[Federal Register Volume 89, Number 2 (Wednesday, January 3, 2024)]
[Notices]
[Pages 425-427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28868]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99247; File No. SR-CboeBZX-2023-063]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Adopt an Alternative to the Minimum $4 Price 
Requirement for Companies Seeking To List Tier II Securities on the 
Exchange

December 27, 2023.
    On September 19, 2023, Cboe BZX Exchange, Inc. (``BZX'' or the 
``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 adopt an alternative to the minimum $4 price 
requirement for companies seeking to list Tier II securities on the 
Exchange. The proposed rule change was published for comment in the 
Federal Register on October 2, 2023.\3\ On November 6, 2023, 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 two 
comments letters on the proposed rule change.\6\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \7\ to determine 
whether to approve or disapprove 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. 98532 (Sept. 26, 
2023) 88 FR 67852.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 98860, 88 FR 77647 
(Nov. 13, 2023). The Commission designated December 31, 2023 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ Comments received on the proposed rule change are available 
at: https://www.sec.gov/comments/sr-cboebzx-2023-063/srcboebzx2023063.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposed Rule Change 8
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    \8\ For a full description of all aspects of the proposed rule 
change, please see the Notice, supra note 3.
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    The Exchange proposes to adopt an alternative to the current 
minimum $4 price requirement for companies seeking to list securities 
on Tier II of the Exchange that are excluded from the definition of a 
``penny stock'' under Exchange Act Rule 3a51-1(g) (the ``Penny Stock 
Rule'').\9\ Specifically, under proposed Exchange Rule 
14.9(b)(1)(A)(ii), a company whose security maintains a $2 or $3 
closing price for at least five consecutive business days prior to 
approval would qualify for listing as a Tier II security, if among 
other things, it meets the net tangible assets or average revenue tests 
of the alternative penny stock exclusion set forth in Exchange Act Rule 
3a51-1(g) \10\ and meets all existing listing standards except for the 
$4 price requirement. Such a company must instead have a minimum $3 
price if it qualifies under the $5 million equity \11\ or $750,000 net 
income alternatives \12\ or a minimum $2 price if it qualifies under 
the $50 million market value of listed securities alternative.\13\ In 
addition, a company qualifying under the proposed standard must have 
either: (a) net tangible assets in excess of $2 million, if the company 
has been in continuous operation for at least three years; or (b) net 
tangible assets in excess of $5 million, if the company has been in 
continuous operation for less than three years; or (c) average revenue 
of at least $6 million for the last three years. For this purpose, net 
tangible assets or revenue must be demonstrated on the company's most 
recently filed audited financial statements, satisfying the 
requirements of the Commission, and which are dated less than 15 months 
prior to the date of listing.\14\
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    \9\ 17 CFR 240.3a51-1(g).
    \10\ See 17 CFR 240.3a51-1(g). A company seeking to qualify 
under only the Market Value of Listed Securities Standard would, 
among other things, also be required to maintain for 90 consecutive 
trading days the market value of its listed securities at $50 
million and the $2 price requirement prior to applying to list under 
the alternative standard. See proposed Exchange Rule 14.9(b)(2)(B). 
Under the Market Value of Listed Securities Standard, a company 
would need to achieve, among other things: (A) market value of 
listed securities of at least $50 million (current publicly traded 
issuers must meet this requirement and the price requirement for 90 
consecutive trading days prior to applying for listing if qualifying 
to list only under the market value of listed securities standard); 
(B) stockholders' equity of at least $4 million; and (C) market 
value of publicly held shares of at least $15 million. The Exchange 
proposes to revise Rule 14.9(b)(2)(B) in order to make it consistent 
with the proposal. In particular, Rule 14.9(b)(2)(B)(i) would be 
revised to delete the specific reference to $4 bid price 
requirement, since an issuer seeking to initially list its 
securities under the Market Value of Listed Securities Standard 
using the proposed alternative price requirement would have to 
maintain a closing price of at least $2 per share for 90 consecutive 
trading days.
    \11\ See Exchange Rule 14.9(b)(2)(A).
    \12\ See Exchange Rule 14.9(b)(2)(C).
    \13\ See proposed Exchange Rule 14.9(b)(2)(B).
    \14\ The Exchange states that the proposed rule adopts the 15-
month requirement to assure consistency with the timing requirements 
contained in Exchange Act Rule 3a51-1(g).
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    As proposed under new Interpretation and Policies .01(a) to 
Exchange Rule 14.9, an Exchange-listed security could become subject to 
the Penny Stock Rule following initial listing if it no longer meets 
the tangible assets or average revenue tests of the alternative 
exclusion and does not qualify for another exclusion under the penny 
stock rules. Further, unlike securities listed under the Exchange's 
existing initial standards, which have a blanket exclusion from the 
Penny Stock Rule, broker-dealers that effect recommended transactions 
in securities that originally qualified for listing under the 
Exchange's alternative price standard would, among other things, under 
Exchange Act Rule 3a51-1(g), need to

[[Page 426]]

review current financial statements of the issuer to verify that it 
meets the applicable net tangible assets or average revenue test, have 
a reasonable basis for believing they remain accurate, and preserve 
copies of those financial statements as part of its records. As 
provided in proposed Interpretation and Policies .01 to Rule 14.9, in 
order to assist brokers' and dealers' compliance with the requirements 
of the Penny Stock Rule, the Exchange would monitor companies listed 
under the proposed alternative and publish a list of any company that 
initially listed under that requirement, which does not then meet the 
requirements of Exchange Act Rule 3a51-1(g), described above, or any of 
the other exclusions from being a penny stock contained in Rule 3a51-
1.\15\ Such list would be updated on a daily basis.\16\
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    \15\ The Exchange believes that the other exclusion most likely 
to be implicated would be Rule 3a51-1(d), 17 CFR 240.3a51-1(d), 
which provides an exclusion from the definition of a penny stock for 
a security with a minimum bid price of $5. However, the Exchange 
states that if a Company obtains a $4 minimum bid price at a time 
when it meets all other initial listing requirements, the Exchange 
would no longer consider the company as having listed under the 
proposed alternative standard.
    \16\ See proposed Interpretations and Policies .01(a) to 
Exchange Rule 14.9.
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    If a company initially lists its security with a bid price below $4 
under the alternative requirement contained in Rule 14.9(b)(1)(A)(ii), 
but subsequently achieves a $4 closing price for at least five 
consecutive business days and, at the same time, satisfies all other 
initial listing criteria, it would no longer be considered as having 
listed under the alternative requirement and the Exchange would notify 
the Company that it has qualified for listing under the price 
requirement contained in Rule 14.9(b)(1)(A)(i).\17\ If a security 
obtains a $4 closing price, the Exchange would determine whether the 
security meets all other initial listing requirements for Tier II 
securities, including both the quantitative and qualitative 
requirements.\18\ If the security meets all initial Tier II listing 
requirements, it would satisfy the requirements for the exclusion 
contained in Rule 3a51-1(a)(2) and would no longer be monitored by the 
Exchange for compliance with the other exclusions from the definition 
of a penny stock. Proposed Interpretations and Policies .01(a) to 
Exchange Rule 14.9 would remind brokers and dealers that the list 
published by the Exchange is only an aid and that the Penny Stock Rule 
imposes specific obligations on brokers and dealers with respect to 
transactions in penny stocks. Proposed Interpretation and Policy .01(b) 
to Exchange Rule 14.9 provides that the proposed alternative price test 
will be based on the BZX Official Closing Price \19\ in the security.
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    \17\ See id.
    \18\ The security would have to meet the $4 bid price 
requirement contained in proposed Exchange Rule 14.9(b)(1)(A)(i). In 
addition, proposed Rule 14.9(b)(2)(B) requires a company qualifying 
only under the Market Value of Listed Securities requirement to 
satisfy that requirement and the price requirement for 90 
consecutive trading days prior to applying for listing. Such a 
company would have to achieve a $4 bid price for 90 consecutive 
trading days and a $4 closing price for five days, although these 
periods may overlap.
    \19\ See Exchange Rule 11.23(a)(3). As provided in Exchange Rule 
11.23(c)(2)(B), ``[f]or a BZX-listed corporate security, the Closing 
Auction price will be the BZX Official Closing Price. In the event 
that there is no Closing Auction for a BZX-listed corporate 
security, the BZX Official Closing Price will be the price of the 
Final Last Sale Eligible Trade. See Exchange Rule 11.23(a)(9) for 
the definition of ``Final Last Sale Eligible Trade.''
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    The Exchange also proposes that the required closing price must be 
achieved for at least five consecutive business days before approval of 
the listing application.\20\ The Exchange may extend the minimum five-
day compliance period required to satisfy these tests based on any fact 
or circumstance, including the margin of compliance, the trading 
volume, the trend of the security's price, or information or concerns 
raised by other regulators concerning the trading of the security.\21\ 
The Exchange states that requiring the minimum $2 or $3 closing price 
to be maintained for a period of five days (as opposed to one day) 
should reduce the risk that some might attempt to manipulate or 
otherwise artificially inflate the closing price in order to allow a 
security to qualify for listing. In addition, the Exchange represents 
that it will exercise its discretionary authority to deny initial 
listing if there are particular concerns about a company, such as its 
ability to maintain compliance with continued listing standards or if 
there are other public interest concerns.\22\
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    \20\ See proposed Interpretations and Policies .01(b) to 
Exchange Rule 14.9. The Exchange states that it will work with FINRA 
to adopt surveillance procedures to monitor securities listed under 
the proposed alternative as they approach $4. See Notice, supra note 
3, at 67853. According to the Exchange, these procedures will be 
designed to identify anomalous trading that could be indicative of 
potential manipulation of the price. See id.
    \21\ See proposed Interpretations and Policies .01(b) to 
Exchange Rule 14.9.
    \22\ See Exchange Rule 14.2. See also Notice, supra note 3, at 
67854.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2023-063 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \23\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\24\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposal with Sections 6(b)(5) \25\ and 6(b)(8) \26\ of the Act. 
Section 6(b)(5) of the Act requires that the rules of a national 
securities exchange be designed, among other things, 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 not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. Section 6(b)(8) of the Act requires that the rules 
of a national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.
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    \24\ Id.
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78f(b)(8).
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    The Commission has consistently recognized the importance of 
exchange listing standards. 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 necessary to promote fair and orderly markets.\27\ Under the

[[Page 427]]

proposed rule change, shares subject to resale restrictions 
(``Restricted Securities'') are counted in the calculations of the 
company's publicly held shares, market value of publicly held shares, 
and round lot holder. The Commission believes that a company's publicly 
held shares, market value of publicly held shares, and the number of 
round lot holders are indicators of the liquidity of its shares. To the 
extent Restricted Securities are counted when calculating a company's 
publicly held shares, market value of publicly held shares, and round 
lot holders, the company's shares could be less liquid, potentially 
making them more susceptible to price manipulation.
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    \27\ The Commission has stated in approving exchange listing 
requirements that the development and enforcement of adequate 
standards governing the listing of securities on an exchange is an 
activity of critical importance to the financial markets and the 
investing public. 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. 91947 (May 19, 2021), 86 
FR 28169 (May 25, 2021) (SR-NASDAQ-2020-057); Securities Exchange 
Act Release Nos. 90768 (Dec. 22, 2020), 85 FR 85807, 85811 n.55 
(Dec. 29, 2020) (SR-NYSE-2019-67) (``NYSE 2020 Order''); 82627 (Feb. 
2, 2018), 83 FR 5650, 5653 n.53 (Feb. 8, 2018) (SRNYSE-2017-30) 
(``NYSE 2018 Order''); 81856 (Oct. 11, 2017), 82 FR 48296, 48298 
(Oct. 17, 2017) (SR-NYSE-2017-31); 81079 (July 5, 2017), 82 FR 
32022, 32023 (July 11, 2017) (SR-NYSE-2017-11). The Commission has 
stated that adequate listing standards, by promoting fair and 
orderly markets, are consistent with Section 6(b)(5) of the Exchange 
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., NYSE 2020 Order, 85 FR at 85811 n.55; NYSE 2018 
Order, 83 FR at 5653 n.53; Securities Exchange Act Release Nos. 
87648 (Dec. 3, 2019), 84 FR 67308, 67314 n.42 (Dec. 9, 2019) (SR-
NASDAQ-2019-059); 88716 (Apr. 21, 2020), 85 FR 23393, 23395 n.22 
(Apr. 27, 2020) (SR-NASDAQ-2020-001).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the 
[Exchange Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \28\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\29\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations.\30\ The Commission is instituting proceedings to allow for 
additional consideration and comment on the issues raised herein.
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    \28\ 17 CFR 201.700(b)(3).
    \29\ See id.
    \30\ See id.
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with the Exchange Act and the rules and regulations 
thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
data, views, and arguments, the Commission will consider, pursuant to 
Rule 19b-4 under the Act,\31\ any request for an opportunity to make an 
oral presentation.\32\
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    \31\ 17 CFR 240.19b-4.
    \32\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (Jun. 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by January 24, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
February 7, 2024.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2023-063 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    All submissions should refer to file number SR-CboeBZX-2023-063. 
This file number should be included on the subject line if email is 
used. To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE, Washington, DC 20549, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. Do 
not include personal identifiable information in submissions; you 
should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-CboeBZX-2023-063 and 
Should be submitted by January 24, 2024. Rebuttal comments should be 
submitted by February 7, 2024.

    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)(57).
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Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023-28868 Filed 1-2-24; 8:45 am]
BILLING CODE 8011-01-P