In July Nasdaq filed a proposed rule change with the SEC to establish listing standards related to notification and disclosure requirements of reverse splits. As of the writing of this blog, the proposed rule change has received only a single comment, which supported the change.
Background
After the market highs of the second half of 2020 and all of 2021, we have all witnessed the general decline, including noticeably depressed valuations and market price, especially in the small cap space. In 2022, Nasdaq processed 196 reverse stock splits, compared to 31 in 2021 and 94 in 2020. As of June 23, 2023, Nasdaq has processed 164 reverse stock splits, and projects significantly more throughout 2023. In its rule proposal, Nasdaq notes that the majority of reverse splits are effectuated by smaller companies that do not have broad media or research coverage. These companies generally trade on the Nasdaq Capital Market tier of the exchange and are completing reverse splits to maintain the minimum $1.00 bid price to avoid delisting.
Nasdaq is concerned that market participants do not have enough visibility on these companies or their capital changes. Nasdaq is also concerned with an increase in errors resulting in a material effect on the market resulting from market participants’ processing of the reverse stock split, including incorrect adjustment or entry of orders.
Interestingly, whereby Nasdaq is responding to the increased number of reverse splits by proposing additional administrative process, the Delaware legislature responded to the same market metrics by implementing amendments to reduce the burdens on Delaware chartered corporations. In particular, the Delaware General Corporation Law (“DGCL”) amendments allow for approval by a majority of votes cast (instead of majority of outstanding) and eliminate the class or series shareholder approval requirement if (a) the shares of such class are listed on a national securities exchange immediately before such amendment becomes effective and meet the listing requirements of such national securities exchange relating to the minimum number of holders immediately after such amendment becomes effective, and (b) at an annual or special meeting, a vote of the stockholders entitled to vote thereon, voting as a single class, is taken for and against the proposed amendment, and the votes cast for the amendment exceed the votes cast against the amendment. For more on the 2023 DGCL amendments, see HERE.
Proposed Rule Changes
Nasdaq is proposing to require a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split at least five (5) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date and make public disclosure about the reverse stock split at least two (2) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date.
Currently, a reverse stock split is considered a “Substitution Listing Event” requiring a company to notify Nasdaq about the split no later than 15 calendar days prior to its implementation. Although not specific to reverse splits, Nasdaq rule 5250 requires a company to make prompt disclosure of “any material information that would reasonably be expected to affect the value of its securities or influence investors’ decision” including reverse splits. Nasdaq FAQ specifies that the disclosure should be disseminated prior to, or in conjunction with, the Nasdaq announcements of corporate changes – i.e., the day prior to the market effective date of the split.
The proposed rule would delete the reference to a reverse split as a Substitution Listing Event and instead add new Listing Rules 5250(b)(4), 5250(e)(7) and IM-5250-3 setting forth the new notification and disclosure requirements. Proposed Listing Rule 5250(b)(4) will specify that a company must provide public notice about a reverse stock split using a Regulation FD compliant method no later than 12:00 p.m. ET at least two (2) business days prior to the proposed market effective date. As is required with all news, disclosure would need to be made to MarketWatch at least 10 minutes prior to the public announcement.
Proposed Listing Rule 5250(e)(7) will specify that, for a reverse stock split, the company must notify Nasdaq by submitting a complete Company Event Notification Form no later than 12:00 p.m. ET five (5) business days prior to the proposed market effective date. The submission must include all information required by the form and a draft of the disclosure required by proposed Rule 5250(b)(4). For more on this process, see HERE. Information required by the notification includes, but is not limited to, the split ratio; new CUSIP number; dates of board approval, shareholder approval, and DTC eligibility; a copy of the proposed Regulation FD press release; and the effective date of the reverse stock split.
Any deviation from the new rule requirements would delay the processing of the reverse split. Nasdaq gives this provision teeth by adding that “if a company takes legal action, such as under state law or in any other manner, to effect a reverse stock split notwithstanding its failure to timely satisfy these requirements, or Nasdaq determines that the company has provided incomplete or inaccurate information about either the timing or ratio of the reverse stock split in the public disclosure required under proposed Rule 5250(e)(4) [sic], Nasdaq will halt the stock in accordance with the procedure set forth in Equity 4, Rule 4120(a)(1), which provides Nasdaq with the authority to halt trading to permit the dissemination of material news.”
Nasdaq believes the shorter notification period will allow a company to get its ducks in a row and have all information available by the time disclosure is made.
Nasdaq has also published a separate proposed rule change to amend Rule 4120 and Rule 4753 to set forth specific requirements for halting trading in a security that is subject to a reverse stock split and resuming trading using the Nasdaq Halt Cross. Current Rule 4120 does not specifically list reverse stock splits in its numerated circumstances in which Nasdaq may halt trading in a security. The proposed amendments will be specific to the automatic initiation, premarket trading and opening of a Nasdaq-listed security undergoing a reverse stock split.
Nasdaq currently processes reverse stock splits overnight, with the security opening for trading at 4:00 a.m. EST in the pre-market hours (i.e., the trading session between 4:00 a.m. to 9:30 a.m. EST) on a split-adjusted basis. The new rule would impose a regulatory halt, which would prohibit pre-market trading immediately after a reverse stock split and open trading in such securities using the Nasdaq Halt Cross process set forth in Rule 4753. The trading halt will be declared before the end of post-market hours on the day immediately before the market effective date of a reverse stock split. In general, Nasdaq expects to initiate the halt at or around 7:30 p.m., prior to the close of post-market trading at 8:00 p.m. on the day immediately before the split is effective, and resume trading at 9:00 a.m. on the day the split is effective.
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, 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 the American Red Cross for Palm Beach and Martin Counties, 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.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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