[Federal Register Volume 86, Number 19 (Monday, February 1, 2021)]
[Notices]
[Pages 7757-7759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02010]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90995; File No. SR-NASDAQ-2020-069]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To
Exclude Special Purpose Acquisition Companies From the Requirement That
at Least 50% of a Company's Round Lot Holders Each Hold Unrestricted
Securities With a Market Value of at Least $2,500
January 26, 2021.
I. Introduction
On October 8, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange 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 exclude special purpose acquisition companies
from the requirement that at least 50% of a company's round lot holders
each hold unrestricted securities with a market value of at least
$2,500. On October 21, 2020, the Exchange filed Amendment No. 1 to the
proposed rule change, which amended and replaced the proposed rule
change in its entirety. The proposed rule change, as modified by
Amendment No. 1, was published for comment in the Federal Register on
October 28, 2020.\3\ On December 11, 2020, pursuant to Section 19(b)(2)
of the Act,\4\ the Commission designated a longer period within which
to approve or disapprove, or institute proceedings to determine whether
to disapprove, the proposed rule change, as modified by Amendment No.
1.\5\ This order approves the proposed rule change, as modified by
Amendment No. 1.
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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. 90245 (October 22,
2020), 85 FR 68400 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 90644, 85 FR 82005
(December 17, 2020). The Commission designated January 26, 2021, as
the date by which the Commission shall either approve or disapprove,
or institute proceedings to determine whether to disapprove, the
proposed rule change, as modified by Amendment No. 1.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The Exchange has proposed to exclude companies listed pursuant to
Nasdaq Rule IM-5101-2 whose business plan is to engage in a merger or
acquisition with one or more unidentified companies within a specified
period of time (``SPACs''), prior to the completion of any such merger
or acquisition, from the requirement that at least 50% of the company's
required minimum number of round lot holders must each hold
unrestricted securities with a market value of at least $2,500 at the
time of initial listing (``Required Minimum Amount'').\6\
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\6\ Nasdaq defines ``round lot holder'' as a holder of a normal
unit of trading of unrestricted securities. The number of beneficial
holders will be considered in addition to holders of record. See
Nasdaq Rule 5005(a)(40). Nasdaq defines ``normal unit of trading''
to mean 100 shares of a security unless, with respect to a
particular security, Nasdaq determines that a normal unit of trading
shall constitute other than 100 shares. See Nasdaq Rule 5005(a)(39).
Nasdaq defines ``unrestricted securities'' to mean securities that
are not restricted securities. See Nasdaq Rule 5005(a)(46). Nasdaq
defines ``restricted securities'' to mean securities that are
subject to resale restrictions for any reason, including, but not
limited to, securities: (1) Acquired directly or indirectly from the
issuer or an affiliate of the issuer in unregistered offerings such
as private placements or Regulation D offerings; (2) acquired
through an employee stock benefit plan or as compensation for
professional services; (3) acquired in reliance on Regulation S,
which cannot be resold within the United States; (4) subject to a
lockup agreement or a similar contractual restriction; or (5)
considered ``restricted securities'' under Rule 144. See Nasdaq Rule
5005(a)(37). The number of required minimum number of round lot
holders is 450 holders for the Nasdaq Global Select Market; 400
holders for the Nasdaq Global Market; and 300 holders for the Nasdaq
Capital Market. See Nasdaq Rules 5315(f)(1)(C), 5405(a)(3), and
5505(a)(3). Nasdaq defines ``market value'' as the consolidated
closing bid price multiplied by the measure to be valued. See Nasdaq
Rule 5005(a)(23).
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The Exchange states in its proposal that it imposed the Required
Minimum Amount to help ensure that at least 50% of the required minimum
number of shareholders hold a meaningful value of unrestricted
securities and that a company has sufficient investor interest to
support an exchange listing.\7\ The Exchange asserts that, prior to
adopting the Required Minimum Amount, it had noticed problems with
companies listing where a large number of round lot holders held
exactly 100 shares, which would be worth only $400 in the case of a
stock that is trading at the minimum bid price of $4 per share, or as
little as $200 in the case of a stock listing under alternative price
criteria.\8\ The Exchange further states that such holders held shares
in the company prior to its IPO and that such amount was not a
representation of genuine investor interest in the company sufficient
to support an exchange listing.\9\ In proposing to adopt the standard,
the Exchange stated that it believed the Required Minimum Amount was a
more appropriate representation of genuine investor interest in the
company and would make it more difficult to circumvent the round lot
holder requirement through share transfers for no value.\10\
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\7\ See Notice, supra note 3, at 68401; Securities Exchange Act
Release No. 86314 (July 5, 2019), 84 FR 33102, 33107 (July 11, 2019)
(order approving SR-NASDAQ-2019-009) (``Required Minimum Amount
Approval Order''). In the Required Minimum Amount Approval Order,
the Commission also approved Nasdaq's proposal to exclude restricted
securities (see supra note 6) from the calculation of publicly held
shares, market value of publicly held shares, and round lot holders
for initial listing purposes. According to Nasdaq, these changes
were designed to help ensure adequate distribution, shareholder
interest, and a liquid trading market for a security. See Notice,
supra note 3, at 68401; Required Minimum Amount Approval Order,
supra, at 33103, 33108-09.
\8\ See Notice, supra note 3, at 68401. See also Required
Minimum Amount Approval Order, supra note 7, at 33109.
\9\ See Notice, supra note 3, at 68401-02.
\10\ See id. at 68401; Required Minimum Amount Approval Order,
supra note 7, at 33109.
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The Exchange states that it does not believe the Required Minimum
Amount is as relevant to the listing of SPACs.\11\
[[Page 7758]]
In contrast to its observations regarding operating companies,\12\ the
Exchange states that typically the only investors holding shares in a
SPAC prior to an IPO are its founders and that all other round lot
holders generally represent new investors in the SPAC's IPO.\13\ The
Exchange therefore does not believe that SPACs present a similar risk
as operating companies of circumventing the round lot holder
requirement through share transfers for no value and represents that it
has not observed this problem with SPACs.\14\ Further, the Exchange
states that shareholders of SPACs are afforded the opportunity to
redeem or tender their shares for a pro rata portion of the value of
the IPO proceeds maintained in a trust account in connection with the
SPAC's business combination, which must occur within 36 months of the
IPO, and therefore, the SPAC structure provides an alternative
liquidity mechanism that operating companies do not offer.\15\
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\11\ See Notice, supra note 3, at 68401. Nasdaq Rule IM-5101-2
sets forth requirements applicable to SPACs and requires, among
other things, that at least 90% of the gross proceeds raised in the
IPO and any concurrent sale by the SPAC of equity securities must be
deposited in a trust account. See Nasdaq Rule IM-5101-2(a). Until a
SPAC has completed business combinations meeting the requirements of
IM-5101-2(b), each shareholder has the right to redeem their shares
into a pro rata share of the aggregate amount in the deposit account
if: (i) The shareholder votes against a business combination; or
(ii) a shareholder vote on the business combination is not held for
which the company must file and furnish a proxy or information
statement subject to Regulation 14A or 14C under the Act. See Nasdaq
Rules IM-5101-2(d) and (e).
\12\ See supra notes 8-9 and accompanying text.
\13\ See Notice, supra note 3, at 68401.
\14\ See id.
\15\ See id. at 68401-02. The Exchange also states that it
believes the value of a SPAC prior to a business combination, unlike
the value of an operating company, is not based solely on investor
demand for the security but, in the Exchange's view, is based
primarily on the value of the cash held in the trust account. See
id.
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The Exchange accordingly believes that SPACs should be excluded
from the Required Minimum Amount and proposes to revise Nasdaq Rules
5315(f)(1)(C) (for the Nasdaq Global Select Market), 5405(a)(3) (for
the Nasdaq Global Market), and 5505(a)(3) (for the Nasdaq Capital
Market) to exclude SPACs from the requirement to meet the Required
Minimum Amount at the time of initial listing.\16\ The Exchange notes,
however, that SPACs must continue to satisfy the Exchange's other
initial listing requirements at the time of listing,\17\ including the
SPAC listing rules, which, among other things, provide shareholders the
right to redeem or convert their shares for a pro rata share of the
trust account in conjunction with the business combination.\18\
Moreover, following a business combination, in order to remain listed,
the combined company must meet Nasdaq's initial listing requirements,
which include the Required Minimum Amount, at the time of the IPO.\19\
The Exchange states in its proposal that it believes that, although
SPACs will be excluded from the Required Minimum Amount at the time of
initial listing, requiring SPACs to satisfy Nasdaq's other initial
listing standards \20\ would continue to help ensure that SPACs have
sufficient public float, investor base, and trading interest likely to
generate depth and liquidity to support exchange listing and trading,
which should help to protect investors and the public interest.\21\
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\16\ See id. at 68402.
\17\ See id. These initial listing requirements currently
include, among other things, a minimum number of unrestricted
publicly held shares, minimum market value of unrestricted publicly
held shares, minimum number of round lot holders of unrestricted
shares, and minimum bid price. See id. at 68402 n.9. The Commission
notes, as an example, that a SPAC listed on the Nasdaq Capital
Market under the Market Value of Listed Securities Standard must
have at least one million unrestricted publicly held shares and a
market value of unrestricted publicly held shares of at least $15
million. See Nasdaq Rules 5505(a)(2) and 5505(b)(2)(C). See also
Nasdaq Rule 5300 Series (The Nasdaq Global Select Market) and 5400
Series (The Nasdaq Global Market).
\18\ See Notice, supra note 3, at 68402-03. See also supra notes
11, 15, and accompanying text.
\19\ See Notice, supra note 3, at 68402.
\20\ See supra note 17.
\21\ See Notice, supra note 3, at 68402.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\22\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\23\
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.
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\22\ 15 U.S.C. 78f(b). In approving this proposed rule change,
as modified by Amendment No. 1, the Commission has considered the
proposed rule change's impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78f(b)(5).
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The Commission has consistently recognized that the development and
enforcement of meaningful listing standards for an exchange is of
critical importance to financial markets and the investing public.\24\
Among other things, the Commission has stated that 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 that have or will have sufficient public float, investor
base, and trading interest likely to generate depth and liquidity
sufficient to promote fair and orderly markets.\25\ 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.\26\
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\24\ See infra notes 25-26.
\25\ See, e.g., Securities Exchange Act Release Nos. 81856
(October 11, 2017), 82 FR 48296, 48298 (October 17, 2017) (``SR-
NYSE-2017-31 Approval Order''); 81079 (July 5, 2017), 82 FR 32022,
32023 (July 11, 2017) (``SR-NYSE-2017-11 Approval Order''); 65708
(November 8, 2011), 76 FR 70799, 70802 (November 15, 2011) (``SR-
NASDAQ-2011-073 Approval Order''); 63607 (December 23, 2010), 75 FR
82420, 82422 (December 30, 2010) (``SR-NASDAQ-2010-137 Approval
Order''); 57785 (May 6, 2008), 73 FR 27597, 27599 (May 13, 2008)
(``SR-NYSE-2008-17 Approval Order''); and 58228 (July 25, 2008), 73
FR 44794, 44796 (July 31, 2008) (``SR-NASDAQ-2008-013 Approval
Order''). 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 No. 82627 (February 2, 2018),
83 FR 5650, 5653 n.53 (February 8, 2018) (``SR-NYSE-2017-30 Approval
Order''); SR-NYSE-2017-31 Approval Order, 82 FR at 48298; SR-NYSE-
2017-11 Approval Order, 82 FR at 32023; SR-NASDAQ-2010-137 Approval
Order, 75 FR at 82422; and SR-NYSE-2008-17 Approval Order, 73 FR at
27599. The Commission has stated that 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., SR-NYSE-2017-30 Approval Order, 83
FR at 5653 n.53; Securities Exchange Act Release Nos. 87648
(December 3, 2019), 84 FR 67308, 67314 n.42 (December 9, 2019) (SR-
NASDAQ-2019-059); and 88716 (April 21, 2020), 85 FR 23393, 23395
n.22 (April 27, 2020) (SR-NASDAQ-2020-001).
\26\ See, e.g., SR-NASDAQ-2011-073 Approval Order, supra note
25, 76 FR at 70802; SR-NASDAQ-2010-137 Approval Order, supra note
25, 75 FR at 82422; SR-NYSE-2008-17 Approval Order, supra note 25,
73 FR at 27599; and SR-NASDAQ-2008-013 Approval Order, supra note
25, 73 FR at 44796.
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The Exchange has proposed to exclude SPACs, prior to the completion
of a business combination, from the requirement to meet the Required
Minimum Amount at the time of initial listing on the Nasdaq Global
Select Market, Nasdaq Global Market, and Nasdaq Capital Market. As
described above, the Exchange states that, unlike with operating
companies where the
[[Page 7759]]
Required Minimum Amount is necessary to demonstrate genuine investor
interest in the operating company to support an exchange listing, SPACs
do not present a similar risk of circumventing the round lot holder
requirement through share transfers for no value and that removing this
requirement will not impact the protection of investors.\27\
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\27\ See supra note 14 and accompanying text.
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Given the differences between SPACs and operating companies,
including in their structure, and the rights of SPAC shareholders to
convert or redeem their shares upon a business combination for a pro
rata portion of the IPO proceeds maintained in a trust account, the
Commission believes that it is reasonable and not unfairly
discriminatory for the Exchange to exclude SPACs from the requirement
to meet the Required Minimum Amount at the time of initial listing of
the SPAC. Specifically, the Commission believes the Exchange has
provided a reasonable basis for its proposal to differentiate SPACs
from operating companies in terms of the requirement to comply with the
Required Minimum Amount upon initial listing given that, in the
Exchange's experience, SPACs do not appear to present a similar risk of
circumventing the round lot holder requirement through share transfers
for no value. As the Exchange states in its proposal, typically the
only investors holding shares in a SPAC prior to an IPO are its
founders, whereas other round lot holders generally represent new
investors, in contrast to the Exchange's experience with operating
companies.\28\
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\28\ See supra notes 12-13 and accompanying text.
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Further, the Exchange's other initial listing requirements will
remain applicable to SPACs at the time of their initial listing
including, among other things, that round lot holders hold unrestricted
shares and that SPACs will continue to meet the minimum number and
market value of unrestricted publicly held shares requirements as well
as the other listing requirements on the applicable market tier, in
addition to the specific listing criteria applicable to SPACs.\29\ As
the Commission stated when approving the Exchange's amendments to
exclude restricted securities from its calculation of a company's
publicly held shares, market value of publicly held shares, and round
lot holders for purposes of qualifying the company's securities for
initial listing, the amendments ``should allow the Exchange to more
accurately determine whether a security has adequate distribution and
liquidity and is thus suitable for listing and trading on the
Exchange.'' \30\ In addition, all initial listing requirements apply to
the combined company upon consummation of a business combination, which
would include the Required Minimum Amount. The Commission therefore
believes the Exchange's current listing rules will continue to provide
appropriate listing standards for SPAC securities, both prior to and
after the completion of any business combination. Moreover, investors
in SPACs will continue to have the ability to convert or redeem their
shares for cash into a pro rata share of the amount in the trust
account, pursuant to the provisions of Nasdaq Rules IM-5101-2(d) and
(e).
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\29\ For example, SPACs listed on the Nasdaq Capital Market
under the Market Value of Listed Securities Standard would be
required to have at least 1,000,000 unrestricted publicly held
shares, at least 300 round lot holders that hold unrestricted
shares, a minimum market value of listed securities of $50 million,
a minimum market value of unrestricted publicly held shares of at
least $15 million, and at least three registered and active market
makers. See Nasdaq Rules 5505(a)-(b). See also Nasdaq Rules 5315(e)-
(f) (Nasdaq Global Select Market) and 5405(a)-(b) (Nasdaq Global
Market). The Commission understands that, although Nasdaq's rules
provide alternative standards to satisfy in lieu of the market value
standards, SPACs typically list under the market value standard
given that they have no prior operating history.
\30\ Required Minimum Amount Approval Order, supra note 7, at
33111. See also supra note 7.
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These other listing requirements, taken together, should continue
to help ensure that SPACs are listed only if there will be a sufficient
market, with adequate depth and liquidity and with sufficient investor
interest to support an exchange listing, and will continue to provide
investors the redemption feature. The Commission also notes that the
Exchange's proposal is consistent with SPAC listing standards on other
listing exchanges that do not require round lot holders to hold
unrestricted securities of a minimum market value amount.\31\ For the
reasons discussed above, the Commission believes the Exchange's
proposal is consistent with the requirements of Section 6(b)(5) of the
Act and with the maintenance of fair and orderly markets under the Act.
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\31\ See, e.g., New York Stock Exchange LLC (``NYSE'') Listed
Company Manual Section 102.06. The Commission notes that NYSE's
initial listing standards for SPACs, which require an aggregate
market value of $100 million and market value of publicly-held
shares of $80 million, are generally higher than those on Nasdaq.
See supra notes 17 and 29. See also NYSE American LLC Company Guide
Sections 102 and 119.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change, as modified by Amendment No. 1
(SR-NASDAQ-2020-069), be, and hereby is, approved.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02010 Filed 1-29-21; 8:45 am]
BILLING CODE 8011-01-P