The Nasdaq Stock Market LLC (Nasdaq) recently filed with the Securities and Exchange Commission (SEC) the proposed amendments to its rules regarding the delisting of penny stocks (i.e., shares with bid price below $1.00), aiming to enhance investor protection by suspending the listing of such shares on Nasdaq after 360 days of noncompliance and restricting excessive reverse stock splits. Once adopted, this proposal would expedite Nasdaq’s ability to delist such companies.
A company’s shares listed on Nasdaq are required to maintain a closing bid price of no less than $1.00 per share (Minimum Bid Price Requirement). If the closing bid price of a company’s shares are below $1.00 for 30 consecutive trading days, the company is considered to be in violation of Minimum Bid Price Requirement.
Once a company receives notice from Nasdaq of its violation of the Minimum Bid Price Requirement, Nasdaq rules provide a 180-day compliance period for the company to regain compliance. Compliance is considered achieved when the company’s shares have closed at or above $1.00 per share for 10 consecutive trading days, although this period may be extended in Nasdaq’s discretion.
A company that is listed on, or that transfers [1] to, the Nasdaq Capital Market may be provided with a second 180-day compliance period. In the event that the company is not eligible for a second 180-day compliance period, or it is granted a second compliance period but fails to regain compliance within such second compliance period, such company will be subject to delisting. The delisting determination can be appealed to the Nasdaq Listing Qualifications Hearings Panel, during which time, under current rules, the company will remain listed and trading on Nasdaq.
Under the proposal, Nasdaq would amend the rules such that a request for a hearing of the delisting determination would not stay the suspension of the shares from trading if a company is afforded the second 180-day compliance period but fails to regain compliance with that period. Thus, a company’s shares would automatically be suspended from trading during the hearings panel’s review. The hearings panel would continue to have the discretion to provide an exception for up to 180 days from the termination of the second 180-day compliance period.
If a company’s shares are suspended, the shares may be traded in the over-the-counter market while the company’s appeal is pending.
Currently as a prevailing practice, if a company fails to comply with the Minimum Bid Price Requirement, it may use a reverse stock split, which combines multiple outstanding shares into one share, thus increasing the price of the combined share, to achieve compliance with the requirement.
To prevent the excessive use of reverse stock splits, the current Nasdaq rules already set some restrictions, including that (1) a company must make a public disclosure about a reverse stock split in advance and (2) if a company’s shares fail to meet the Minimum 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, then it will not be eligible for any compliance period but will be subject to immediate delisting.
Nasdaq’s proposed amendment would add an additional restriction that if a company’s shares fail to meet the Minimum Bid Price Requirement and the company has effected a reverse stock split during the prior one-year period, then the company would not be eligible for the automatic 180-day compliance period and would be subject to immediate delisting. A company would still be permitted to appeal the delisting determination to the Nasdaq hearings panel, where it could potentially receive up to 180 days to regain compliance.
Nasdaq’s proposed amendments will take effect within 45 days of their publication in the Federal Register (i.e., August 23, 2024), unless the SEC seeks additional time to approve or reject Nasdaq’s proposal.
Once the abovementioned rule changes are formally adopted, companies listed on Nasdaq whose stock price fluctuates around $1.00 will be facing heightened requirements to regain compliance and maintain listing status. Nasdaq-listed companies should be cautious of such strengthened rules and manage any delisting risks in advance.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
*A solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP
[1] If a company listed on the Nasdaq Global Select Market or the Nasdaq Global Market fails to regain compliance in the abovementioned first 180-day compliance period, it may, subject to certain requirements, transfer to the Nasdaq Capital Market.