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Lucosky Brookman is a leader in the representation of small and micro-cap companies. The Firm has led it clients through numerous capital raise transaction and over a dozen uplisting and initial public offering transactions.  Access the latest news about Lucosky Brookman, our clients’ business transactions and industry updates here. 

Equity Regulatory Alert: Regulatory Considerations for Small Capitalization Initial Public Offerings

On November 17, 2022, in following with FINRA and NYSE alerts they each issued today, Nasdaq issued an alert expressing concerns about a recent trend of unusual price spikes immediately following the pricing of certain initial public offerings (IPO’s) on U.S. exchanges, mostly with respect to small-cap companies whose offerings are less than $25 million. In many instances, the IPO securities that are the subject of these extreme price spikes then experience equally dramatic price declines to a level at or below the offering price. All three alerts focused on due diligence by underwriters and their role in providing confidence in the market.

Nasdaq, NYSE, and FINRA ask underwriters to focus in on their role as gatekeepers in promoting fair and orderly trading patterns for companies introduced to the marketplace, such as by ensuring newly listed securities have sufficient public float, investor base, and trading interest. When such pricing volatility is observed, investigations will continue to ensure underwriters have engaged in proper conduct and fulfillment of their duties. Underwriters should reexamine their policies and procedures for due diligence review of issuers, including files, facilities, and registration statements involved with IPOs. Nasdaq may request that issuers and underwriters provide lists of investors and their expected allocations and ask issuers to represent that they are unaware of investors being loaned money to purchase shares in initial public offerings.

Before determining whether to approve the listing and certify the Form 8-A Nasdaq will require that underwriters and syndicate firms provide account-level information about the recipient of shares promptly after pricing. Nasdaq and the NYSE will consider factors such as shareholder concentration, first-day trading restrictions, and geographic locations of shareholder accounts before providing required certifications or approving listing applications. FINRA has noted that this ramp-and-dump trend often involves foreign broker-dealers and nominee accounts, as well as shares concentrated among very few holders. In their alerts, Nasdaq and NYSE each provided a non-exhaustive list of inquiries each underwriter should focus on when applying to list on the respective national exchanges.

Nasdaq Underwriters’ Role:

A non-exhaustive list of questions each underwriter may consider asking in determining whether to go ahead with pricing an IPO include:

  1. Do the total offering amount and target price per share reflect market supply and demand? Is there more diligence the underwriter should conduct to ensure that the float proposed by the issuer is sufficient to ensure fair and orderly trading?
  2. Who are the selling shareholders and what is their relationship with the issuer or entities or individuals to whom shares are allocated?
  3. Are the terms and conditions of lock-up agreements reasonable? What additional diligence should be conducted to ensure that those lock-up agreements are not circumvented? Will the lock-ups contribute to an illiquid market in the company’s shares?
  4. Are shares allocated broadly, in a way that ensures liquidity is sufficient to encourage, rather than inhibit, price discovery? What more diligence can be conducted to ensure the entities and individuals to whom shares are allocated are not restricted from trading them, thereby potentially causing the price to artificially increase due to lack of supply?
  5. Will shares allocated outside the United States be immediately freely tradeable or will they be subject to clearing or other logistical delays?
  6. Are the IPO’s terms and conditions fair and reasonable?
  7. Does the underwriter have any conflicts of interest with the IPO and, if so, have they been clearly disclosed?
  8. When releasing the security for trading in the IPO cross, is the underwriter confident that sufficient liquidity exists to ensure price stability?
  9. Once the IPO begins trading, is the underwriter fulfilling its obligation for price stabilization?
  10. What can the underwriter learn from prior IPOs that experienced unusual price movements? Is the underwriter making process improvements to mitigate the risk that an upcoming IPO will trade in a similar fashion?

Manipulative Trading Concerns

Nasdaq members, as well as the members of other self-regulatory organizations, that underwrite IPO's and that play other roles in the offering process, should expect a heightened focus when an IPO experiences unusual price movements. 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, ant to protect investors and the public interest. Areas of focus will include suspected manipulation and whether the members are complying with their obligation to observe high standards of commercial honor and just and equitable principles of trade pursuant to Nasdaq Rule General 9, Section 1(a). That rule sets forth a standard intended to encompass a wide variety of conduct that may operate as an injustice to investors or other participants in the marketplace.

NYSE - Underwriters and Other Broker-Dealers Role:

The following is a non-exhaustive list of factors that, depending on the specific circumstances of the offering, may be lines of inquiry during NYSE Regulation’s listing review:

  1. Whether the proposed size of the offering and disclosed price range are appropriate in light of the potential market for the offering and the issuer’s likely public market value;
  2. The nature and scale of the selling efforts being undertaken in connection with the IPO;
  3. The anticipated public demand for the offering and whether there are other recent comparable transactions;
  4. Whether the underwriting group or syndicate includes foreign broker-dealers and the percentage of the offering that is anticipated to be placed outside the United States;
  5. Whether the underwriter has experience successfully marketing an IPO of the proposed size and type in the United States;
  6. Whether the issuer and any of the underwriters are under common ownership or otherwise affiliated with each other;
  7. Whether there are any relationships between the issuer (and its affiliates) and investors receiving allocations in the offering;
  8. The percentage of the pre-IPO shares that will be subject to lock-up agreements and the terms of those agreements;
  9. Whether the shares will be allocated broadly or whether there will be significant concentrations in the allocations of the offering;
  10. Whether the underwriter has any conflicts of interest with respect to the IPO, and, if so, whether they have been clearly disclosed;
  11. Whether the underwriter is confident that sufficient liquidity will exist to ensure price stability when the security is released for trading in the IPO cross;
  12. Whether the underwriter is prepared to make appropriate efforts to fulfill its price stabilization obligations after the IPO has been priced;
  13. Comparisons to prior IPOs that experienced unusual price movements; and

Whether the underwriter is taking appropriate efforts to mitigate the risks of unusual price movements in upcoming IPOs. If you are interested in learning more, please contact Lucia Martin, Marketing Director at (732) 7122710 or