Document ID: SEC-2021-0763-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-05-26T04:00Z

[Federal Register Volume 86, Number 100 (Wednesday, May 26, 2021)]
[Notices]
[Pages 28407-28410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11099]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91961; File No. SR-NASDAQ-2020-062]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend Listing Rules Applicable to Special Purpose Acquisition Companies 
Whose Business Plan Is To Complete One or More Business Combinations

May 20, 2021.

I. Introduction

    On September 3, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its listing rules to 
permit companies whose business plan is to complete one or more 
business combinations (``SPACs'' or ``Acquisition Companies'') 15 
calendar days following the closing of a business combination to 
demonstrate that the SPAC has satisfied the applicable round lot 
shareholder requirement. The proposed rule change was published for 
comment in the Federal Register on September 22, 2020.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89897 (September 16, 
2020), 85 FR 59574 (``Notice''). Comments received on the proposal 
are available on the Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2020-062/srnasdaq2020062.htm. See also, infra, 
note 8.
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    On November 4, 2020, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\

[[Page 28408]]

On December 16, 2020, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Exchange Act \6\ to determine whether to 
approve or disapprove the proposed rule change (``OIP)''.\7\ On 
February 25, 2021, the Exchange filed Amendment No. 1 to the proposed 
rule change, which superseded the proposed rule change as originally 
filed. Amendment No. 1 was published for comment in the Federal 
Register on March 16, 2021.\8\ On March 18, 2021, the Commission 
designated a longer period for Commission action on the proposed rule 
change.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90340, 85 FR 71704 
(November 10, 2020). The Commission designated December 21, 2020, as 
the date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 90682, 85 FR 83113 
(December 21, 2020).
    \8\ See Securities Exchange Act Release No. 91294 (March 10, 
2021), 86 FR 14508 (March 16, 2021) (``Notice II''). Comments 
received in response to Amendment No. 1 to the proposal are 
available on the Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2020-062/srnasdaq2020062.htm.
    \9\ See Securities Exchange Act Release No. 91348, 86 FR 15747 
(March 24, 2021).
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 1, because, as discussed below, Nasdaq has not met its 
burden under the Exchange Act and the Commission's Rules of Practice to 
demonstrate that its proposal is consistent with the requirements of 
Section 6(b)(5) of the Exchange Act, and, in particular, the 
requirement that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest.\10\
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    \10\ 15 U.S.C. 78f(b)(5).
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II. Description of the Proposal, as Modified by Amendment No. 1

    A SPAC is a company with no operations whose business plan is to 
complete an initial public offering and then subsequently engage in a 
merger or acquisition with one or more unidentified operating companies 
within a specific period of time.\11\ Nasdaq listing rules, among other 
things, require a SPAC to keep at least 90% of the proceeds from its 
initial public offering in an escrow account,\12\ and to complete one 
or more business combinations having an aggregate fair market value of 
at least 80% of the value of the escrow account within a specified 
period of time.\13\ Following each business combination, the combined 
company must meet the requirements for initial listing on Nasdaq \14\ 
including those requiring a minimum number of round lot shareholders 
(the ``Shareholder Requirement'').\15\ If the combined company does not 
meet all the initial listing requirements following a business 
combination, Nasdaq listing rules currently provide that Nasdaq staff 
will issue a Staff Delisting Determination.\16\
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    \11\ See Securities Exchange Act Release No. 58228 (July 25, 
2008), 73 FR 44794 (July 31, 2008) (order approving the predecessor 
rule to IM-5101-2).
    \12\ See Nasdaq IM-5101-2(a).
    \13\ See Nasdaq IM-5101-2(b).
    \14\ See Nasdaq IM-5101-2(d). If a shareholder vote on the 
business combination is held, public shareholders voting against a 
business combination must have the right to convert their shares of 
common stock into a pro rata share of the aggregate amount then in 
the escrow account (net of taxes payable and amounts distributed to 
management for working capital purposes) if the business combination 
is approved and consummated. Id. If a shareholder vote on the 
business combination is not held, the company must provide all 
shareholders with the opportunity to redeem their shares for cash 
equal to their pro rata share of the aggregate amount then in the 
deposit account (net of taxes payable and amounts distributed to 
management for working capital purposes). See Nasdaq IM-5101-2(e).
    \15\ Nasdaq has three listing tiers, each of which require, 
among other things, a company to have a minimum number of 
shareholders in order to initially list on the Exchange. See Nasdaq 
Rule 5315 (f)(1) (on Global Select, an issuer must have at least 550 
Total Holders with a minimum average monthly trading volume over the 
prior 12 months, 2,200 Total Holders, or 450 Round Lot Holders with 
50% of holders holding Unrestricted Securities); Nasdaq Rule 
5405(a)(3) (on Global, an issuer must have at least 400 Round Lot 
Holders with 50% of holders holding Unrestricted Securities); and 
Nasdaq Rule 5505(a)(3) (on Capital, an issuer must have at least 300 
Round Lot Holders with at least 50% of holders holding Unrestricted 
Securities.
    \16\ See Nasdaq IM-5101-2(d).
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    In its proposal, Nasdaq acknowledges that its existing rules 
require that, ``following each business combination'' with a SPAC, the 
resulting company must satisfy all initial listing requirements. Nasdaq 
states, however, that the rule does not provide a timetable for the 
company to demonstrate that it satisfies those requirements. 
Accordingly, Nasdaq proposes to modify the rule to specify if the SPAC 
demonstrates that it will satisfy all requirements except the 
applicable Shareholder Requirement, then the SPAC will receive 15 
calendar days following the closing to demonstrate that it satisfied 
the applicable Shareholder Requirement immediately following the 
transaction's closing. In addition, Nasdaq proposes to require that a 
company relying on this 15-day grace period publicly announce, prior to 
the business combination, on a Form 8-K, where required by SEC rules, 
or by issuing a press release, that it has not yet demonstrated 
compliance with the Shareholder Requirement and is subject to delisting 
if it cannot do so within the requisite time frame.\17\ Finally, Nasdaq 
proposes to halt trading in the securities if the company fails to make 
this public announcement.\18\
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    \17\ See Notice II of Amendment No. 1, supra note 8.
    \18\ See id.
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    Nasdaq states that it ordinarily determines compliance with the 
Shareholder Requirement at the time of a business combination by 
reviewing a company's public disclosures and information provided by 
the company about the transaction.\19\ According to Nasdaq, if it 
cannot determine compliance using public information, it will typically 
request the company to provide additional information such as 
registered shareholder lists from the company's transfer agent, data 
from Cede & Co. about shares held in street name, or data from broker-
dealers and third parties that distribute information such as proxy 
materials for the broker-dealers. If the company can provide 
information demonstrating compliance before the business combination 
closes, Nasdaq states that no further information would be required.
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    \19\ Nasdaq states, for example, that the merger agreement may 
result in the Acquisition Company issuing a round lot of shares to 
more than 300 holders of the target of the business combination at 
closing.
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    However, Nasdaq states that it has observed that in some cases it 
can be difficult for a company to obtain evidence demonstrating the 
number of shareholders that it has or will have following a business 
combination. Nasdaq states that shareholders in a SPAC may redeem or 
tender their shares until just before the time of the business 
combination, and the SPAC may not know how many shareholders will 
choose to redeem until very close to the consummation of the business 
combination.\20\ Nasdaq states that this could impact its ability to 
determine compliance before the business combination closes, in cases 
where the number of round lot shareholders is close to the applicable 
requirement.
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    \20\ The Exchange notes that SPACs are unlike other newly 
listing companies which do not face redemptions and are not already 
listed and trading at the time they must demonstrate compliance.
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    Nasdaq states that under its proposal the SPAC must still 
demonstrate that it satisfied the round lot shareholder requirement 
immediately following the business combination, and that the proposal 
merely would give the SPAC 15 calendar days to provide evidence that it 
had met the Shareholder Requirement. Nasdaq also states that it 
believes that the proposed public disclosure requirement will help 
provide transparency to investors about the status of the company 
during the additional time period it has to evidence

[[Page 28409]]

compliance with the Shareholder Requirement.\21\
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    \21\ See Notice II of Amendment No. 1, supra note 8.
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    Nasdaq believes that the proposal ``balances the burden placed on 
the Acquisition Company to obtain accurate shareholder information for 
the new entity and the need to ensure that a company that does not 
satisfy the initial listing requirements following a business 
combination enters the delisting process promptly.'' \22\ Nasdaq states 
that if the company does not evidence compliance within the proposed 
time period, Nasdaq staff would issue a Staff Delisting Determination, 
which the company could then appeal to an independent hearings 
panel.\23\
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    \22\ The Exchange also states that shareholders of the SPAC 
would be harmed if Nasdaq issued a delisting determination at a time 
when the company did, in fact, satisfy all initial listing 
requirements but could not yet provide proof.
    \23\ The Exchange has also proposed to eliminate a duplicative 
paragraph and add a new subsection enumeration to its existing rule.
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    The Commission received two comment letters opposing the proposal 
from the Council of Institutional Investors.\24\ The commenter stated 
that additional information from Nasdaq in response to the OIP would be 
helpful in determining whether the proposed rule change is consistent 
with the Exchange Act, and questioned whether a loosening of SPAC 
listing standards is consistent with the protection of investors and 
the public interest.\25\ More broadly, the commenter referenced a 
recent study that it believes finds that SPACs and their officers and 
directors face limited liability to investors for material 
misstatements in, or omissions from, their registration statements, and 
that SPAC structures generally create losses for long-term 
investors.\26\ Finally, the commenter referenced the study's suggestion 
that the regulatory treatment for SPACs should be generally equivalent 
to that for direct listings and questioned whether Nasdaq's proposal 
would lead to a pro-SPAC bias.\27\ The Exchange responded to CII Letter 
I that the proposal would not loosen SPAC listing standards because 
under its proposal SPACs would still have to comply with the 
Shareholder Requirement at the time of the business combination and 
would just be provided an additional 15 days after completing their 
business combination to demonstrate such compliance.\28\ The Exchange 
further stated that its proposal will provide transparency and does not 
pose any additional risk to the protection of shareholders.\29\
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    \24\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (January 7, 2021) (``CII Letter 
I''); Letter from Jeffrey P. Mahoney, General Counsel, Council of 
Institutional Investors (March 25, 2021) (``CII Letter II'').
    \25\ See CII Letter I, supra note 24.
    \26\ Id.
    \27\ See CII Letter II, supra note 24.
    \28\ See Letter from Arnold Golub, Vice President and Deputy 
General Counsel, (February 25, 2021) (``Nasdaq Letter'').
    \29\ Id.
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III. Discussion and Commission Findings

    The Commission must consider whether Nasdaq's proposal is 
consistent with the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, including 
Section 6(b)(5) of the Exchange Act, which requires, in relevant part, 
that the rules of a national securities exchange be designed ``to 
prevent fraudulent and manipulative acts and practices'' and ``to 
protect investors and the public interest.'' \30\ Under the 
Commission's Rules of Practice, the ``burden to demonstrate that a 
proposed rule change is consistent with the Exchange Act and the rules 
and regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \31\
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    \30\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78(f)(b)(5).
    \31\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\32\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\33\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\34\
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    \32\ See id.
    \33\ See id.
    \34\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    The Commission has consistently recognized the importance of the 
minimum number of holders and other similar requirements stating that 
such listing standards help ensure that exchange listed securities have 
sufficient public float, investor base, and trading interest to provide 
the depth and liquidity necessary to promote fair and orderly 
markets.\35\ The Shareholder Requirement also helps to ensure that 
trading in exchange-listed securities is not susceptible to 
manipulation.\36\
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    \35\ The Commission considers distribution standards, including 
minimum number of holders and number of shares outstanding 
requirements, to be important means of promoting fair and orderly 
markets. See, e.g., Securities Exchange Act Release No. 57785 (May 
6, 2008), 73 FR 27597 (May 13, 2008) (SR-NYSE-2008-17) (stating that 
the distribution standards, which includes exchange holder 
requirements ``. . . should help to ensure that the [Acquisition 
Companies'] securities have sufficient public float, investor base, 
and liquidity to promote fair and orderly markets''); Securities 
Exchange Act Release No. 86117 (June 14, 2019), 84 FR 28879 (June 
20, 2018) (SR-NYSE-2018-46) (disapproving a proposal to reduce the 
minimum number of public holders continued listing requirement 
applicable to Acquisition Companies from 300 to 100).
    \36\ See, e.g., Securities Exchange Act Release Nos. 91236 
(March 2, 2021), 86 FR 13414 (March 8, 2021) (SR-NYSEArca-2020-56) 
and 90819 (December 29, 2020), 86 FR 332 (January 5, 2021) (SR-
CboeBZX-2020-036).
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    As discussed above, Nasdaq is proposing to: (1) Allow a SPAC 15 
calendar days following the closing of a business combination to 
demonstrate that it satisfied the applicable Shareholder Requirement 
immediately following the transaction's closing, and (2) require a SPAC 
relying on the additional 15 day period to publicly announce, prior to 
the listing of the combined company, that it has not demonstrated 
compliance with the Shareholder Requirement and is subject to delisting 
if it cannot do so within the requisite time period. Nasdaq states that 
it can be difficult for a SPAC to obtain evidence demonstrating the 
number of holders the SPAC will have following its business combination 
because SPAC shareholders have the right to redeem or tender their 
shares until just before the time of such business combination. 
Further, Nasdaq states that, given the uncertainty around the number of 
redemptions and ongoing trading through the closing of the business 
combination, it may not be possible for

[[Page 28410]]

the SPAC to definitively establish that it will satisfy the Shareholder 
Requirement before completing the combination. In addition, Nasdaq 
states that, while other companies cannot become listed until they 
demonstrate compliance with the Shareholder Requirement, SPACs 
completing business combinations are already listed and, without more 
time, would be the only type of company to face immediate delisting as 
a result of these difficulties. Finally, Nasdaq states that 21 of the 
49 SPAC business combinations processed by Nasdaq during 2019 and 2020 
needed additional time to demonstrate compliance with the Shareholder 
Requirement.
    Nasdaq emphasizes that, under its proposal, the SPAC must still 
demonstrate that it satisfied the applicable Shareholder Requirement 
immediately following the business combination, and is simply being 
provided 15 calendar days to provide evidence that it did. However, 
Nasdaq has not explained the extent to which the 21 SPACs that needed 
additional time to demonstrate compliance in 2019 and 2020 actually 
were in compliance with the shareholder requirement immediately 
following the closing of the business combination, or instead were not 
in compliance and needed additional time to acquire the requisite 
number of shareholders. If the former, Nasdaq has not explained why, 
like newly-listed companies in advance of their public offerings, the 
SPAC could not provide preliminary evidence of its compliance with the 
Shareholder Requirement in advance of the business combination, or why 
last minute shareholder redemptions would impact that evidence. If the 
latter, then the SPACs in fact were not in compliance with the 
Shareholder Requirement at the time of the business combination, and do 
not provide support for Nasdaq's proposal, which is premised on the 
assumption that such SPACs simply needed additional time to evidence 
their compliance.
    More broadly, Nasdaq does not explain how its proposal addresses 
the regulatory risks to fair and orderly markets, investor protection 
and the public interest, and the manipulation concerns if companies 
initially list, and can continue to trade, on the Exchange without 
meeting the Shareholder Requirement. Notably, and as discussed in the 
OIP, Nasdaq has not addressed the risk that, by waiting for SPACs to 
demonstrate compliance with the Shareholder Requirement until after the 
closing of the business combination, non-compliant companies could be 
listed on the Exchange despite not meeting initial listing standards, 
and have their securities continue to trade until the delisting process 
has been completed. In such circumstances, a SPAC could complete a 
business combination and very soon thereafter be subject to delisting 
proceedings, and during such time its securities may continue to trade 
with a number of holders that is substantially less than the required 
minimum raising concerns about the maintenance of fair and orderly 
markets and investor protection.
    While Nasdaq has amended its proposal to require certain public 
disclosure, the Commission does not believe the disclosure required by 
the proposed rule adequately addresses the potential risks associated 
with trading during a time period in which the minimum number of round 
lot shareholders may not be present, nor has Nasdaq explained why 
subjecting shareholders to this potential risk is consistent with the 
protection of investors and the public interest, and the other 
requirements of Section 6(b)(5) of the Exchange Act.\37\
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    \37\ The Commission notes that the commenter continued to oppose 
the proposal after Nasdaq amended it to require this public 
disclosure. See CII Letter II, supra note 24.
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    As stated above, under the Commission's Rules of Practice, the 
``burden to demonstrate that a proposed rule change is consistent with 
the Exchange Act and the rules and regulations issued thereunder . . . 
is on the self-regulatory organization [`SRO'] that proposed the rule 
change.'' \38\ The description of a proposed rule change, its purpose 
and operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding, and any failure of an SRO 
to provide this information may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\39\ For the reasons discussed above, the Commission 
concludes that, because Nasdaq has not demonstrated that its proposal 
is designed to prevent fraudulent and manipulative acts and practices 
or to protect investors and the public interest, Nasdaq has not met its 
burden to demonstrate that its proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular Section 6(b)(5) of the Exchange Act.\40\ For this reason, 
the Commission must disapprove the proposal.
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    \38\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \39\ See id.
    \40\ In disapproving this proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act,\41\ that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.\42\
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    \41\ 15 U.S.C. 78s(b)(2).
    \42\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-Nasdaq-2020-062 is 
disapproved.
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    \43\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-11099 Filed 5-25-21; 8:45 am]
BILLING CODE 8011-01-P