SEC Approves Nasdaq’s Revisions to its Initial Listing Standards to Improve Liquidity in the Market
On July 5, 2019, the Securities and Exchange Commission (“SEC” or “Commission”) recently approved a proposal by The Nasdaq Stock Market LLC ("Nasdaq") to revise its initial listing standards to improve liquidity in the market.
Below is a brief overview of what we believe to be the most relevant revisions for our clients.
Minimum Number of Publicly Held Shares
Previously, to list its shares on the Nasdaq, a company was required to have at least 1 million shares held by public shareholders (shareholders other than officers, directors, and 10% holders), calculated to include restricted securities.
With the intention of improving liquidity in the market, Nasdaq suggested to revise its initial listing requirements to exclude “restricted securities”, which are illiquid and not freely transferable, from a company’s calculation of publicly held shares, market value of publicly held shares and round lot holders. Nasdaq made no changes to its related continued listing requirements.
The Nasdaq added to its rules the following new definitions:
“Restricted Securities” are defined 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.”
“Unrestricted Publicly Held Shares” are defined as “Publicly Held Shares that are Unrestricted Securities.”
“Unrestricted Securities” are defined as “securities that are not Restricted Securities.”
The changes will become effective on August 4, 30 days after the SEC’s approval.
Round Lot Holder Definition
To list its shares on the Nasdaq, a company is required to have at least 300 “round lot shareholders”. Previously, shareholders who held at least 100 shares of the company were considered to be round lot shareholders. Nasdaq revised its prior definition of round lot holder to include a shareholders who hold 100 shares of the company’s unrestricted securities. A new requirement from Nasdaq is that at least half of the required round lot shareholders will hold unrestricted securities with a market value of at least $2,500.
Nasdaq believes that these changes will result in a more liquid trading market which will better protect investors and “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.”
Companies Trading Over the Counter
A new Nasdaq listing requirement is related to companies who are traded over the counter at the time of their listing. Pursuant to the new requirement, a minimum average daily trading volume of at least 2,000 shares a day must be achieved over the 30 trading days prior to listing on the Nasdaq, with trading occurring on more than half of those 30 days. An exemption from the average daily trading volume requirement is available for companies that are being listed on the Nasdaq in connection with a firm commitment underwritten public offering of at least $4 million.
Nasdaq believes this “will help ensure a liquid trading market, promote price discovery and establish an appropriate market price for the listed securities.”