Document ID: SEC-2021-0226-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-02-16T05:00Z

[Federal Register Volume 86, Number 29 (Tuesday, February 16, 2021)]
[Notices]
[Pages 9549-9555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02993]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91089; File No. SR-NASDAQ-2021-007]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt Additional Initial 
Listing Criteria for Companies Primarily Operating in Jurisdictions 
That Do Not Provide the PCAOB With the Ability To Inspect Public 
Accounting Firms

February 9, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 1, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt additional initial listing criteria 
for companies primarily operating in jurisdictions that do not 
currently provide the PCAOB with the ability to inspect public 
accounting firms.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As described below, Nasdaq proposes to adopt additional initial 
listing criteria for companies primarily operating in jurisdictions 
that do not currently provide the Public Company Accounting Oversight 
Board (``PCAOB'') with the ability to inspect public accounting 
firms.\3\
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    \3\ Nasdaq proposed a similar rule change in May 2020, which was 
withdrawn by Nasdaq on February, 1, 2021. Securities Exchange Act 
Release No. 89027 (June 8, 2020), 85 FR 35962 (June 12, 2020) (SR-
Nasdaq-2020-027). The Commission issued an Order Instituting 
Proceedings to Determine Whether to Approve or Disapprove this 
proposal. Securities Exchange Act Release No. 89799 (September 9, 
2020), 85 FR 57282 (September 15, 2020). This revised proposal 
addresses the concerns raised by the Commission in its Order.
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    Nasdaq rules \4\ and federal securities laws \5\ require a 
company's financial statements included in its initial registration 
statement or annual report to be audited by an independent public 
accountant that is registered with the PCAOB. Company management is 
responsible for preparing the company's financial statements and for 
establishing and maintaining disclosure controls and procedures and 
internal control over financial reporting. The company's auditor, based 
on its independent audit of the evidence supporting the amounts and 
disclosures in the financial statements, expresses an opinion on 
whether the financial statements present fairly, in all material 
respects, the company's financial position, results of operations and 
cash flows. ``To form an appropriate basis for expressing an opinion on 
the financial statements, the auditor must plan and perform the audit 
to obtain reasonable assurance about whether the financial statements 
are free of material misstatement due to error or fraud.'' \6\
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    \4\ See Rule 5210(b) (``Each Company applying for initial 
listing must be audited by an independent public accountant that is 
registered as a public accounting firm with the Public Company 
Accounting Oversight Board, as provided for in Section 102 of the 
Sarbanes-Oxley Act of 2002 [15 U.S.C. 7212].'') and Rule 5250(c)(3) 
(``Each listed Company shall be audited by an independent public 
accountant that is registered as a public accounting firm with the 
Public Company Accounting Oversight Board, as provided for in 
Section 102 of the Sarbanes-Oxley Act of 2002 [15 U.S.C. 7212].'').
    \5\ See Section 4100--Qualifications of Accountants, SEC 
Financial Reporting Manual (June 30, 2009), available at https://www.sec.gov/corpfin/cf-manual/topic-4/.
    \6\ See PCAOB Auditing Standard 1101.03--Audit Risk, available 
at https://pcaobus.org/Standards/Auditing/Pages/AS1101.aspx.
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    The auditor, in turn, is normally subject to inspection by the 
PCAOB,

[[Page 9550]]

which assesses compliance with PCAOB and SEC rules and professional 
standards in connection with the auditor's performance of audits. 
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According to the PCAOB,

PCAOB inspections may result in the identification of deficiencies 
in one or more of an audit firm's audits of issuers and/or in its 
quality control procedures which, in turn, can result in an audit 
firm carrying out additional procedures that should have been 
performed already at the time of the audit. Those procedures have 
sometimes led to the audited public company having to revise and 
refile its financial statements or its assessment of the 
effectiveness of its internal control over financial reporting. In 
addition, through the quality control remediation portion of the 
inspection process, inspected firms identify and implement practices 
and procedures to improve future audit quality.\7\
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    \7\ See Public Company Accounting Oversight Board, Public 
Companies that are Audit Clients of PCAOB-Registered Firms from Non-
U.S. Jurisdictions where the PCAOB is Denied Access to Conduct 
Inspections (October 1, 2020), available at https://pcaobus.org/oversight/international/denied-access-to-inspections.

    Nasdaq and investors rely on the work of auditors to provide 
reasonable assurances that the financial statements provided by a 
company are free of material misstatements. Nasdaq and investors 
further rely on the PCAOB's critical role in overseeing the quality of 
the auditor's work. The Chairman and the Chief Accountant of the 
Commission, along with the Chairman of the PCAOB, have raised concerns 
that national barriers on access to information can impede effective 
regulatory oversight of U.S.-listed companies with operations in 
certain countries, including the PCAOB's inability to inspect the audit 
work and practices of auditors in those countries.\8\ Similar concerns 
have been expressed by Members of Congress,\9\ the State Department 
\10\ and the President's Working Group on Financial Markets.\11\ In 
particular, the PCAOB is currently prevented from inspecting the audit 
work and practices of PCAOB-registered auditors in Belgium, France, 
China and Hong Kong (to the extent their audit clients have operations 
in mainland China).\12\
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    \8\ See SEC Chairman Jay Clayton, SEC Chief Accountant Wes 
Bricker and PCAOB Chairman William D. Duhnke III, Statement on the 
Vital Role of Audit Quality and Regulatory Access to Audit and Other 
Information Internationally--Discussion of Current Information 
Access Challenges with Respect to U.S.-listed Companies with 
Significant Operations in China (December 7, 2018), available at 
https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other (``Positions 
taken by some foreign authorities currently prevent or significantly 
impair the PCAOB's ability to inspect non-U.S. audit firms in 
certain countries, even though these firms are registered with the 
PCAOB.''). On April 21, 2020, these concerns were reiterated by the 
Chairman and the Chief Accountant of the Commission, along with the 
Chairman of the PCAOB and the Directors of the SEC Divisions of 
Corporation Finance and Investment Management. See SEC Chairman Jay 
Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant 
Sagar Teotia, SEC Division of Corporation Finance Director William 
Hinman, SEC Division of Investment Management Director Dalia Blass, 
Emerging Market Investments Entail Significant Disclosure, Financial 
Reporting and Other Risks; Remedies are Limited (April 21, 2020), 
available at https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting. See also Chairman Jay 
Clayton's Statement at the SEC's Emerging Markets Roundtable (July 
9, 2020), available at https://www.sec.gov/news/public-statement/clayton-emerging-markets-roundtable-2020-07-09.
    \9\ See Congress Passes Legislation to De-List Chinese Companies 
Unless U.S. Has Access to Audit Workpapers (December 2, 2020), 
available at https://sherman.house.gov/media-center/press-releases/congress-passes-legislation-to-de-list-chinese-companies-unless-us-has; see also SEC Chairman Jay Clayton, Statement after the 
Enactment of the Holding Foreign Companies Accountable Act (December 
18, 2020), available at https://www.sec.gov/news/public-statement/clayton-hfcaa-2020-12#_ftn5.
    \10\ See Press Statement of Michael R. Pompeo, Secretary of 
State, New Nasdaq Restrictions Affecting Listing of Chinese 
Companies (June 4, 2020), available at https://www.state.gov/new-nasdaq-restrictions-affecting-listing-of-chinese-companies/.
    \11\ See President's Working Group on Financial Markets: Report 
on Protecting United States Investors from Significant Risks from 
Chinese Companies (July 24, 2020), available at https://home.treasury.gov/system/files/136/PWG-Report-on-Protecting-United-States-Investors-from-Significant-Risks-from-Chinese-Companies.pdf.
    \12\ See supra note 7. The PCAOB notes that ``[t]he position 
taken by authorities in mainland China may in some circumstances 
cause a registered firm located in another jurisdiction to attempt 
to resist PCAOB inspection of public company audit work that the 
firm has performed relating to the company's operations in mainland 
China. Only in mainland China and Hong Kong, however, is the 
position of the Chinese authorities effectively an obstacle to 
inspection of all, or nearly all, registered firms in the 
jurisdiction.'' In addition, the PCAOB's cooperative arrangement 
with the French audit authority expired in December 2019, preventing 
inspections of registered firms in France until a new arrangement is 
concluded. According to the PCAOB, it expects to enter into 
bilateral cooperative arrangements soon ``that will permit the PCAOB 
to commence inspections in Belgium and resume inspections in 
France.''
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    Nasdaq shares these concerns and believes that accurate financial 
statement disclosure is critical for investors to make informed 
investment decisions. Nasdaq believes the lack of transparency from 
certain markets raises concerns about the accuracy of disclosures, 
accountability, and access to information, particularly when a company 
is based in a jurisdiction that does not provide the PCAOB with access 
to conduct inspections of public accounting firms that audit Nasdaq-
listed companies (a ``Restrictive Market'').
    Nasdaq's listing requirements include a number of criteria which, 
in the aggregate, are designed to ensure that a security listed on 
Nasdaq has sufficient liquidity and public interest to support a 
listing on a U.S. national securities exchange. These requirements are 
intended to ensure that there are sufficient shares available for 
trading to facilitate proper price discovery in the secondary market. 
Nasdaq believes that concerns about the accuracy of disclosures, 
accountability, and access to information can be compounded when a 
company from a Restrictive Market lists on Nasdaq through an initial 
public offering (``IPO'') or business combination with a small offering 
size or a low public float percentage because such companies may not 
attract market attention and develop sufficient public float, investor 
base, and trading interest to provide the depth and liquidity necessary 
to promote fair and orderly trading. As a result, the securities may 
trade infrequently, in a more volatile manner and with a wider bid-ask 
spread, all of which may result in trading at a price that may not 
reflect their true market value. In addition, foreign issuers are more 
likely to issue a portion of an offering to investors in their home 
country, which raises concerns that such investors will not contribute 
to the liquidity of the security in the U.S. secondary market.
    Less liquid securities may be more susceptible to price 
manipulation, as a relatively small amount of trading activity can have 
an inordinate effect on market prices. The risk of price manipulation 
due to insider trading is more acute when a company principally 
administers its business in a Restrictive Market (a ``Restrictive 
Market Company''), particularly if a company's financial statements 
contain undetected material misstatements due to error or fraud and the 
PCAOB is unable to inspect the company's auditor to determine if it 
complied with PCAOB and SEC rules and professional standards in 
connection with its performance of audits. The risk to investors in 
such cases may be compounded because regulatory investigations into 
price manipulation, insider trading and compliance concerns may be 
impeded and investor protections and remedies may be limited in such 
cases due to obstacles encountered by U.S. authorities in bringing or 
enforcing actions against the companies and insiders.\13\
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    \13\ See SEC Chairman Jay Clayton, PCAOB Chairman William D. 
Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of 
Corporation Finance Director William Hinman, SEC Division of 
Investment Management Director Dalia Blass, Emerging Market 
Investments Entail Significant Disclosure, Financial Reporting and 
Other Risks; Remedies are Limited (April 21, 2020), available at 
https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting; see also SEC Division of 
Corporation Finance, CF Disclosure Guidance: Topic No. 10: 
Disclosure Considerations for China-Based Issuers (November 23, 
2020), available at https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuers.

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[[Page 9551]]

    Currently, Nasdaq may rely upon its discretionary authority 
provided under Rule 5101 \14\ to deny initial listing or to apply 
additional and more stringent criteria when Nasdaq is concerned that a 
small offering size for an IPO may not reflect the company's initial 
valuation or ensure sufficient liquidity to support trading in the 
secondary market. Nasdaq is proposing to adopt new Rules 5210(k)(i) and 
(ii) that would require a minimum offering size or public float for 
Restrictive Market Companies listing on Nasdaq in connection with an 
IPO or a business combination (as described in Rule 5110(a) or IM-5101-
2). Nasdaq is also proposing to adopt a new Rule 5210(k)(iii) to 
provide that Restrictive Market Companies would be permitted to list on 
the Nasdaq Global Select or Nasdaq Global Markets if they are listing 
in connection with a Direct Listing (as defined in IM-5315-1), but 
would not be permitted to list on the Nasdaq Capital Market, which has 
lower requirements for Unrestricted Publicly Held Shares, in connection 
with a Direct Listing.
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    \14\ Listing Rule 5101 provides Nasdaq with broad discretionary 
authority over the initial and continued listing of securities in 
Nasdaq in order to maintain the quality of and public confidence in 
its market, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and to 
protect investors and the public interest. Nasdaq may use such 
discretion to deny initial listing, apply additional or more 
stringent criteria for the initial or continued listing of 
particular securities, or suspend or delist particular securities 
based on any event, condition, or circumstance that exists or occurs 
that makes initial or continued listing of the securities on Nasdaq 
inadvisable or unwarranted in the opinion of Nasdaq, even though the 
securities meet all enumerated criteria for initial or continued 
listing on Nasdaq.
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I. Definition of Restrictive Market

    Nasdaq proposes to adopt a new definition of Restrictive Market in 
Rule 5005(a)(37) to define a Restrictive Market as a jurisdiction that 
does not provide the PCAOB with access to conduct inspections of public 
accounting firms that audit Nasdaq-listed companies. This is similar to 
the President's Working Group on Financial Markets definition of ``Non-
Cooperating Jurisdictions,'' which observed that:

Certain jurisdictions, however, do not currently provide the PCAOB 
with the ability to inspect public accounting firms, including 
sufficient access to conduct inspections and investigations of 
audits of public companies, or otherwise do not cooperate with U.S. 
regulators (``Non-Cooperating Jurisdictions,'' or ``NCJs''). The 
PCAOB has been unable to fulfill its statutory mandate under 
Sarbanes-Oxley to inspect audit firms in NCJs, including those in 
China, potentially exposing investors in U.S. capital markets to 
significant risks. The PCAOB has been unable to fulfill this mandate 
meaningfully with respect to audit firms based in China for more 
than a decade.\15\
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    \15\ See supra note 11 at 2.

    The PCAOB maintains a map of where it can and cannot conduct 
oversight activities on its website.\16\ In addition, the PCAOB 
publishes a list identifying the public companies for which a PCAOB-
registered public accounting firm signed and issued an audit report and 
is located in a jurisdiction where obstacles to PCAOB inspections 
exist.\17\
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    \16\ See Public Company Accounting Oversight Board, Oversight: 
International (last accessed January 29, 2020), available at https://pcaobus.org/oversight/international.
    \17\ See supra note 7.
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    Nasdaq will consider a company's business to be principally 
administered in a Restrictive Market if: (i) The company's books and 
records are located in that jurisdiction; (ii) at least 50% of the 
company's assets are located in such jurisdiction; or (iii) at least 
50% of the company's revenues are derived from such jurisdiction. 
Nasdaq also proposes to renumber the remainder of Rule 5005(a) to 
ensure consistency in its rulebook.
    For example, Company X's books and records could be located in 
Country Y, which is not a Restrictive Market, while 90% of its revenues 
are derived from operations in Country Z, which is a Restrictive 
Market. If Company X applies to list its Primary Equity Security on 
Nasdaq in connection with an IPO, Nasdaq would consider Company X's 
business to be principally administered in Country Z, and Company X 
would therefore be subject to the proposed additional requirements 
applicable to a Restrictive Market Company. Conversely, Company A's 
books and records could be located in Country B, which is a Restrictive 
Market, but 90% of its revenues are derived from Country C, which is 
not a Restrictive Market. Nasdaq would consider Company A's business to 
be principally administered in Country B, and Company A would therefore 
be subject to the proposed additional requirements applicable to a 
Restrictive Market Company.

II. Minimum Offering Size or Public Float Percentage for an IPO

    As proposed, Rule 5210(k)(i) would require a company that is 
listing its Primary Equity Security \18\ on Nasdaq in connection with 
its IPO, and that principally administers its business in a Restrictive 
Market, to offer a minimum amount of securities in a Firm Commitment 
Offering \19\ in the U.S. to Public Holders \20\ that: (a) Will result 
in gross proceeds to the company of at least $25 million; or (b) will 
represent at least 25% of the company's post-offering Market Value \21\ 
of Listed Securities,\22\ whichever is lower. For example, Company X is 
applying to list on Nasdaq Global Market. Company X principally 
administers its business in a Restrictive Market and its post-offering 
Market Value of Listed Securities is expected to be $75,000,000. Since 
25% of $75,000,000 is $18,750,000, which is lower than $25,000,000, it 
would be eligible to list under the proposed rule based on a Firm 
Commitment Offering in the U.S. to Public Holders of at least 
$18,750,000. However, Company X would also need to comply with the 
other applicable listing requirements of the Nasdaq Global Market, 
including a Market Value of Unrestricted Publicly Held Shares \23\ of 
at least $8 million.\24\
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    \18\ Rule 5005(a)(33) defines ``Primary Equity Security'' as ``a 
Company's first class of Common Stock, Ordinary Shares, Shares or 
Certificates of Beneficial Interest of Trust, Limited Partnership 
Interests or American Depositary Receipts (ADR) or Shares (ADS).''
    \19\ Rule 5005(a)(17) defines ``Firm Commitment Offering'' as 
``an offering of securities by participants in a selling syndicate 
under an agreement that imposes a financial commitment on 
participants in such syndicate to purchase such securities.''
    \20\ Rule 5005(a)(36) defines ``Public Holders'' as ``holders of 
a security that includes both beneficial holders and holders of 
record, but does not include any holder who is, either directly or 
indirectly, an Executive Officer, director, or the beneficial holder 
of more than 10% of the total shares outstanding.''
    \21\ Rule 5005(a)(23) defines ``Market Value'' as ``the 
consolidated closing bid price multiplied by the measure to be 
valued (e.g., a Company's Market Value of Publicly Held Shares is 
equal to the consolidated closing bid price multiplied by a 
Company's Publicly Held Shares).''
    \22\ Rule 5005(a)(22) defines ``Listed Securities'' as 
``securities listed on Nasdaq or another national securities 
exchange.''
    \23\ See Rule 5005(a)(45) (definition of ``Unrestricted Publicly 
Held Shares''), Rule 5005(a)(46) (definition of ``Unrestricted 
Securities''), and Rule 5005(a)(37) (definition of ``Restricted 
Securities'').
    \24\ See Rule 5405(b)(1)(C).
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    In contrast, Company Y, which also principally administers its 
business in a Restrictive Market, is applying to list on the Nasdaq 
Global Select Market and its post-offering Market Value of Listed 
Securities is expected to be $200,000,000. Since 25% of

[[Page 9552]]

$200,000,000 is $50,000,000, which is higher than $25,000,000, it would 
be eligible to list under the proposed rule based on a Firm Commitment 
Offering in the U.S. to Public Holders that will result in gross 
proceeds of at least $25,000,000. However, Company Y would also need to 
comply with the other applicable listing requirements of the Nasdaq 
Global Select Market, including a Market Value of Unrestricted Publicly 
Held Shares of at least $45 million.\25\
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    \25\ See Rule 5315(f)(2)(C).
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    The Exchange believes that the proposal to require a Restrictive 
Market Company conducting an IPO to offer a minimum amount of 
securities in the U.S. to Public Holders in a Firm Commitment Offering 
will provide greater support for the company's price, as determined 
through the offering, and will help assure that there will be 
sufficient liquidity, U.S. investor interest and distribution to 
support price discovery once a security is listed. Nasdaq believes 
there is a risk that substantial participation by foreign investors in 
an offering, combined with insiders retaining significant ownership, 
does not promote sufficient investor base and trading interest to 
support trading in the secondary market. The risk to U.S. investors is 
compounded when a company is located in a Restrictive Market due to 
restrictions on the PCAOB's ability to inspect the audit work and 
practices of auditors in those countries, which may be accompanied by 
limitations on the ability of U.S. regulators to conduct investigations 
or bring or enforce actions against the company and non-U.S. persons. 
As a result, there are increased concerns about the accuracy of 
disclosures, accountability and access to information.
    Further, the Exchange has observed that Restrictive Market 
Companies listing on Nasdaq in connection with an IPO with an offering 
size below $25 million or public float ratio below 25% have a high rate 
of compliance concerns. Nasdaq believes that these concerns may be 
mitigated by the company conducting a Firm Commitment Offering of at 
least $25 million or 25% of the company's post-offering Market Value of 
Listed Securities, whichever is lower. Firm Commitment Offerings 
typically involve a book building process that helps to generate an 
investor base and trading interest that promotes sufficient depth and 
liquidity to help support fair and orderly trading on the Exchange. 
Such offerings also typically involve more due diligence by the broker-
dealer than would be done in connection with a best-efforts offering, 
which helps to ensure that third parties subject to U.S. regulatory 
oversight are conducting significant due diligence on the company, its 
registration statement and its financial statements. The Exchange 
believes that the proposal will help ensure that Restrictive Market 
Companies seeking to list on the Exchange have sufficient investor base 
and public float to support fair and orderly trading on the Exchange.
    In developing the Proposal, Nasdaq analyzed the data behind its 
observations. An analysis of initial public offerings from January 1, 
2015 to September 30, 2020, found that 113 Restrictive Market companies 
listed on Nasdaq through an IPO and 39 of such companies would not have 
qualified under proposed Rule 5210(k)(i) because they had offering 
amounts of $25 million or less.\26\ Of those, 20, or 51%, were cited 
for a compliance issue, a significantly higher rate than other 
Restrictive Market Companies (16%).
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    \26\ Two of these companies were considered to be principally 
administered in a Restrictive Market because they had at least 50% 
of the company's assets located in a Restrictive Market and 37 met 
the definition because they had at least 50% of the company's 
revenues derived from a Restrictive Market.
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    During the period from January 1, 2015 to September 30, 2020, 84 
Restrictive Market Companies had a ratio of offering size to Market 
Value of Listed Securities of 25% or less. Of these, 25, or 30%, failed 
to comply with one or more listing standards after listing, which is a 
significantly higher non-compliance rate than other foreign companies 
(11%) and other Restrictive Market Companies (21%) that had such 
listings. In some cases, when the ratio of offering size to Market 
Value of Listed Securities is low there may be concerns about whether 
there are sufficient freely tradable shares to meet investor demand.
    Lastly, during the period from January 1, 2015 to September 30, 
2020, 35 Restrictive Market Companies would not have qualified under 
either proposed Rule 5210(k)(i)(a) or (b). Of these companies, 18 were 
cited for a compliance concern.

III. Minimum Market Value of Publicly Held Shares for a Business 
Combination

    Nasdaq believes that a business combination, as described in Rule 
5110(a) or IM-5101-2, involving a Restrictive Market Company presents 
similar risks to U.S. investors as IPOs of Restrictive Market 
Companies. However, such a business combination would typically not 
involve an offering. Therefore, Nasdaq proposes to adopt a new Rule 
5210(k)(ii) that would impose a similar new requirement as applicable 
to IPOs, but would reflect that the listing would not typically be 
accompanied by an offering. Specifically, proposed Rule 5210(k)(ii) 
would require the listed company to have a minimum Market Value of 
Unrestricted Publicly Held Shares following the business combination 
equal to the lesser of: (a) $25 million; or (b) 25% of the post-
business combination entity's Market Value of Listed Securities.
    For example, Company A is currently listed on the Nasdaq Capital 
Market and plans to acquire a company that principally administers its 
business in a Restrictive Market, in accordance with IM-5101-2. 
Following the business combination, Company A intends to transfer to 
the Nasdaq Global Select Market. Company A expects the post-business 
combination entity to have a Market Value of Listed Securities of 
$250,000,000. Since 25% of $250,000,000 is $62,500,000, which is higher 
than $25,000,000, to qualify for listing on the Nasdaq Global Select 
Market the post-business combination entity must have a minimum Market 
Value of Unrestricted Publicly Held Shares of at least $25,000,000. 
However, Company A would also need to comply with the other applicable 
listing requirements of the Nasdaq Global Select Market, including a 
Market Value of Unrestricted Publicly Held Shares of at least 
$45,000,000.\27\
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    \27\ See Rule 5315(f)(2)(C).
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    In contrast, Company B is currently listed on Nasdaq Capital Market 
and plans to combine with a non-Nasdaq entity that principally 
administers its business in a Restrictive Market, resulting in a change 
of control as defined in Rule 5110(a), whereby the non-Nasdaq entity 
will become the Nasdaq-listed company. Following the change of control, 
Company B expects the listed company to have a Market Value of Listed 
Securities of $50,000,000. Since 25% of $50,000,000 is $12,500,000, 
which is lower than $25,000,000, the listed company must have a minimum 
Market Value of Unrestricted Publicly Held Shares following the change 
of control of at least $12,500,000. However, the company would also 
need to comply with the other applicable listing requirements of the 
Nasdaq Capital Market, including a Market Value of Unrestricted 
Publicly Held Shares of at least $5 million.\28\
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    \28\ See Rule 5505(b)(3)(C).

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[[Page 9553]]

    Market Value of Unrestricted Publicly Held Shares excludes 
securities subject to resale restrictions from the calculation of 
Publicly Held Shares because securities subject to resale restrictions 
are not freely transferrable or available for outside investors to 
purchase and therefore do not truly contribute to a security's 
liquidity upon listing. Nasdaq believes that requiring the post-
business combination entity to have a minimum Market Value of 
Unrestricted Publicly Held Shares of at least $25 million or 25% of its 
Market Value of Listed Securities, whichever is lower, would help to 
provide an additional assurance that there are sufficient freely 
tradable shares and investor interest to support fair and orderly 
trading on the Exchange when the target company principally administers 
its business in a Restrictive Market. Nasdaq believes that this will 
help mitigate the unique risks that Restrictive Market Companies 
present to U.S. investors due to restrictions on the PCAOB's ability to 
inspect the audit work and practices of auditors in those countries, 
which create concerns about the accuracy of disclosures, accountability 
and access to information.
    Nasdaq found that out of seven business combinations involving 
Restrictive Market Companies from 2015 through September 30, 2020, five 
would not have qualified under proposed Rule 5210(k)(ii). All five of 
these companies have been cited for a deficiency after the completion 
of their business combination. Of the two business combinations 
involving Restrictive Market Companies that would have qualified under 
proposed Rule 5210(k)(ii), one was cited for a compliance concern. As 
such, Nasdaq believes that a business combination, as described in 
Nasdaq Rule 5110(a) or IM-5101-2, involving a Restrictive Market 
Company presents similar risks to U.S. investors as an IPO of a 
Restrictive Market Company and, therefore, believes it is appropriate 
to apply similar thresholds to post-business combination entities to 
ensure that a company listing through a business combination would have 
satisfied equivalent standards that apply to an IPO.

IV. Direct Listings of Restrictive Market Companies

    Nasdaq proposes to adopt Rule 5210(k)(iii) to provide that a 
Restrictive Market Company would be permitted to list on the Nasdaq 
Global Select Market or Nasdaq Global Market in connection with a 
Direct Listing (as defined in IM-5315-1), provided that the company 
meets all applicable listing requirements for the Nasdaq Global Select 
Market and the additional requirements of IM-5315-1, or the applicable 
listing requirements for the Nasdaq Global Market and the additional 
requirements of IM-5405-1. However, such companies would be not be 
permitted to list on the Nasdaq Capital Market in connection with a 
Direct Listing notwithstanding the fact that such companies may meet 
the applicable initial listing requirements for the Nasdaq Capital 
Market and the additional requirements of IM-5505-1.
    Direct Listings are currently required to comply with enhanced 
listing standards pursuant to IM-5315-1 (Nasdaq Global Select Market) 
and IM-5405-1 (Nasdaq Global Market). If a company's security has had 
sustained recent trading in a Private Placement Market,\29\ Nasdaq may 
attribute a Market Value of Unrestricted Publicly Held Shares equal to 
the lesser of (i) the value calculable based on a Valuation \30\ and 
(ii) the value calculable based on the most recent trading price in the 
Private Placement Market.\31\ Nasdaq believes that the price from such 
sustained trading in the Private Placement Market for the company's 
securities is predictive of the price in the market for the common 
stock that will develop upon listing of the securities on Nasdaq and 
that qualifying a company based on the lower of such trading price or 
the Valuation helps assure that the company satisfies Nasdaq's 
requirements.
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    \29\ See Rule 5005(a)(34).
    \30\ See IM-5315-1(a)(1).
    \31\ See IM-5315-1(a)(1) (Nasdaq Global Select Market) and IM-
5405-1(a)(1) (Nasdaq Global Market).
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    Nasdaq may require a company listing on the Nasdaq Global Select 
Market that has not had sustained recent trading in a Private Placement 
Market to satisfy the applicable Market Value of Unrestricted Publicly 
Held Shares requirement and provide a Valuation evidencing a Market 
Value of Publicly Held Shares of at least $250,000,000.\32\ For a 
company that has not had sustained recent trading in a Private 
Placement Market and that is applying to list on the Nasdaq Global 
Market, Nasdaq will generally require the company to provide a 
Valuation that demonstrates a Market Value of Listed Securities and 
Market Value of Unrestricted Publicly Held Shares that exceeds 200% of 
the otherwise applicable requirement.\33\ Nasdaq believes that in the 
absence of recent sustained trading in the Private Placement Market, 
the requirement to demonstrate a Market Value of Publicly Held Shares 
of at least $250 million for a company seeking to list on Nasdaq Global 
Select Market, or that the company exceeds 200% of the otherwise 
applicable price-based requirement for a company seeking to list on 
Nasdaq Global Market, helps assure that the company satisfies Nasdaq's 
requirement by imposing a standard that is more than double the 
otherwise applicable standard.
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    \32\ See IM-5315-1(b).
    \33\ See IM-5405-1(a)(2) (Nasdaq Global Market).
---------------------------------------------------------------------------

    Thus, companies listing in connection with a Direct Listing on the 
Nasdaq Global or Global Select Market tiers are already subject to 
enhanced listing requirements and Nasdaq believes it is appropriate to 
permit Restrictive Market Companies to list through a Direct Listing on 
the Nasdaq Global Select Market or Nasdaq Global Market. On the other 
hand, while companies listing in connection with a Direct Listing on 
the Capital Market are also subject to enhanced listing requirements, 
Nasdaq does not believe that these enhanced requirements are sufficient 
to overcome concerns regarding sufficient liquidity and investor 
interest to support fair and orderly trading on the Exchange with 
respect to Restrictive Market Companies.\34\ Nasdaq believes that 
Restrictive Market Companies present unique risks to U.S. investors due 
to restrictions on the PCAOB's ability to inspect the audit work and 
practices of auditors in those countries, which create concerns about 
the accuracy of disclosures, accountability and access to information. 
Therefore, Nasdaq believes that precluding a Restrictive Market Company 
from listing through a Direct Listing on the Capital Market will help 
to ensure that the company has sufficient public float, investor base, 
and trading interest likely to generate depth and liquidity necessary 
to promote fair and orderly trading on the secondary market.
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    \34\ For example, the Nasdaq Global Select Market and Nasdaq 
Global Market require a company to have at least 1,250,000 and 1.1 
million Unrestricted Publicly Held Shares, respectively, and a 
Market Value of Unrestricted Publicly Held Shares of at least $45 
million and $8 million, respectively. In contrast, the Nasdaq 
Capital Market requires a company to have at least 1 million 
Unrestricted Publicly Held Shares and a Market Value of Unrestricted 
Publicly Held Shares of at least $5 million.
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V. Conclusion

    Nasdaq believes that the U.S. capital markets can provide 
Restrictive Market Companies with access to additional capital to fund 
ground-breaking research and technological advancements. Further, such 
companies provide U.S. investors with opportunities to diversify their 
portfolio by providing exposure to

[[Page 9554]]

Restrictive Markets. However, as discussed above, Nasdaq believes that 
Restrictive Market Companies present unique potential risks to U.S. 
investors due to restrictions on the PCAOB's ability to inspect the 
audit work and practices of auditors in those countries, which create 
concerns about the accuracy of disclosures, accountability and access 
to information.\35\ Nasdaq believes that the proposed rule changes will 
help to ensure that Restrictive Market Companies have sufficient 
investor base and public float to support fair and orderly trading on 
the Exchange.
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    \35\ See supra note 8.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\36\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\37\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, 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. Further, 
the Exchange believes that this proposal is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has previously opined on the importance of 
meaningful listing standards for the protection of investors and the 
public interest.\38\ In particular, the Commission stated:
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    \38\ Securities Exchange Act Release No. 65708 (November 8, 
2011), 76 FR 70799 (November 15, 2011) (approving SR-Nasdaq-2011-073 
adopting additional listing requirements for companies applying to 
list after consummation of a ``reverse merger'' with a shell 
company).

Among other things, listing standards provide the means for an 
exchange to screen issuers that seek to become listed, and to 
provide listed status only to those that are bona fide companies 
with sufficient public float, investor base, and trading interest 
likely to generate depth and liquidity sufficient to promote fair 
and orderly markets. Meaningful listing standards also are important 
given investor expectations regarding the nature of securities that 
have achieved an exchange listing, and the role of an exchange in 
overseeing its market and assuring compliance with its listing 
standards.\39\
---------------------------------------------------------------------------

    \39\ Id at 70802.

    Nasdaq believes that requiring a minimum offering size or public 
float percentage for Restrictive Market Companies seeking to list on 
Nasdaq through an IPO or business combination will ensure that a 
security to be listed on Nasdaq has adequate liquidity, distribution 
and U.S. investor interest to support fair and orderly trading in the 
secondary market, which will reduce trading volatility and price 
manipulation, thereby protecting investors and the public interest.
    Similarly, Nasdaq believes that permitting Restrictive Market 
Companies to list on Nasdaq Global Select Market or Nasdaq Global 
Market, rather than the Nasdaq Capital Market, in connection with a 
Direct Listing will ensure that such companies satisfy more rigorous 
listing requirements, including the minimum amount of Publicly Held 
Shares and Market Value of Publicly Held Shares, which will help to 
ensure that the security has sufficient public float, investor base, 
and trading interest likely to generate depth and liquidity sufficient 
to promote fair and orderly trading, thereby protecting investors and 
the public interest.
    While the proposal applies only to Restrictive Market Companies, 
the Exchange believes that the proposal is not designed to permit 
unfair discrimination among companies because Nasdaq believes that 
Restrictive Market Companies present unique potential risks to U.S. 
investors due to restrictions on the PCAOB's ability to inspect the 
audit work and practices of auditors in those countries, which create 
concerns about the accuracy of disclosures, accountability and access 
to information.
    Nasdaq and investors rely on the work of auditors to provide 
reasonable assurances that the financial statements provided by a 
company are free of material misstatements. The PCAOB states that 
``[r]easonable assurance is obtained by reducing audit risk to an 
appropriately low level through applying due professional care, 
including obtaining sufficient appropriate audit evidence.'' \40\ 
Nasdaq believes that the PCAOB's inability to inspect the audit work 
and practices of auditors in certain countries weakens the assurance 
that the auditor obtained sufficient appropriate audit evidence to 
express its opinion on a company's financial statements, and decreases 
confidence that the auditor complied with PCAOB and SEC rules and 
professional standards in connection with the auditor's performance of 
audits. Nasdaq believes that without reasonable assurances from an 
auditor that a company's financial statements and related disclosures 
are free from material misstatements, there is a risk that a company 
that would otherwise not have qualified to list on Nasdaq may satisfy 
Nasdaq's listing standards by presenting financial statements that 
contain undetected material misstatements. In In the Matter of the 
Tassaway, Inc., the Commission observed that
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    \40\ See supra note 6.

Though exclusion from the system may hurt existing investors, 
primary emphasis must be placed on the interests of prospective 
future investors. The latter group is entitled to assume that the 
securities in the system meet the system's standards. Hence the 
presence in NASDAQ of non-complying securities could have a serious 
deceptive effect.\41\
---------------------------------------------------------------------------

    \41\ See In the Matter of Tassaway, Inc., Securities Exchange 
Act Release No. 11291, 1975 WL 160383; 45 SEC 706 (March 13, 1975).

    The proposed rule change would provide greater assurances to 
investors that a company truly meets Nasdaq's financial listing 
requirements by imposing heightened listing criteria on a company that 
principally administers its business in a Restrictive Market, thereby 
preventing fraudulent and manipulative acts, protecting investors and 
promoting the public interest.
    In addition, securities of Restrictive Market Companies may not 
develop sufficient public float, investor base, and trading interest to 
provide the depth and liquidity necessary to promote fair and orderly 
trading, resulting in a security that is illiquid. Nasdaq is concerned 
because illiquid securities may trade infrequently, in a more volatile 
manner and with a wider bid-ask spread, all of which may result in 
trading at a price that may not reflect their true market value.
    Less liquid securities also may be more susceptible to price 
manipulation, as a relatively small amount of trading activity can have 
an inordinate effect on market prices. Price manipulation is a 
particular concern when insiders retain a significant ownership portion 
of the company. The risk of price manipulation due to insider trading 
is more acute when a company principally administers its business in a 
Restrictive Market and management lacks familiarity or experience with 
U.S. securities laws. Therefore, Nasdaq believes that it is not 
unfairly discriminatory to treat Restrictive Market Companies 
differently under this proposal because it will help ensure that 
securities of a Restrictive Market Company listed on Nasdaq have 
sufficient public float, investor base, and trading interest to provide 
the depth and liquidity necessary to promote fair and orderly markets, 
thereby promoting investor protection and the public interest.

[[Page 9555]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. While the proposed rule changes 
will apply only to companies primarily operating in Restrictive 
Markets, Nasdaq and the SEC have identified specific concerns with such 
companies that make the imposition of additional initial listing 
criteria on such companies appropriate to enhance investor protection, 
which is a central purpose of the Act. Any impact on competition, 
either among listed companies or between exchanges, is incidental to 
that purpose.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2021-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2021-007. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2021-007 and should be submitted 
on or before March 9, 2021.
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    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02993 Filed 2-12-21; 8:45 am]
BILLING CODE 8011-01-P