Nasdaq proposes to modify the application of bid price compliance periods, impacting companies planning a reverse stock split

What has happened?

In July 2024, the Securities and Exchange Commission published a notice setting forth The Nasdaq Stock Market LLC's (“Nasdaq”) proposal to modify the application of its bid price compliance periods.¹ The purpose of this proposal is to add clarity and guidance for when a company initiates a reverse stock split that causes non-compliance with other listing requirements.

Companies are allowed to effect a reverse split to regain compliance with the minimum bid price²  required by the Nasdaq listing rules. Because a reverse split results in a proportional reduction in the number of publicly held shares, a reverse split can trigger non-compliance with other listing rules, and start a new deficiency process. For example, a reverse-split may decrease a company's total outstanding publicly held shares below the threshold set by the Nasdaq Global Market, which is set to either 750,000 or 1.1 million shares depending on the characteristics of the company.³

Currently, Nasdaq allows a company a 45 day period to provide a plan to regain compliance with the listing requirements; additionally, there is an option for Nasdaq to grant an extension of up to 180 days. These scenarios where the timeline is not clear for when a company must regain compliance with listing rules can create confusion for investors, which in turn could negatively impact investor confidence in the market.

What are the proposed changes?

Nasdaq is proposing an amendment to provide that a company will not be considered to have regained compliance with its bid price requirement if the company takes an action to achieve compliance with that requirement (i.e., a reverse stock split), and that action results in the company's security falling below the threshold for another listing requirement, without regard to any compliance process otherwise available for that listing requirement.

Under current rules, Nasdaq would notify the company about their new listing deficiency and would allow the company an additional 45 days to submit a plan to regain compliance (with the possibility of being afforded up to 180 days to regain compliance). However, Nasdaq now believes that it is not appropriate for a company to receive additional time to cure non-compliance with the newly violated listing standards. Nasdaq is therefore proposing this rule change to prevent companies from benefitting from additional time for the subsequent deficiency that was caused by the company's non-compliance with the bid price requirement.

Impact on companies effecting a reverse-split

Under the proposed amendment, there are a number of consequences companies should be aware of when effecting a reverse split. These include:

• A company will be deemed non-compliant with the bid price requirement until both the new publicly held shares deficiency is cured and thereafter the company maintains a $1.00 bid price for a minimum of 10 consecutive business days.
  • All compliance must be accomplished during the compliance period applicable to the initial bid price requirement deficiency.
• There will no longer be an opportunity for a company to submit a plan to regain compliance with the publicly held shares requirement; instead, the company must regain compliance with both rules within the applicable compliance period for the bid price requirement.

Nasdaq believes the proposed amendment will protect investors and provide additional clarity to companies and market participants by clarifying compliance determinations.

Footnotes:

_{1. See Securities and Exchange Commission, Release No. 34-100461; File No. SR-NASDAQ-2024, Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change to Modify the Application of Bid Price Compliance Periods (2024), https://www.sec.gov/files/rules/sro/nasdaq/2024/34-100461.pdf}

_{2. Nasdaq requires that specified securities maintain a $1.00 minimum bid price. When a company fails to satisfy the applicable minimum bid price requirement, it will have 180 calendar days to regain compliance. See Rule 5450(a)(1) and Rule 5810(3)(A).}

_{3. Rules 5450(a)(2), 5450(b)(1)(B), 5450(b)(2)(B) and 5450(b)(3)(B) require 400 total holders and, depending on the characteristics of the company, either 750,000 or 1.1 million publicly held listed shares.}