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Nasdaq Rule Amendments 2020

In addition to the temporary rule changes and relief that Nasdaq has provided this year for companies affected by Covid-19 (see HERE and HERE), the exchange has enacted various rule amendments with varying degrees of impact and materiality.

In particular, over the last year Nasdaq has amended its delisting process for low-priced securities, updated its definition of a family member for the purpose of determining director independence and has clarified the term “closing price” for purposes of the 20% rule.  This blog discusses each of these amendments.

Delisting Process

In April 2020, the SEC approved Nasdaq rule changes to the delisting process for certain securities that fall below the minimum price for continued listing.  The rule change modifies the delisting process for securities with a bid price at or below $0.10 for ten consecutive trading days during any bid-price compliance period and for securities that have had one or more reverse stock splits with a cumulative ratio of 250 shares or more to one over the prior two-year period.

Nasdaq’s rules require that primary equity securities, preferred stocks, and secondary classes of common stock maintain a minimum bid price of at least $1.00 per share for continued listing.  Under Rule 5810(c)(3)(A), a security is considered deficient with this bid price requirement if its bid price closes below $1.00 for a period of 30 consecutive business days. Under Nasdaq Rule 5810(c)(3)(A), a company with a bid price deficiency has 180 calendar days from notification of the deficiency to regain compliance. A company generally can regain compliance with the bid-price requirement by maintaining a $1.00 closing bid price for a minimum of ten consecutive business days during the 180-day compliance period.

Also under the current rules, if a company is listed on or moves to the Nasdaq Capital Market, the lowest tier of Nasdaq, it may be eligible for a second 180-day period to regain compliance, provided that in the last half of the first compliance period, the company met the market value of publicly held shares requirement, as well as compliance with other Nasdaq rules.  Accordingly, a company trading on the Nasdaq Capital Market could have up to 360 days to regain compliance with a deficient bid price.

However, where a company has a bid price below $.10 or has completed several reverse splits, it likely has more severe issues that will not be able to be corrected regardless of the allowable period to regain compliance.

The rule amendment allows Nasdaq to provide a notice of Staff Delisting Determination to a company that has traded below $1.00 for thirty consecutive business days (the time it would normally receive its deficiency notice) if the security has a closing bid price of $0.10 or less for a period of ten consecutive trading days.  Likewise, instead of receiving a notice of deficiency, a company will receive a Staff Delisting Determination if it falls out of compliance with the $1.00 minimum bid price after completing one or more reverse stock splits resulting in a cumulative ratio of 250 shares or more to one over the two-year period immediately prior to such non-compliance.

A company could appeal the Staff Delisting Determination to a Nasdaq hearing panel which could grant a 180-day compliance period if it believes the company will be able to achieve and maintain compliance with the bid-price requirement.

The rule amendment was effective immediately and applied to all companies that received notice of noncompliance with the bid-price requirement after the date of its effectiveness.  However, on May 14, 2020, Nasdaq extended the new rule such that it will be effective for companies that first receive notification of non-compliance on or after September 1, 2020.  Nasdaq extended the rule effective date to provide relief for companies experiencing wide trading fluctuations as a result of Covid-19.  The effective date extension is in addition to Nasdaq’s prior announcement that it would toll the 180-day period for companies that had already received a non-compliance notice, through June 30, 2020 (see HERE).

Although the new rule was extended, Nasdaq notes that it still may rely on its discretion to deny a second 180-day period to regain compliance for a company with a very low stock or that has completed multiple prior reverse splits.  For a review of Nasdaq’s current initial listing standards, see HERE.

Definition of Family Member for Purposes of Determining Director Independence

Back in December, I wrote a blog drilling down on the Nasdaq board independence requirements (see HERE) and noted that a few months earlier, the SEC had declined to approve a Nasdaq rule change to the definition of “family member.”

Nasdaq Rule 5605 delineates the listing qualifications and requirements for a board of directors and committees, including the independence standards for board members.  Nasdaq requires that a majority of the board of directors of a listed company be “independent” and further that all members of the audit, nominating and compensation committees be independent.

For purposes of Rule 5605, “family member” was defined as a person’s spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone residing in such person’s home.  This definition technically encompasses stepchildren as they are children “by marriage.”  However, when applying the three-year look-back provisions, a company does not have to consider a person who is no longer a family member as a result of legal separation, divorce, death or incapacitation.

In June 2019, Nasdaq proposed to amend the definition of “family member” to narrow who can be included and add a level of certainty.  In particular, Nasdaq proposed to change the definition to “a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home.”  In the proposed rule-change release, Nasdaq admitted that it did not intend to include stepchildren and that the change would correct this mistake.  The proposed language matched the NYSE definition. However, in September 2019, the SEC instituted proceedings to determine whether to disapprove the proposed rule change believing that the rule release made an over-correction.

In February, Nasdaq submitted its third amendment to the proposed rule change, which was approved by the SEC.  Although the definition of “family member” as approved by the SEC, is the same as proposed in June 2019, the rule release now states that Nasdaq intends to exclude domestic employees who share the director’s home, and stepchildren who do not share the director’s home, from the types of relationships that always preclude a finding that a director is independent.  Rather, a company’s board of directors will need to examine all facts and circumstances to determine if a particular step-child relationship would be likely to interfere with the director’s exercise of independent judgment in carrying out his or her responsibilities

Clarification of “Closing Price” in 20% Rule

In January 2020, Nasdaq filed a rule change to clarify the meaning of the term “Closing Price” as used in Rule 5635(d), known as the 20% Rule.  For more information on Rule 5635(d), see HERE.  The rule change does not make any substantive changes but rather is meant to clarify the language to avoid any potential confusion.

Nasdaq Rule 5635(d) requires shareholder approval prior to a 20% issuance of securities at a price that is less than the Minimum Price in a transaction other than a public offering. A 20% issuance is a transaction, other than a public offering, involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or substantial shareholders of the company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. “Minimum Price” means a price that is the lower of: (i) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.

The rule amendment changes the term “closing price” to “Nasdaq Official Closing Price” in the definition of Minimum Price.  The term Nasdaq Official Closing Price had been used in the September 2018 rule release when Nasdaq adopted the definition of Minimum Price.  Aligning the language will add a layer of consistency and avoid any confusion for listed companies.

The Author

Laura Anthony, Esq.

Founding Partner

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 siting 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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