Nasdaq has adopted new listing qualifications which were proposed in April 2019 (see HERE). The final rules were adopted with some modifications to prior proposals.
On July 5, 2019, the SEC approved a Nasdaq rule change to amend initial listing standards related to liquidity. For a review of the Nasdaq Capital Market’s current initial listing standards, see HERE and related to direct listings, see HERE. In particular, to help assure adequate liquidity for listed securities, Nasdaq revised its initial listing criteria to (i) exclude restricted securities from the Exchange’s calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders; (ii) imposed a new requirement that at least 50% of a company’s round lot holders must each hold shares with a market value of at least $2,500; and (iii) adopt a new listing rule requiring a minimum average daily trading volume for OTC traded securities at the time of their listing.
On June 28, 2019, the SEC approved a Nasdaq rule change adding an additional listing requirement such that companies seeking listing in connection with a Regulation A offering must, at the time of approval of the listing, have a minimum operating history of two years. Companies may seek a listing on Nasdaq when completing a Regulation A offering either through an initial public offering or an uplisting. As a result of the rule change, in addition to the standard listing requirements, all such companies will need to have a minimum of two years’ operating history.
Final Liquidity Standards Rule Change
To help assure adequate liquidity for listed securities, Nasdaq has revised its initial listing criteria to (i) exclude restricted securities from the Exchange’s calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders (“Initial Liquidity Calculations”); (ii) impose a new requirement that at least 50% of a company’s round lot holders must each hold shares with a market value of at least $2,500; and (iii) adopt a new listing rule requiring a minimum average daily trading volume for OTC traded securities at the time of their listing subject to an exemption where there is a firm commitment underwritten offering of at least $4 million.
Prior to the rule change, restricted securities were included in the Initial Liquidity Calculations even though such shares were not available for trading. As such, a company could have satisfied the initial listing requirements even though a substantial number of its securities were restricted and not available for trading, resulting in a listed security that was illiquid. Illiquid securities may trade infrequently, in a more volatile manner and with a wider bid-ask spread, all of which may result in trading at a price that may not reflect the true market value. Less liquid securities also may be more susceptible to price manipulation, as a relatively small amount of trading activity can have an inordinate effect on market prices.
In order to facilitate the rule change to the Initial Liquidity Calculations, Nasdaq has adopted new definitions to the terms “restricted securities,” “unrestricted publicly held shares” and “unrestricted securities” and also has amended the definition of “round lot holder.”
Nasdaq Rule 5005(a)(37) has been amended to define “restricted securities” as securities (i) acquired directly or indirectly from the issuer or an affiliate of the issuer in unregistered offerings such as private placements or Regulation D offerings; (ii) acquired through an employee stock benefit plan or as compensation for professional services; (iii) acquired in reliance on Regulation S and subject to U.S. restriction; (iv) subject to a lockup agreement or a similar contractual restriction; or (v) restricted under Rule 144. For purposes of an ADR, Nasdaq will consider restrictions that prohibit the resale or trading of the underlying security on the company’s home country market.
Conversely, “unrestricted securities” are now defined as securities which do not fall within the new definition of “restricted securities.” Nasdaq believes that the rule changes will result in more liquid exchange traded securities and notes that even the FTSE Russell and S&P indexes make adjustments to only include only freely tradable public float securities. The FTSE Russell excludes shares held within employee share plans, shares subject to a “lock-in” clause, and shares subject to contractual restrictions. Similarly, the S&P adjusts its indices to “reflect only those shares available to investors rather than all of a company’s outstanding shares.”
The final rules amendment modified the initial listing requirements related to publicly held shares to only include unrestricted shares. All tiers of Nasdaq require a company to have a minimum number of publicly held shares to satisfy the listing requirements. In order to facilitate the changes to the Initial Liquidity standards, Nasdaq has maintained the definition of “publicly held shares” and added a new definition of “unrestricted publicly held shares.” “Publicly held shares” will continue to be defined as “shares not held directly or indirectly by an officer, director or any person who is the beneficial owner of more than 10 percent of the total shares outstanding. Determinations of beneficial ownership in calculating publicly held shares shall be made in accordance with Rule 13d-3 under the Act.” “Unrestricted publicly held shares” are defined as publicly held shares that satisfy the new definition of “unrestricted shares.”
As part of the rule change, Nasdaq made many conforming changes throughout the rules to change references from “publicly held shares” to “unrestricted publicly held shares” such that listing standards will not be focused on the value and number of freely tradable securities, including those related to market capitalization and market value of publicly held shares.
As part of the conforming changes, a company seeking to list on the Nasdaq Capital Markets must now have 1 million unrestricted publicly held common shares with a market value of either $15 million or $5 million depending on the standard being used to qualify. The computation for market value of unrestricted publicly held shares is as of the date of the application by the company for all market tiers.
The amendment also applies to the number of round lot holders, which now only includes unrestricted round lot holders. Furthermore, the rule amendments add additional requirements related to the market value of round lot holders. Prior to the amendment, a shareholder may be considered a round lot holder by holding exactly 100 shares, which would be worth only $400 in the case of a stock that is trading at the minimum bid price of $4 per share. Under the new rules, Nasdaq requires that at least 50% of a company’s required round lot holders hold shares with a market value of at least $2,500. The requirement excludes the initial listing of warrants because warrants do not have a minimum price requirement and may have little value at the time of issuance. Nasdaq believes that the amendment will help ensure that a majority of the required minimum number of shareholders hold a meaningful value of stock and that a company has sufficient investor interest to support an exchange listing.
The Rule changes affect the calculations for determining bid price, market capitalization and market value of publicly held shares for companies applying to list on the Exchange through a direct listing. Nasdaq recently amended the rules related to the direct listing process for companies seeking to list on the Nasdaq Global Select Market tier (see HERE), and this new amendment makes the requirements even more stringent. Nasdaq will attribute a bid price, market capitalization, and market value of publicly held shares to the company equal to the lesser of (i) the value calculable based on an independent third-party valuation of $250,000,000 or more (a “Valuation”) and (ii) the value calculable based on the most recent trading price in an established Private Placement Market, both of which will can only include unrestricted publicly held shares.
Rule Change Related to Uplistings from OTC Markets
Nasdaq has amended its rules to require a minimum average daily trading volume for OTC traded securities at the time of their listing. OTC-traded securities are now required to have a minimum average daily trading volume over the 30 trading days prior to listing of at least 2,000 shares a day (including on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days (i.e., at least 16 days). Nasdaq has concurrently adopted an exemption from this requirement for uplistings involving a firm commitment underwritten public offering of at least $4 million.
Regulation A Final Rule Change
Although Regulation A IPO’s waned after an initial burst in popularity, I am seeing an uptick in this space and believe we will continue to do so for the foreseeable future. One of the reasons for the uptick is the December 2018 rule change making Regulation A available for use by companies subject to the Exchange Act reporting requirements (see HERE). I also think that the elimination of the 30% limit on resale or secondary sales for non-affiliate sellers after the first Regulation A offering (or subsequent Regulation A offerings that are qualified within one year of the first offering) will encourage greater use of Regulation A for resale registrations as the fairly new offering method continues to age and gain widespread acceptance (see HERE).
As proposed, Nasdaq has adopted a rule change to add an additional listing requirement such that companies seeking listing in connection with a Regulation A offering must, at the time of approval of the listing, have a minimum operating history of two years. A company offering securities under Tier 2 may register its securities under the Exchange Act concurrently with the qualification of its Regulation A offering statement and list those securities on a national securities exchange, such as Nasdaq, if it meets applicable listing standards.
Most Regulation A IPO’s are conducted by a less mature company than traditional IPO’s. Less mature companies may have less developed business plans and a greater need to continue to access capital markets. In its rule release, Nasdaq indicated that it believes that the Regulation A offering process does not adequately prepare companies for the rigors of operating a public company and satisfying the SEC and Exchange’s reporting and corporate governance requirements. I don’t necessarily agree with that statement as I don’t think it is the IPO process that lays the groundwork for financial reporting and governance, but rather solid management and seasoned accounting and legal teams are the more important factor.
Regardless, it is undeniable that when Regulation A/A+ was first adopted in 2015, both Nasdaq and the NYSE American actively courted these new IPO’s, but both exchanges saw many companies struggle in the IPO aftermath. The rule change is thought to help ensure that only more mature companies seek a Nasdaq listing.
Although Nasdaq does not discuss the issue in the rule release, it is well known that companies completing a Regulation A IPO have generally experienced an immediate down-tick in their stock price. The reason for this is likely due to the lack of firm commitment offerings and the accompanying overallotment (greenshoe) option. An overallotment option, often referred to as a greenshoe option because of the first company that used it, Green Shoe Manufacturing, is where an underwriter is able to sell additional securities if demand warrants same, thus having a covered short position. A covered short position is one in which a seller sells securities it does not yet own, but does have access to. This helps stabilize an offering price in two ways. First, if the offering is a big success, more orders can be filled. Second, if the offering price drops and the underwriter has oversold the offering, it can cover its short position by buying directly into the market, which buying helps stabilize the price (buying pressure tends to increase and stabilize a price, whereas selling pressure tends to decrease a price).
Interestingly, in a hedged comment, Nasdaq points out that the financial press, Congress and others have raised concerns about the potential for fraud by companies conducting offerings under Regulation A. I would venture to say that Nasdaq couches the statement without owning it on purpose. Companies conducting a Regulation A offering are not systemically more prone to fraud than others, but unfortunately the view is reflective of a general prejudice to small-cap markets and their participants in today’s world (for more on my views, see HERE and HERE).
In response to the issues faced by Nasdaq-traded companies following completion of a Regulation A IPO, Nasdaq increased its discretionary review procedures. Word of the informal changes spread quickly and Nasdaq Regulation A IPO’s basically stopped short for a while. However, interest in the offering process and an exchange listing has put pressure on the exchange to continue to open its doors to these companies and the rule change seems a fair addition. I personally do not believe that a company that has not operated for at least two years (other than SPACs) should be seeking a public listing in any event.
In addition to hopefully assuring that a company has a more developed business plan, companies that have two years of operations must necessarily have successfully funded their start-up and initial phases and have proven some level of execution and met milestones.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including sitting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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