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Proposed Nasdaq Rule Could Narrow Options for Companies with $1 Bid Price Deficiency

On July 3, 2024, the Securities and Exchange Commission (“SEC”) issued a notice that The Nasdaq Stock Market LLC (“Nasdaq”) submitted a proposed rule to change the requirements for regaining compliance with its $1 bid price rule. If approved by the SEC, the proposed rule would add a new complication for Nasdaq-listed companies seeking to regain compliance with the bid price rule.

Background

All Nasdaq-listed companies must maintain compliance with the bid price rule, which requires a company’s bid price to remain at or above $1 per share. If a company’s bid price drops below $1 for 30 consecutive days or more, it receives a deficiency notice from Nasdaq and has 180 days to cure the deficiency.

Often, if a company’s stock price does not increase, it will effect a reverse stock split to regain compliance with the bid price rule. The reverse stock split will divide the total number of outstanding shares at a certain ratio, which typically results in the company’s stock price increasing by that ratio. The reverse stock split could result in the company having fewer than the required number of publicly held shares (500,000) or shareholders (400 or 300, depending on the market tier) under Nasdaq’s rules. Under the current rules, if the reverse stock split raised the stock price above $1 per share for a minimum of 10 business days, Nasdaq will determine that the company has cured the bid price deficiency, even if it has triggered a new deficiency for the number of shareholders or publicly held shares. The company would then be able to use the compliance process for the new deficiency, essentially buying itself more time to cure its Nasdaq compliance issues.

Proposed Rule

Under Nasdaq’s proposed rule, if the company violates a new listing standard when effecting a reverse stock split to attempt to cure the bid price deficiency, it will not be deemed to cure the bid price deficiency. The company could not cure the bid price deficiency until the new deficiency was cured, and Nasdaq will not provide additional time after the 180-day compliance period for the company to cure the deficiencies. In the rule proposal, Nasdaq explained that it believes the proposed rule would advance investor protection by not allowing a company to publicly announce that it has regained compliance with one Nasdaq listing standard when it has triggered a new deficiency in the process.

New Considerations

Currently, a company seeking to regain compliance with the bid price rule has to consider the state law requirements for effecting a reverse stock split and other Nasdaq guidance about reverse stock splits. State law may require stockholder approval of a reverse stock split before it can be effected. Existing Nasdaq rules eliminate the 180-day cure period for regaining compliance with the bid price rule if the company has effected one or more reverse stock splits in the last two years with a cumulative ratio of 250 or more shares to one. In that scenario, if the company fails to comply with the bid price requirement, Nasdaq will issue a delisting determination instead of a deficiency notice.

In addition to those considerations, if the proposed rule is adopted, the company must ensure that it will remain in compliance with Nasdaq’s other numerical listing standards, like the number of holders and number of publicly held shares, before effecting a reverse stock split. Together, the existing rules and the proposed rule will narrow the field of options for companies that have had trouble maintaining compliance with the bid price rule during the tough micro-cap market of the past few years.

Next Steps

The SEC is accepting comments on the proposed rule until July 30, 2024, and will determine whether to approve or disapprove the rule after that date. If the proposed rule is approved, Nasdaq-listed companies will have less flexibility to address bid price deficiencies and may struggle to remain listed on Nasdaq. If you have any questions about Nasdaq’s proposed rule or maintaining or regaining compliance with Nasdaq’s rules, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.

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