The Securities and Exchange Commission (“SEC”) was expected to issue a decision on a proposed rule from The Nasdaq Stock Market LLC (“Nasdaq”) that would accelerate the delisting process for companies with low stock prices by November 21, 2024, as described in our LEGALcurrents. On November 20, 2024, the SEC issued an order that institutes proceedings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to determine whether to approve or disapprove the proposed rule.
As outlined in our LEGALcurrents, the proposed rule would limit the time a company not in compliance with the requirement to maintain a closing bid price above $1.00 per share (the “bid price rule”) could remain listed on Nasdaq. The rule would automatically (i) suspend a company’s securities from trading on Nasdaq if the company had not regained compliance with the bid price rule within 360 days, even if it was appealing to a Nasdaq Listing Qualifications Hearings Panel, and (ii) move to delist a company’s securities if it had effected a reverse stock split in the last year and the company failed to comply with the bid price rule.
Instead of approving or disapproving the proposed rule after an initial extension period, the SEC instituted proceedings to allow for additional comment on the proposed rule. The scheduled timing for the proceedings likely pushes the decision on this proposed rule into 2025 and to the SEC under the next presidential administration. Under the Exchange Act, to approve the rule, the SEC is required to find that the proposed Nasdaq rule is consistent with the Exchange Act. In the order instituting proceedings about the proposed rule, the SEC explicitly asked commenters to address whether there is sufficient support for finding the rule consistent with the section of the Exchange Act requiring the rules of a national securities exchange to prevent manipulative acts and to protect investors and the public interest. It is unusual for the SEC to institute proceedings for proposed self-regulatory organization (“SRO”) rules, since the SRO and the SEC tend to work together to resolve these questions before rules are proposed or during the typical review period.
Most comments supported the proposed rule, indicating that the proposed rule was a step in the right direction toward addressing concerns about the trading of low-priced stock. One commenter opposed the proposed rule, arguing that it could incentivize market manipulation and limit access to capital for small companies, such as pharmaceutical, biotechnology or other pre-revenue companies.
For now, this development means that companies at risk of a bid price rule deficiency or working to cure a bid price deficiency should operate under Nasdaq’s existing rules. These companies should keep recent rule changes in mind when creating their plan of compliance. A reverse stock split that causes a company to violate another listing standard will not be deemed to cure a bid price rule deficiency, even if the company’s stock begins trading above $1.00.
The SEC is accepting additional comments on the proposed rule until 21 days after the order is published in the Federal Register and rebuttal comments until 35 days after the order is published in the Federal Register. If you have any questions about the proposed rule or maintaining or regaining compliance with the rules of Nasdaq, please contact a member of Harter Secrest & Emery LLP’s Securities and Capital Markets group.