[Federal Register Volume 85, Number 81 (Monday, April 27, 2020)]
[Notices]
[Pages 23393-23396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08814]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88716; File No. SR-NASDAQ-2020-001]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Approving a Proposed Rule Change To Modify the Delisting Process for
Securities With a Bid Price at or Below $0.10 and for Securities That
Have Had One or More Reverse Stock Splits With a Cumulative Ratio of
250 Shares or More to One Over the Prior Two-Year Period
April 21, 2020.
I. Introduction
On January 2, 2020, The Nasdaq Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange
[[Page 23394]]
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to modify the delisting process
for securities with a bid price at or below $0.10 in certain
circumstances as described below and for securities that have had one
or more reverse stock splits with a cumulative ratio of 250 shares or
more to one over the prior two-year period. The proposed rule change
was published for comment in the Federal Register on January 22,
2020.\3\ On March 5, 2020, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ The Commission received no comment letters on the proposed
rule change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87982 (January 15,
2020), 85 FR 3736.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 88325, 85 FR 14264
(March 11, 2020). The Commission designated April 21, 2020 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
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II. Description of the Proposal
The Exchange has proposed to modify its delisting process for
securities with a closing bid price at or below $0.10 for ten
consecutive trading days during any bid price compliance period and for
securities that have had one or more reverse stock splits with a
cumulative ratio of 250 shares or more to one over the prior two-year
period (i.e., in cases where following such reverse stock split(s) an
investor would hold one share for every 250 shares or more owned at the
start of the two-year period).
Nasdaq's current rules require that primary equity securities,
preferred stocks, and secondary classes of common stock maintain a
minimum bid price of at least $1.00 per share for continued listing.\6\
Under Rule 5810(c)(3)(A), a security is considered deficient with this
bid price requirement if its bid price closes below $1.00 for a period
of 30 consecutive business days. Under Nasdaq Rule 5810(c)(3)(A), a
company with a bid price deficiency has 180 calendar days from
notification of the deficiency to regain compliance. A company
generally can regain compliance with the bid price requirement by
maintaining a $1.00 closing bid price for a minimum of ten consecutive
business days during the 180-day compliance period.\7\ Under Rule
5810(c)(3)(A)(ii), a company that lists its security on the Nasdaq
Capital Market, or transfers its listing to that market, may be
eligible for a second 180 calendar day period to regain compliance,
provided that on the last day of the first compliance period the
company meets the market value of publicly held shares requirement for
continued listing as well as all other applicable standards for initial
listing (except for the bid price requirement) on the Nasdaq Capital
Market and notifies the Exchange of its intent to cure the bid price
deficiency.\8\ If a company is able to avail itself of this second 180-
day bid price compliance period when listed on, or transferring to,
Nasdaq's Capital Market, the total compliance period to cure a bid
price deficiency would be up to 360 calendar days.\9\
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\6\ See Rules 5450(a)(1), 5460(a)(3), 5550(a)(2), and
5555(a)(1).
\7\ Under Rule 5810(c)(3)(G), Nasdaq staff could extend this
ten-day period to a maximum of 20 days.
\8\ If it does not appear to Nasdaq that it is possible for the
company to cure the deficiency with the bid price requirement, it
will not be eligible for this second 180-day period to achieve
compliance. See Rule 5810(c)(3)(A)(ii). See also Rule
5810(c)(3)(A)(i), which describes the conditions for a company
transferring from the Nasdaq Global Market to the Nasdaq Capital
Market to avail itself of the additional 180-day compliance period
set forth in Rule 5810(c)(3)(A)(ii).
\9\ See Notice, supra note 3, 85 FR at 3737. See also Rule
5810(c)(3)(A).
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According to the Exchange, it believes that there are certain
situations where a company may be facing more serious issues for which
a compliance period of up to 360 days may not be appropriate.\10\ The
Exchange stated that these situations involve securities with very low
prices (as proposed, at or below $0.10) and securities where the
company has completed one or more reverse stock splits over the prior
two-year period that, when considered cumulatively, result in a ratio
of 250 shares or more to one and then fails to satisfy the bid price
requirement. According to the Exchange, the challenges facing the
company in these situations are generally not temporary and may be so
severe that the company is not likely to regain compliance within the
prescribed compliance period.\11\ The Exchange also stated that these
companies often become subject to delisting for other reasons during
the compliance periods.\12\ Accordingly, the Exchange has proposed to
modify its listing rules so that companies that fit into the categories
specified above are subject to shortened compliance periods, which, in
the Exchange's view, could lead to earlier delisting and enhanced
review procedures.
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\10\ See Notice, supra note 3, 85 FR at 3737.
\11\ See id.
\12\ See id.
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With respect to securities with very low prices, the Exchange has
proposed to modify its listing rules to provide that a company in any
bid price compliance period under Rule 5810(c)(3)(A) as described above
(i.e., the company's security has already traded below $1.00 for thirty
consecutive business days) will immediately receive a Staff Delisting
Determination if the security has a closing bid price of $0.10 or less
for a period of ten consecutive trading days, which would end any
otherwise applicable compliance period.\13\ The Exchange also has
proposed to amend its rules to not permit a company to avail itself of
any bid price compliance periods under Rule 5810(c)(3)(A), and instead
require the issuance of a Staff Delisting Determination, if a company
falls out of compliance with the $1.00 minimum bid price after
completing one or more reverse stock splits resulting in a cumulative
ratio of 250 shares or more to one over the two-year period immediately
prior to such non-compliance.\14\ According to the Exchange, it
believes it would be inappropriate to permit such securities to remain
listed while relying on very large reverse stock splits to maintain
compliance with the $1.00 minimum bid price.\15\
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\13\ The Exchange noted that such a company could request review
of the Staff Delisting Determination by a Hearings Panel, and the
Hearings Panel could grant the company additional time to complete a
reverse stock split or otherwise regain compliance. See id. See also
infra note 16 and accompanying text, noting that the Hearings Panel
can grant up to an additional 180 days.
\14\ The Exchange stated, for example, that a company could
effect a reverse stock split in a ratio of 25 shares to one,
followed within the two-year period by a second reverse stock split
in a ratio of ten shares to one, resulting in a cumulative ratio of
250 shares to one. See Notice, supra note 3, 85 FR at 3737 n.7.
Alternatively, a company could affect three reverse stock splits in
the two-year period, with ratios of ten shares to one, five shares
to one, and five shares to one, respectively, resulting in a
cumulative ratio of 250 shares to one. See id.
\15\ See id. at 3737. See also supra note 13 (noting that the
Hearings Panel could grant the company up to an additional 180
days).
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The Exchange stated that a company that is not eligible for a
compliance period under the proposed rule change would receive a Staff
Delisting Determination, which it could appeal to a Hearings Panel. The
Hearings Panel could grant the company an exception to remain listed
for a period not to exceed 180 days from the date of the Staff
Delisting Determination if, according to the Exchange, it believes the
company will be able to achieve and maintain compliance with the bid
price
[[Page 23395]]
requirement.\16\ However, the Exchange also proposed to modify its
listing rules so that following such a Hearings Panel exception the
company would be subject to the procedures applicable to a company with
recurring deficiencies as described in Rule 5815(d)(4)(B). As a result,
if within one year of the date a company regained compliance (i.e., in
those cases where the company was not granted a compliance period under
proposed Rule 5810(c)(3)(A)(iii) and (iv) but the Hearings Panel had
granted an exception during which time the company came into
compliance) the company again fails to maintain compliance with the bid
price requirement, the company would not be eligible for a compliance
period and instead the Listing Qualifications Department will issue a
Staff Delisting Determination, which can be appealed to the Hearings
Panel.
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\16\ See Rule 5815(c)(1)(A).
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The Exchange has proposed to begin to implement the proposed rule
change for companies that first receive notification of non-compliance
with the bid price requirement after the date of this approval order.
Accordingly, a company that has already received notification of such
non-compliance would be permitted to regain compliance under the
existing rule, in the manner that the notification of non-compliance
would have described.\17\
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\17\ See Notice, supra note 3, 85 FR at 3738. The Exchange noted
in its proposal that under Rule 5810(c)(3)(A)(ii), a company is not
eligible for the second compliance period ``if it does not appear to
Nasdaq that it is possible for the Company to cure the deficiency.''
See id. at 3738 n.8. The Exchange stated that, as is currently the
case, it may rely upon this language to deny the second compliance
period to a company with a very low stock price or that has engaged
in significant prior reverse stock splits, even though the company
is not yet subject to the proposed rule change. See id. See also
Rule 5810(c)(3)(A)(i), which states that following a transfer from
Nasdaq Global Market to Capital Market a company will be afforded
the remainder of the applicable compliance period in Rule
5810(c)(3)(A)(ii) ``unless it does not appear to Nasdaq that it is
possible for the Company to cure the deficiency.''
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\18\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\19\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to 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, brokers, or dealers. In addition, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(7) of the Act,\20\ which requires, among other things,
that the rules of a national securities exchange provide a fair
procedure for the prohibition or limitation by the exchange of any
person with respect to access to services offered by the exchange.
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\18\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 15 U.S.C. 78f(b)(7).
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The development and enforcement of meaningful listing standards
\21\ for an exchange is of critical importance to financial markets and
the investing public. Among other things, such listing standards help
ensure that exchange-listed companies will have sufficient public
float, investor base, and trading interest to provide the depth and
liquidity to promote fair and orderly markets.\22\ Meaningful listing
standards are also important given investor expectations regarding the
nature of securities that have achieved an exchange listing and the
role of an exchange in overseeing its market and assuring compliance
with its listing standards.\23\
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\21\ The Commission notes that this reference to ``listing
standards'' is referring to both initial and continued listing
standards.
\22\ The Commission has consistently recognized the importance
of exchange listing standards. Among other things, listing standards
provide the means for an exchange 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 likely to generate depth and liquidity sufficient
to promote fair and orderly markets. In addition, once a security
has been approved for initial listing, maintenance criteria allow an
exchange to monitor the status and trading characteristics of that
issue to ensure that it continues to meet the exchange's standards
for market depth and liquidity so that fair and orderly markets can
be maintained. See, e.g., Securities Exchange Act Release Nos. 81856
(October 11, 2017), 82 FR 48296, 48298 (October 17, 2017) (SR-NYSE-
2017-31); 81079 (July 5, 2017), 82 FR 32022, 32023 (July 11, 2017)
(SR-NYSE-2017-11). The Commission notes that, in general, adequate
listing standards, by promoting fair and orderly markets, are
consistent with Section 6(b)(5) of the Act, in that they are, among
other things, designed to prevent fraudulent and manipulative acts
and practices, promote just and equitable principles of trade, and
protect investors and the public interest. See, e.g., Securities
Exchange Act Release No. 80933 (June 15, 2017), 82 FR 28200 (June
20, 2017) (SR-NYSE-2017-30).
\23\ See supra note 22.
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The proposed amendments would shorten the compliance periods
available to listed companies to cure a bid price deficiency in certain
circumstances, which could lead to earlier delisting of the company. In
particular, rather than being able to take advantage of the compliance
periods under the Exchange's rules of 180 calendar days or 360 calendar
days for companies that so qualify, companies in a bid price compliance
period that have a closing bid price at or below $0.10 for ten
consecutive trading days would have that compliance period end and be
issued an immediate Staff Delisting Determination, which could then be
appealed. Similarly, companies that have had reverse stock splits with
a cumulative ratio of 250 shares to one over the prior two-year period
would not be able to take advantage of any of the compliance periods
under Rule 5810(c)(3)(A) if they fail the bid price requirement and the
company would receive an immediate Staff Delisting Determination, which
could then be appealed.
The Exchange noted in its proposal that the compliance periods are
designed to allow adequate time for a company that faces temporary
business issues, temporary decreases in the market value of its
securities, or temporary market conditions to come back into compliance
with a bid price deficiency.\24\ According to the Exchange, however, in
those situations where securities have a very low security price (i.e.,
$0.10 or below) or the company has undertaken large reverse stock
splits over a two-year period but then fails the bid price requirement,
a compliance period of up to 360 calendar days may not be appropriate.
The Exchange has found that companies meeting such criteria often have
problems so severe that they are not likely to regain compliance during
either the 180 or 360 calendar day compliance periods. In Nasdaq's
experience, such companies are not usually experiencing temporary
problems, have other compliance issues, and frequently need to raise
additional capital to fund their business operations and often do so by
engaging in extremely dilutive transactions. The Commission believes
that, in such circumstances, there are investor protection concerns
with allowing the securities identified in the Exchange's proposal to
have an extended period of time to regain compliance with the bid
[[Page 23396]]
price requirement, as provided under Nasdaq's current rules, prior to
commencing delisting proceedings. The Commission believes that
shortening the available compliance periods in the described
situations, and immediately commencing delisting proceedings, should
therefore help to ensure that only those securities that are suitable
for continued Exchange trading remain listed on the Exchange.
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\24\ See Notice, supra note 3, 85 FR at 3737.
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Further, the low-priced stocks identified in the criteria raise
concerns about their susceptibility to manipulation and the prevention
of fraudulent and manipulative acts and practices as well as the
ability to promote fair and orderly markets on the Exchange in such
securities. As Nasdaq stated in its proposal, securities listed on the
Exchange are exempt from the Penny Stock Rules, which provide enhanced
investor protections, among other things, to prevent fraud and
safeguard against potential market manipulation.\25\ The Exchange
stated in support of its proposal that it believes such exemption may
not be appropriate for abnormally low-priced securities and securities
that are trading below $1.00 after completing one or more reverse stock
splits with a cumulative ratio of 250 shares to one or more over the
prior two-year period because these securities, in the Exchange's view,
may have similar characteristics to penny stocks.\26\ Given the
historical concerns regarding penny stocks, the Commission believes
Nasdaq's proposal to commence delisting proceedings sooner in the
process for those companies meeting the criteria identified in the
proposed rule that fail to satisfy the bid price requirement is
appropriate.
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\25\ See 17 CFR 240.3a51-1(a)(1); 17 CFR 240.15g-1 to -9. In
particular, the Penny Stock Rules provide protections to investors
in low-priced stocks requiring, among other things, that broker-
dealers provide a disclosure document to their customers describing
the risk of investing in penny stocks and approve customer accounts
for transactions in penny stocks.
\26\ See Notice, supra note 3, 85 FR at 3738.
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The Commission also notes that companies that have shortened
compliance periods as a result of the proposed changes being approved
herein will still be able to appeal the Staff Delisting Determination
to the Hearings Panel.\27\ The Hearings Panel, as noted above, can
grant the company an additional 180 days to comply with the bid price
requirement should the Hearings Panel determine that the facts warrant
such additional time. The Commission believes that the shortening of
the 180 or 360 calendar day period to regain compliance with a bid
price deficiency in the situations described above is appropriate in
light of the need to protect investors and the public interest and that
the Hearings Panel review process should continue, as it currently
does, to provide a fair procedure for the review of the Staff Delisting
Determination in accordance with Section 6(b)(7) of the Act.
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\27\ A timely request for a hearing shall ordinarily stay the
suspension and delisting action pending the issuance of a written
Panel Decision. See Rule 5815(A)(1)(b).
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Finally, the Commission notes that, for the same reasons discussed
above, it is appropriate and consistent with the protection of
investors for Nasdaq to amend its recurring deficiency provisions to
include companies that fall out of compliance with the bid price
requirement within a year of regaining such compliance after being
granted an exception from the Hearings Panel, in those cases where such
companies were previously not eligible for a compliance period due to a
low stock price or excessive reverse stock splits. The Commission
believes it is reasonable for the Exchange to determine that such
recurrent violators of the bid price requirement may not be able to
regain compliance during the compliance periods and as such should be
subject to an immediate Staff Delisting Determination, which can then
be appealed to the Hearings Panel.\28\
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\28\ See Notice, supra note 3, 85 FR at 3738.
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The Exchange's proposal identifies securities listed on its market
that have had serious and recurrent issues in meeting and regaining
compliance with the $1.00 bid price continued listing requirement and
proposes to prohibit such companies from utilizing the compliance
periods and instead commence immediate delisting proceedings. This
should help to protect investors and the public interest, while at the
same time providing a fair procedure for companies to appeal the Staff
Delisting Determination to the Hearings Panel. Based on the above, the
Commission believes that the proposed rule change can help to ensure
that the Exchange lists only securities with a sufficient market, with
adequate depth and liquidity, and with sufficient investor interest to
support an exchange listing.
Based on the foregoing, the Commission finds that the proposed rule
change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-NASDAQ-2020-001) be, and
hereby is, approved.
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\29\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08814 Filed 4-24-20; 8:45 am]
BILLING CODE 8011-01-P