shares sold in the public offering” and, as a result, 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. To that end, Nasdaq has proposed 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 ADRs, must satisfy the applicable MVUPHS requirement for each initial listing standard for primary equity securities with the proceeds of that offering.”
Likewise, Nasdaq has proposed to apply a similar requirement to companies that are uplisting from the OTC in connection with a firm commitment underwritten public offering of a specified size—the alternative to ADV—because, in those cases, the liquidity would also be supported by the offering. As a result, for companies uplisting from the OTC market, Nasdaq has proposed to modify the alternative to the ADV Requirement in Nasdaq Listing Rules 5405(a)(4) and 5505(a)(5) to require that a company relying on this alternative must also satisfy the applicable MVUPHS requirement with only the proceeds from the offering. In addition, to align with the minimum MVUHPS requirement for each market, Nasdaq has proposed to modify those rules to increase the size of the required public offering from $4 million to $5 million for Nasdaq Capital Market applicants and to $8 million for Nasdaq Global Market applicants. Further, if the company “qualifies under a standard other than the income standard, the minimum raise instead will have to satisfy the [MVUPHS] requirement of the applicable standard.” Nasdaq has previously observed 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.”
The SEC found that the proposed changes were consistent with the requirements of the Exchange Act and the related rules and regulations applicable to a national securities exchange. Meaningful listing standards are “of critical importance to financial markets and the investing public”: among other things, they “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.” In addition, they help to satisfy “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.” These proposed changes should allow Nasdaq “to better determine whether a security has adequate liquidity and thus is suitable for listing and trading on the Exchange. Accordingly, the amendments to the Exchange’s initial listing standards should help to ensure that the Exchange lists only securities with a sufficient market, with adequate depth and liquidity, and with sufficient investor interest to support an exchange listing.”
As noted by the SEC, Amendment No. 1 made only “minor changes to improve the clarity and readability of the proposal and provides that the proposed changes will become operative 30 days after approval by the Commission.” Further, the Amendment did “not modify the operation or meaning of the proposed changes.” Accordingly, the SEC approved the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.
