Yesterday, each of Nasdaq, FINRA and NYSE released Regulatory Alerts highlighting concerns surrounding fraudulent activities in Small-Cap IPOs. Each of these alerts raises similar issues, highlights the importance of the Underwriter in the process, and stresses the obligations that Underwriters have as Gatekeepers in the IPO Process. Below is a link to each of these Alerts and some relevant excerpts from them.

These alerts follow a “pause” that was recently instituted by Nasdaq on small-cap IPOs following the unusually volatile trading activity in some IPOs launched that involved Chinese issuers. The recent regulatory activity has resulted in a near total stoppage in IPOs and Up-Listings for all small-cap issuers, regardless of where they are from or which firm is proposing to act as Underwriter. In the case of Nasdaq, the process of Underwriting and launching an IPO has literally been turned on its head, and issuers are no longer able to obtain approval and certification of their listing applications prior to launching their road show or having their registration statement declared effective by the SEC without having the Underwriter, as well as syndicate and selling group members, first provide complete information regarding the names, locations and proposed allocations of the individuals and entities that will be given an opportunity to participate in the IPO. Historically, Underwriters would not typically launch a road show for an issuer without some assurance that the listing application had been approved by the Exchange, and the activity involving the identification of investors (other than Testing the Waters activity) was prohibited and considered to be “gun jumping.”

Nasdaq Notice on Regulatory Considerations for Small Capitalization IPOs

Equity Regulatory Alert #2022 – 9 Regulatory Considerations for Small Capitalization IPOs (nasdaqtrader.com)

The Nasdaq Alert highlights the role of Underwriter’s as gatekeepers and the active role that Nasdaq regulation intends to take to protect investors.

“Unusual price volatility following IPOs of certain small-cap issuers highlights the essential role underwriters play. Nasdaq, and companies undergoing their IPOs, rely on underwriters to select the selling syndicate and ensure that the shares are placed in a way that is reasonably designed to allow liquid trading, consistent with Nasdaq’s listing requirements, and the successful introduction of the company to the marketplace.”

“Nasdaq Regulation will continue to investigate to determine whether such members have complied with applicable rules designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. Nasdaq Regulation currently has open investigations relating to the activity described in this bulletin.”

FINRA Notice to Members Regarding Heightened Threat of Fraud in What They Deem to be a Recent Trend in Small-Capitalization IPO’s

Regulatory Notice 22-25 | FINRA.org

The FINRA Notice to Members highlights the risks of fraud in these offerings and the role of and liability that Underwriter’s may have as gatekeepers.

“FINRA has observed significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries. FINRA has concerns regarding potential nominee accounts that invest in the small-cap IPOs and subsequently engage in apparent manipulative limit order and trading activity. Some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams.“

“Firms that act as underwriters in offerings of securities serve as the “link in the distribution of securities from issuers to investors,” and underwriters perform an important role as “gatekeepers to the public markets.” This role subjects underwriters to potential liability under Sections 11 and 12 of the Securities Act of 1933, providing a strong incentive for underwriters to help ensure the accuracy of disclosures in registration statements.”

NYSE Regulatory Memorandum Regarding REGULATORY SCRUTINY IN CONNECTION WITH IPOS

Microsoft Word – NYSER Reg Memo – Regulatory Scrutiny in Connection with IPOs (2022.11.17 final).docx

The NYSE Memorandum highlights the volatility in these recent offerings, sets forth the issues considered and raised by the NYSE in its determination to list these issuers, and raises the issue regarding the role of Underwriters as gatekeepers of these offerings.

“In light of extreme volatility in the immediate aftermath of certain recent IPOs, NYSE Regulation believes it is helpful to enumerate some of the issues that may be relevant to its initial listing decisions. NYSE Regulation encourages underwriters and other broker-dealers that are members of the NYSE Exchanges or other self-regulatory organizations to consider these factors in their capacity as gatekeepers in the IPO process.”