The SEC has approved, on an accelerated basis, the recent Nasdaq proposal (as amended by new amendment no. 3) to revise its initial listing standards to improve liquidity in the market. (See this PubCo post.) Prior to the amendments, under the initial listing rules, to list its equity on any Nasdaq tier, a company was required to have a minimum number of publicly held shares, calculated to include restricted securities. Nasdaq proposed, among other things, to revise the initial listing criteria to exclude “restricted securities” from the calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders, given that restricted securities are not freely transferable and are generally illiquid. To that end, the Nasdaq proposal added new definitions for “restricted securities,” “unrestricted publicly held shares” and “unrestricted securities.” As a result of these changes, only securities that are “freely transferable will be included in the calculation of publicly held shares to determine whether a company satisfies the Exchange’s initial listing criteria under these rules.” No changes were proposed to the continued listing requirements. To allow companies adequate time to complete in-process transactions based on the existing rules, the changes will become effective 30 days after approval (July 5) by the SEC (August 4).
As revised, Nasdaq Rule 5005(a)(37) will define “Restricted Securities” as “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.” Nasdaq has also adopted a new definition of “Unrestricted Securities” at Rule 5005(a)(46), which are “securities that are not Restricted Securities,” and added a new definition of “Unrestricted Publicly Held Shares” at Rule 5005(a)(45), defined as “Publicly Held Shares that are Unrestricted Securities.” Similar revisions are being made to other related rules, including adding a new definition for “Market Value of Unrestricted Publicly Held Shares,” which bases market value on only unrestricted shares. The reason for these changes was that Nasdaq believed that, because illiquid securities trade infrequently, they could be more volatile, more susceptible to price manipulation and have a wider bid-ask spread, all of which could lead to market prices that do not accurately reflect market value.
Nasdaq is also amending the definition of “round lot holder” to refer to a holder of a normal unit of trading (generally, 100 shares) of Unrestricted Securities. Nasdaq believes that “these amendments will help ensure adequate distribution and investor interest in a listed security, which will result in a more liquid trading market and which will better protect investors.” Nasdaq is also adding a new requirement that at least 50% of a company’s round lot holders must each hold Unrestricted Securities with a market value of at least $2,500. Prior to the amendment, a shareholder could be considered a round lot holder by holding exactly 100 shares, which, in the case of a stock that is trading at the minimum bid price of $4 per share, would be worth only $400. Nasdaq believes that this amendment will “help ensure that a majority 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.”
In addition, for securities trading OTC at the time of their listing, Nasdaq is adding a new listing requirement for a minimum average daily trading volume over the 30 trading days prior to listing of at least 2,000 shares a day, with trading occurring on more than half of those 30 days (including trading volume of the underlying security on the primary market with respect to an ADR). Nasdaq believes this change “will help ensure a liquid trading market, promote price discovery and establish an appropriate market price for the listed securities.” Nasdaq adopted an exemption from the ADTV requirement for securities listed in connection with a firm commitment underwritten public offering of at least $4 million.
With respect to ADRs, Nasdaq will consider the unrestricted publicly held shares of the underlying security, taking into account only those “restrictions that prohibit the resale or trading of the underlying security on the foreign issuer’s home country market.”
In addition, for a company applying through a direct listing “that has not had sustained recent trading in a private placement market prior to listing,” Nasdaq will determine that the company “has met the Market Value of Unrestricted Publicly Held Shares requirement if the Company satisfies the applicable Market Value of Unrestricted Publicly Held Shares requirement and provides a Valuation evidencing a Market Value of Publicly Held Shares of at least $250,000,000.” Because that last valuation requirement was meant to measure the size of the entity and not its liquidity, Nasdaq is not excluding restricted securities from the determination of the $250 million minimum valuation.