On October 7, 2024, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposed amendment to its Listing Rule 5810(c)(3)(A), which affects companies utilizing reverse stock splits to regain compliance with Nasdaq’s $1.00 minimum bid price requirement.
The new rule modifies the application of the bid price compliance period so that when a company institutes a reverse stock split to regain compliance but as a result, falls out of compliance with another Nasdaq listing requirement, it is not deemed to have corrected the initial bid price issue until it cures the resulting deficiency. Unlike in the past, there is no longer the possibility of an extended grace period to regain compliance if another Nasdaq listing violation arises as a result of a reverse stock split.
On September 30, 2024, the New York Stock Exchange proposed a similar amendment of its listing requirements to the SEC, which is still under review by the SEC.
Background
Under Nasdaq Rule 5550(a)(2) and Rule 5450(a)(1), Nasdaq-listed companies are required to maintain a minimum bid price of at least $1.00 per share. If the bid price remains below $1.00 per share for 30 consecutive business days, the company is deemed noncompliant, and Nasdaq will send the company a deficiency notice. The company has 180 calendar days from the date of the deficiency notice to regain compliance by maintaining a minimum bid price above $1.00 for at least 10 consecutive business days.
Many companies that fail to meet the minimum bid price requirement choose to conduct reverse stock splits to increase their share price by consolidating shares. However, as a result of the reverse split, the number of publicly held shares and public shareholders could be reduced. This may lead to noncompliance with other Nasdaq listing requirements, such as maintaining a minimum of 500,000 publicly held shares and 300 public shareholders.
Previously, companies that found themselves noncompliant for a different Nasdaq listing requirement as a result of a reverse split could receive additional time to resolve these secondary deficiencies, extending the total compliance process beyond the initial minimum bid price deficiency period of 180 days.
New Nasdaq Rule
Under the new rule, if a Nasdaq-listed company takes an action, such a reverse split, to comply with the minimum bid price requirement, and it leads to noncompliance with another listing requirement, the company will still not be considered to have regained compliance with the minimum bid price requirement. No new compliance period will be offered to the company for the subsequent deficiency.
The company will continue to be considered noncompliant until (1) the other deficiency is cured; and (2) the company thereafter meets the minimum bid requirement for at least 10 consecutive business days.
For example, if a company uses a reverse stock split to bring its 10-day closing bid price above $1.00, but consequently has fewer than 500,000 publicly held shares, it will still be considered noncompliant with Nasdaq’s minimum bid price listing requirement and must rectify this secondary deficiency within the original 180-day period that began tolling when the bid price fell below $1.00. If the company does not regain compliance with both listing requirements during the initial bid price compliance period, Nasdaq will issue a Staff Delisting Determination Letter.
Next Steps
Nasdaq-listed companies contemplating reverse stock splits should consider how a reverse stock split would impact the following continued listing requirements to avoid noncompliance:
- Maintaining at least two active market makers.
- Maintaining at least 300 public shareholders.
- Maintaining at least 500,000 publicly held shares.
- Maintaining a value of publicly held shares of at least $1 million.
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