In March 2024, the Nasdaq Stock Market quietly amended Rule 5210 requiring that all lead underwriters on an IPO must be Nasdaq members or limited underwriting members as a prerequisite to applying for a listing. The new rules also created the “limited underwriting member” class and accompanying rules applicable to the group and its associates including eligibility, application process and ongoing requirements. Although the amendment garnered little attention at the time, now that it has become effective, it is loudly impacting the small cap IPO market.
Rule 5210 – Background
Nasdaq Rule 5210 sets forth the prerequisites for a company to apply for a Nasdaq listing. Until October 2023, the Rule had 12 subparts with new Rule 5210(l) being added in October 2023 and new Rule 5210(m) being added in March 2024. Rule 5210(l) requires that any company listing on Nasdaq comply with the recovery of erroneously awarded compensation (Clawback) rules. For more on the Clawback rules see HERE. New Rule 5210(m) requires that all lead underwriters be special members of Nasdaq, as further discussed below.
Nasdaq Rule 5210 requires
- All companies must be registered under the Securities Exchange Act Section 12(b), unless specifically exempted by the SEC;
- Each company must be audited by an independent auditor that is registered with the PCAOB;
- All securities must be eligible for a Direct Registration Program unless those that are book-entry only;
- The Company pays the Nasdaq listing fees;
- All companies must be current in their SEC filing requirements and may not be suspended from trading by the SEC or its country of domicile;
- Nasdaq shall have certified the Section 12(b) registration;
- All companies must have a transfer agent and a CUSIP number;
- Limited Partnership roll-ups must comply with certain rules;
- Following a reverse merger, the seasoning rule must be complied with – for more on the seasoning rule see HERE;
- Companies listing in connection with a Regulation A offering must have a minimum of two years operating history;
- Any companies that operates in a Restrictive Market must meet certain U.S. investor allocations. For more on Restrictive Markets and the Holding Foreign Companies Accountable Act see HERE;
- All companies must comply with the Recovery of Erroneously Awarded Compensation (Clawback) rules; and
- All companies applying for initial listing in connection with a transaction involving an underwriter must have a principal underwriter that is a Member or Limited Underwriting Member of Nasdaq.
Rule 5210(m) – Underwriter Membership
In March 2024, Nasdaq added new Section (m) to Rule 5210 requiring that all companies applying for initial listing in connection with a transaction involving an underwriter must have a principal underwriter that is a Member or Limited Underwriting Member of Nasdaq and creating a new limited underwriter membership group. A “principal underwriter” is defined as “an underwriter in privity of contract with the issuer of the securities as to which he is underwriter.” “Limited Underwriting Member” is defined as a broker or dealer admitted to limited underwriting membership in Nasdaq. A “limited underwriting membership” in turn allows a broker or dealer to act as a principal underwriter without having the right to trade on the exchange.
As noted above, the amendments also added new rules applicable to limited underwriting membership including eligibility, application process, procedural and governance obligations, and ongoing rights, obligations and requirements as to such an underwriter and its associated persons. Those particular rules are beyond the scope of this blog.
The initial rule change was first published by Nasdaq on July 12, 2023, and went through three amendments before being approved by the SEC. The rule release provides some insight into Nasdaq actions, comments and questions during the application process in recent years. In its release Nasdaq states that “underwriters play a critical role as gatekeepers to the capital markets in connection with the trading of newly issued securities” and that “it relies on underwriters to select the selling syndicate and ensure that the shares are placed in a way that is reasonably designed to allow liquid trading, consistent with Nasdaq’s listing requirements, and the successful introduction of the company to the market place.”
Nasdaq continues that despite this important gatekeeping role, prior to the rule change, underwriters that were not members of Nasdaq, would not be required to respond to ongoing inquiries, or participate in investigations (though they could do so voluntarily). By requiring all principal underwriters to either be a full or limited underwriting member of Nasdaq, such underwriters would be under the jurisdiction of the exchange and required to respond to inquiries directly both during and following an IPO process. Nasdaq created the separate class of “limited underwriting membership” to accomplish its goal while also offering underwriters the ability to select a membership category that is less burdensome.
The rule release explains that in the Fall of 2022, Nasdaq observed instances of unusual trading in certain issuers immediately following the pricing of an IPO, including extreme spikes in trading prices followed by a crash. As I wrote about in December 2022, as a result of these activities, Nasdaq completely shut down all small-cap IPO’s for several months and slowly re-opened the gates with a much different process and attitude (see HERE).
In particular, Nasdaq started asking for early information on allocations including pre-pricing indications of interest and potential syndicate members. Moreover, after a deal was priced but before it started trading, investment banks were asked to provide a full list of syndicate firms and each of their allocations. Further once a deal started trading, Nasdaq wanted final deal information including all investors that received shares directly from both lead underwriters and syndicate firms. It became readily apparent that some syndicate members were problematic, and a listing would not be approved if they were involved. I’m guessing some of these problematic firms were involved with the unusual market activity and refused to provide post-closing information.
Over time, and especially as the final iteration of the new rule was approaching, Nasdaq started refusing listing applications where certain underwriters were involved, even if such underwriters were not aware of being subject to a regulatory issue. In hindsight it is clear that those underwriters were not Nasdaq members. Moreover, following passage of the final new rule, Nasdaq completely refuses to review allocations or other pre-pricing information regarding a listing application where the principal underwriter is not a member or limited underwriting member, even where an issuer would have time to add such an underwriter prior to a deal closing.
Although this blog does not cover the plethora of rules regarding eligibility, application and related processes applicable to becoming a limited underwriter member, I can be sure they are extensive and arduous.
In approving the final rules, the SEC noted that, as required by law, they are “designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers and brokers, or dealers.” Furthermore, the SEC notes that the new listing standards provide Nasdaq with the means to “screen issuers that seek to become listed, and to provide listed status only to those that are bona fide companies with sufficient public float, investor base, and trading interest to provide the depth and liquidity necessary to promote fair and orderly markets.”
Bottom line is, that not only must the principal underwriter be a Nasdaq member or limited underwriting member, but Nasdaq will not approve listing where there is not a sufficient widespread allocation of a float to ensure an active trading market and limit the ability for manipulation.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities 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, Linder & Cacomanolis, 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 ALC 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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