On August 6, 2024, the Nasdaq Stock Market LLC (“Nasdaq”) submitted proposed rule changes to the U.S. Securities and Exchange Commission (“SEC”). If adopted, the revised rules would modify the Nasdaq delisting process in respect of securities that fail to maintain a closing bid price of at least $1.00 per share. Specifically, the proposed rules would accelerate delisting for a company whose securities either:
- fail to regain compliance with the minimum bid price requirement following the second compliance period granted under Nasdaq’s listing rules; or
- become non-compliant with the minimum bid price requirement within one year after a reverse stock split.
Current Minimum Bid Price Regime
The Nasdaq Stock Market rules (the “Listing Rules”) require that a listed company maintain a closing bid price of at least $1.00 per share. Pursuant to Listing Rule 5810(c)(3)(A), a company that receives a deficiency notice for failing to maintain this minimum bid price is automatically granted a 180-day period to regain compliance, regardless of the Nasdaq market on which they are listed (the “first compliance period”). Companies listed on the Nasdaq Capital Market which do not regain compliance with the minimum bid price at the end of the first compliance period are afforded a second 180 day compliance period (the “second compliance period”).1 Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market are not granted this additional compliance period, but can transfer their listing to the Nasdaq Capital Market (subject to meeting the applicable initial listing requirements for that market tier, other than in respect of minimum bid price), and thereafter they are afforded the second compliance period unless Nasdaq determines that it does not appear possible for the company to cure the deficiency.2 Companies regain compliance with this rule by meeting the $1.00 minimum bid price for a minimum of 10 consecutive trading days, and they often utilize reverse stock splits to do so.
If at the expiration of the second compliance period a company is still deficient, Nasdaq will issue a delisting determination, which the company can appeal to the Nasdaq Listing Qualifications Headings Panel (the “Hearings Panel”). The Hearings Panel can allow a company appealing a delisting determination an additional period up to another 180 days from the date of the delisting determination to regain compliance with the Listing Rules. Consequently meaning the company would be continuously deficient under the Listing Rules for more than 360 days while still trading on Nasdaq during the appeal process.3
Non-Compliance for More Than 360 Days
Nasdaq has proposed to amend the Listing Rules to eliminate the stay in suspension of trading in the securities of a company that has appealed to the Hearings Panel. If adopted, Listing Rule 5815(a)(1)(B)(ii)d would therefore have the effect of limiting a company to a maximum of 360 days to regain compliance with the minimum bid price.
Nasdaq has indicated that it believes two consecutive compliance periods for an aggregate of 360 days should be sufficient time for a company to regain compliance with the minimum bid price requirement, including when taking into account time to obtain stockholder approval for a reverse stock split (as many jurisdictions require), and it would be inappropriate for such securities to continue trading during the pendency of the Hearings Panel review process after the expiration of the 360 days (i.e., two 180 day compliance periods).
Issuers of securities suspended under the new rules would still be allowed to appeal the delisting determination, but the securities in question could potentially trade only in the over-the-counter (or OTC) market while that appeal is pending. The Hearings Panel would continue to have authority to reinstate the trading of a company’s securities on Nasdaq when it finds the company to be in compliance with the Listing Rules.
Non-Compliance After Completing a Reverse Stock Split Within the Past Year
As noted above, many companies facing a minimum bid price requirement deficiency conduct a reverse stock split in an effort to increase their trading price and thereby regain compliance. However, some companies have engaged in a pattern of repeated reverse stock splits in order to maintain compliance, and Nasdaq has indicated that such actions are “often indicative of deep financial or operational distress rendering such companies inappropriate for trading on Nasdaq for investor protection reasons.” Nasdaq believes such challenges are generally not temporary, and a company in this situation may have difficulty maintaining compliance with the minimum bid price requirement in the long-term.
Therefore, Nasdaq also has proposed to amend the Listing Rules to require the exchange to immediately initiate delisting any company’s securities that becomes non-compliant with the minimum bid price requirement if in the prior year the company conducted a reverse stock split at any ratio. If adopted, Listing Rule 5810(c)(3)(A)(iv) would provide that a company in such position would not be eligible for any of the above-referenced compliance periods permitted under Listing Rule 5810(c)(3)(A).
Companies that receive delisting determinations in accordance with this rule still would be permitted to appeal the delisting notification to the Hearings Panel, which appeal, if timely, would stay the suspension of trading and delisting of the securities. Therefore, such a company would be afforded one period of up to 180 days to regain compliance with the minimum bid price requirement.
Next Steps for Proposed Rule Changes
The SEC will either approve or disprove of the proposed rule changes (or institute proceedings to determine whether the proposed rule changes should be disapproved) within 45-90 days of the date of publication of the notice in the Federal Register.
Interested parties are allowed to submit comments on the proposed rules to the SEC on its website at www.sec.gov.
1 See Listing Rule 5810(c)(3)(A)(ii).
2 See Listing Rule 5810(c)(3)(A)(i).
3 The compliance period discussed above may be cut short in instances where (i) the company’s security has a closing bid price of $0.10 or less for 10 consecutive trading days or (ii) if the company has effected one or more reverse stock splits during the past two years with a cumulative split ratio of 250 shares or more to one.
