On October 7, 2024 the SEC approved amendments to Nasdaq Rule 5810(c)(3)(A) to allow for an accelerated delisting process where a listed company uses a reverse split to regain compliance with the bid price requirement for continued listing, but that as a result of the reverse split, the company falls below other listing standards, such as the minimum number of round lot holders, or minimum number of shares in the publicly held float. This new rule is separate from another pending rule change that would accelerate the delisting process for companies that fail to regain compliance with the minimum bid price requirements following a second compliance period and for securities that have had a reverse stock split over the prior one-year period.
These rule changes follow other recent rule changes meant to reduce the number of ultra micro-cap companies trading on the national exchange and tighten up compliance for those that do meet the standards. In March 2024, Nasdaq amended listing Rule 5210 to require that all lead underwriters be either full or special members of Nasdaq – see HERE. Earlier, in November 2023, Nasdaq amended the rules delineating the reverse split process – see HERE.
Background
About a year ago, I wrote a three part blog series detailing the Nasdaq Listing Deficiencies and Delisting process (see HERE; HERE; and HERE). As discussed in that blog series, there are three types of deficiency notices: (i) deficiencies resulting in immediate delisting determinations; (ii) deficiencies that allow a company to submit a plan of compliance for Nasdaq review; and (iii) deficiencies that provide for an automatic cure/compliance period.
A bid price deficiency provides for an automatic cure period. In particular, “if a company fails to meet the minimum bid price requirement for 30 consecutive trading days, it will receive a deficiency notice from Nasdaq providing an automatic 180-day cure period. Regaining compliance requires trading above the minimum price for 10 consecutive business days; however, Nasdaq has the discretion to require up to 20 days as discussed below under “Nasdaq Discretion Relating to Price Based Requirements.” During the 180-day period, a company that is trading on the Nasdaq Global Market may transfer to the Nasdaq Capital Market as long as it meets the market value of listed securities continued listing requirement and all of the applicable initial listing requirements other than the bid price requirement.”
A company may request an additional 180-day compliance period if at the 180th day of the first compliance period, it meets the market value of publicly held shares continued listing requirement and all of the applicable initial listing requirements other than the bid price requirement. The company must also explicitly notify Nasdaq of its intent to cure, generally through a reverse split. If the company has publicly announced information (e.g., in an earnings release) indicating that it no longer satisfies the applicable listing criteria, it shall not be eligible for the additional compliance period.
New Rule 5810(c)(3)(A)
Nasdaq has modified Rule 5810(c)(3)(A) to allow for an accelerated delisting process where a listed company takes action, such as a reverse split, to regain compliance with the bid price requirement for continued listing, but that as a result of the action, the company falls below other listing standards, such as the minimum number of round lot holders, or minimum number of shares in the publicly held float. Prior to the rule change, if a company had a new deficiency as a result of a reverse split to correct a bid price deficiency, they would receive a new deficiency notice with a 180 day cure period to regain compliance with the newly created deficiency.
In its release Nasdaq asserts that a company should not have this additional time to cure the new deficiency when it is directly caused by a company action to cure an existing deficiency. Under the amended rule, a company will not be considered to have cured the bid price deficiency if the company takes an action to achieve compliance and that action results in the company’s security falling below the numeric threshold for another listing requirement. That is, the clock would continue to click on the bid price deficiency cure period and no new cure period will be extended for the new deficiency.
The company will remain non-compliant until both: (i) the new deficiency is cured; and (ii) thereafter the company meets the bid price standard for a minimum of 10 consecutive business days, unless Nasdaq uses its discretion to extend the 10 day period to 20 days as allowed in the rules. Under the new rule, a company may not communicate to its shareholders that it had cured the deficiencies until both were cured in the order above.
Proposed Modification to Rules 5810 and 5815
Separate from the changes to Rule 5810(c)(3)(A), Nasdaq has proposed a rule change that would accelerate the delisting process for companies that fail to regain compliance with the minimum bid price requirements following a second compliance period and for securities that have had a reverse stock split over the prior one-year period.
In particular, Nasdaq is proposing to amend listing Rules 5810 and 5815 to provide that a company’s trading on Nasdaq will be suspended if the company has been non-compliant with the bid price requirements ($1.00) for more than 360 days. Further, the proposal provides that that Nasdaq will immediately send a Delisting Determination, as defined in Rule 5805(h), without any compliance period, to any company that becomes non-compliant with the $1.00 minimum bid price requirement if the company effected a reverse stock split within the prior one-year period. That is, the company would receive a notice of immediate delisting as opposed to the current deficiency notice that allows for an automatic 180 day cure/compliance period and prospect of an additional 180 day cure period.
The proposed new rule adds a third element to existing rules that also allow for an accelerated delisting process. Currently, Nasdaq may issue a desilting determination, despite any otherwise available compliance period, if: (i) a company’s security has a closing bid price of $0.10 or less for 10 consecutive trading days; or (ii) a company fails to meet the bid price requirement and the company has effected one or more reverse stock splits over the prior two year period with a cumulative ratio of 250 shares or more to one.
Nasdaq notes that often times, companies fail to cure a bid price deficiency by the end of a second 180 day compliance period, but then appeal a delisting determination, which then often results in a third 180 day compliance period or more time in which to complete a reverse split during the appeal process. A company is not delisted during the appeal process. Nasdaq believes that a total of 360 days is more than enough time to regain compliance and under the proposed rule, would not allow the company to continue to trade on Nasdaq following the 360 days, regardless of an ongoing appeal process. The company’s securities would trade on OTC Markets during the appeals process.
Under the proposed rule, Nasdaq would have authority to provide an exception for up to 180 days from the delisting determination date for the company to regain compliance with the bid price requirement and to determine that the company has regained compliance and can begin trading on Nasdaq again.
Nasdaq is also proposing a rule change to accelerate delisting for companies that engage in a pattern of repeated stock splits. Under the proposed rule, Nasdaq would immediately initiate a delisting process (rather than providing a 180 day cure/compliance period) for any company’s securities that fall below the minimum bid price requirement, if the company has completed a reverse split in the prior one year period. The company could appeal the delisting determination, at which Nasdaq would have the discretion to provide an additional 180 day cure compliance period. However, if both proposed rules are passed, the company would trade on the OTC Markets during the appeal process.
In its rule release, one of the reasons propounded by Nasdaq for the rule changes, is that it does not believe these low priced security companies should be exempt from the penny-stock rules by continuing to trade on Nasdaq while out of compliance with the requirements.
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.
Contact Anthony, Linder & Cacomanolis, PLLC. Inquiries of a technical nature are always encouraged.
Follow Anthony, Linder & Cacomanolis, PLLC on Facebook, LinkedIn, YouTube, Pinterest and Twitter.
Anthony, Linder & Cacomanolis, PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
© Anthony, Linder & Cacomanolis, PLLC
