• If a company implements a reverse stock split to meet the $1.00 minimum price rule that results in failing to comply with another listing standard (e.g., minimum publicly held shares or minimum number of public stockholders), it will not be considered compliant with the minimum price rule until all deficiencies are cured.

Summary

The Nasdaq Stock Market LLC (“Nasdaq”) filed a proposed rule change with the U.S. Securities and Exchange Commission (the “SEC”) on June 21, 2024.¹ The proposed rule change would modify how minimum bid price compliance periods are applied when a company takes action, such as conducting a reverse stock split, to avoid delisting but by doing so causes non-compliance with another listing requirement. Under the new rule, the company would not receive more time to correct the new violation(s).

Under Nasdaq Rule 5550(a)(2), companies must maintain a minimum bid price of at least $1.00 per share (the “Minimum Bid Price Requirement”) to remain listed on Nasdaq. If a company’s bid price dips below $1.00 for a period of 30 consecutive trading days, it will be considered non-compliant with the Minimum Bid Price Requirement. The company then has 180 calendar days from the date it receives a notice of non-compliance from Nasdaq to regain compliance (and, in certain cases, may obtain an addition 180 days). To do so, the company must maintain a bid price of $1.00 or more for ten consecutive trading days (or longer, at Nasdaq’s discretion).

Companies often use reverse stock splits to regain compliance with the Minimum Bid Price Requirement. A reverse stock split combines multiple outstanding shares into a single share, thereby increasing the price of each post-split share.

However, because reverse stock splits consolidate a company’s shares, they also proportionally reduce the number of outstanding shares, including the number of publicly held shares,² and may decrease the number of public stockholders. To remain listed on Nasdaq, companies must have at least 500,000 publicly held shares under Nasdaq Rule 5550(a)(4) (the “Publicly Held Shares Requirement”) and at least 300 public stockholders under Nasdaq Rule 5550(a)(3) (the “Public Stockholders Requirement”). Therefore, implementing a reverse stock split could result in non-compliance with these Nasdaq listing rules and trigger a new deficiency process. In such cases, Nasdaq would notify the company about the new deficiency and the company would have 45 calendar days to submit a compliance plan and could be afforded up to 180 calendar days to regain compliance.

In the proposed rule release, Nasdaq stated that it is inappropriate for a company to receive additional time to cure non-compliance with a newly violated listing standard caused by compliance with the Minimum Bid Price Requirement. In Nasdaq’s view, this situation can confuse investors about a company’s ability to maintain compliance with the Nasdaq Listing Rules, potentially undermining investor confidence in the market. Accordingly, Nasdaq indicated that it believes companies should not be afforded additional time to address any new deficiencies created by actions taken to meet the Minimum Bid Price Requirement.

Under the proposed rule change, a company would not be considered compliant with the Minimum Bid Price Requirement if the company takes an action, such as a reverse stock split, that results in non-compliance with another listing requirement. Instead, the company would be deemed in violation of both the Minimum Bid Price Requirement and newly violated requirement (e.g., the Publicly Held Shares Requirement and/or Public Stockholders Requirement), until all deficiencies are cured. All of this must be accomplished within the compliance period initially set for the initial Minimum Bid Price Requirement deficiency.

Nasdaq indicates that it believes the proposed amendment will protect investors and provide additional clarity to companies and market participants by improving the quality of a compliance determination following a Minimum Bid Price Requirement deficiency. Specifically, the proposal would protect investors by ensuring that a company cannot request or receive a compliance determination, nor communicate to investors that it has regained compliance with the Nasdaq Listing Rules, until it has also cured any new deficiencies caused by actions to address the initial Minimum Bid Price Requirement deficiency.

While many companies have taken advantage of the 2023 changes to the Delaware General Corporation Law, which lowered the stockholder approval threshold for reverse stock splits, Nasdaq is proposing to adopt a stricter position on reverse stock splits. If the proposed rule change is enacted, companies planning reverse stock splits to address a Minimum Bid Price Requirement deficiency should ensure that they do not inadvertently cause non-compliance with any other Nasdaq listing standards.

Next Steps

Nasdaq's proposal was published in the Federal Register on Tuesday, July 9. The SEC has 45 days after publication to approve or disapprove the proposed rule change, unless it seeks additional time.

¹ The proposed rule change can be found here.

² Publicly held shares are shares held by non-affiliates of the company, i.e., stockholders who are not officers, directors or 10% stockholders.