Document ID: SEC-2019-0424-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-04-09T04:00Z

[Federal Register Volume 84, Number 68 (Tuesday, April 9, 2019)]
[Notices]
[Pages 14172-14180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06935]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85503; File No. SR-NASDAQ-2019-009]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Revise the Exchange's 
Initial Listing Standards Related to Liquidity

April 3, 2019.
    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 March 21, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or the 
``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 revise the Exchange's initial listing 
standards related to liquidity.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, 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
    Nasdaq proposes several amendments in this rule change to increase 
Nasdaq's requirements for initial listing and help assure adequate 
liquidity for listed securities. First, Nasdaq proposes to revise its 
initial listing criteria to exclude restricted securities from the 
Exchange's calculations of a company's publicly held shares, market 
value of publicly held shares and round lot holders (``Initial 
Liquidity Calculations''). To do so, Nasdaq proposes to add three new 
definitions to define ``restricted securities'', ``unrestricted 
publicly held shares'' and ``unrestricted securities'' and proposes to 
amend the definition of ``round lot holder''. Second, Nasdaq proposes 
to impose a new requirement that at least 50% of a company's round lot 
holders must each hold shares with a market value of at least $2,500. 
Third, Nasdaq proposes to adopt a new listing rule requiring a minimum 
average daily trading volume for securities trading over-the-counter 
(``OTC'') at the time of their listing. Nasdaq is not proposing to 
change the requirements for continued listing purposes at this time, 
but believes that these heightened initial listing requirements will 
result in enhanced liquidity for the companies that satisfy them on an 
ongoing basis.\3\ Each amendment is described in more detail below.
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    \3\ Nasdaq staff may apply additional and more stringent 
criteria to a listed company that satisfies all of the continued 
listing requirements but where there are indications that there is 
insufficient liquidity in the security to support fair and orderly 
trading. In such circumstances, Nasdaq would typically first allow 
the company to provide and implement a plan to increase its 
liquidity in the near term.
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I. Restricted Securities

    Nasdaq is proposing to modify its initial listing standards to 
exclude securities subject to resale restrictions from its Initial 
Liquidity Calculations. Currently, securities subject to resale 
restrictions are included in the Exchange's Initial Liquidity 
Calculations, however, such securities are not freely transferrable or 
available for outside investors to purchase and therefore do not truly 
contribute to a security's liquidity upon listing. Because the current 
Initial Liquidity Calculations include restricted securities, a 
security with a substantial number of restricted securities could 
satisfy the Exchange's initial listing requirements related to 
liquidity and list on the Exchange, even though there could be few 
freely tradable shares, resulting in a security listing on the Exchange 
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

[[Page 14173]]

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.
    To address this concern, Nasdaq is proposing to adopt a new 
definition of ``restricted securities'' at Nasdaq Rule 5005(a)(37), 
which includes any securities subject to resale restrictions for any 
reason, including restricted securities (1) acquired directly or 
indirectly from the issuer or an affiliate of the issuer in 
unregistered offerings such as private placements or Regulation D 
offerings; \4\ (2) acquired through an employee stock benefit plan or 
as compensation for professional services; \5\ (3) acquired in reliance 
on Regulation S, which cannot be resold within the United States; \6\ 
(4) subject to a lockup agreement or a similar contractual restriction; 
\7\ or (5) considered ``restricted securities'' under Rule 144.\8\ 
Nasdaq is also proposing to adopt a new definition of ``unrestricted 
securities'' at Nasdaq Rule 5005(a)(46), which includes securities of a 
company that are not restricted securities. In connection with these 
amendments, Nasdaq is proposing to renumber the remaining provisions of 
Rule 5005 to maintain an organized rule structure.
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    \4\ See, e.g., 17 CFR 230.144(a)(3)(i) and (ii), which states 
that securities issued in transactions that are not a public 
offering or under Regulation D are considered restricted securities.
    \5\ See, e.g., 17 CFR 230.701(g), which states that securities 
issued pursuant to certain compensatory benefit plans and contracts 
relating to compensation are considered restricted securities.
    \6\ See 17 CFR 230.144(a)(3)(v), which states that securities of 
domestic issuers acquired in a transaction in reliance on Regulation 
S are considered restricted securities.
    \7\ Securities issued in such transactions would typically 
include a ``restrictive'' legend stating that the securities cannot 
be freely resold unless they are registered with the SEC or in a 
transaction exempt from the registration requirements, such as the 
exemption available under Rule 144.
    \8\ See generally Securities and Exchange Commission Investor 
Publications, Rule 144: Selling Restricted and Control Securities 
(January 16, 2013), available at: https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html.
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    The Exchange believes that these proposed amendments to the listing 
rules will enhance its listing criteria and better protect investors by 
helping to ensure that securities listed on Nasdaq are liquid and have 
sufficient investor interest to support an exchange listing. Nasdaq 
notes that in developing their index methodologies the FTSE Russell and 
S&P indices take a similar approach. As disclosed by FTSE Russell, 
``All FTSE Russell equity index constituents are free float adjusted in 
accordance with the index rules, to reflect the actual availability of 
stock in the market for public investment.'' \9\ FTSE Russell excludes 
shares held within employee share plans, shares subject to a ``lock-
in'' clause, and shares subject to contractual restrictions.\10\ S&P 
Dow Jones adjusts its indices to ``reflect only those shares available 
to investors rather than all of a company's outstanding shares.'' \11\
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    \9\ See FTSE Russell, ``Free-Float'', available at: https://www.ftse.com/products/indices/free-float.
    \10\ See FTSE Russell, ``Free Float Restrictions v2.0'', May 
2018, available at: https://www.ftse.com/products/downloads/Free_Float_Restrictions.pdf.
    \11\ See S&P Dow Jones Indices, ``Float Adjustment 
Methodology'', April 2018, available at: https://us.spindices.com/documents/index-policies/methodology-sp-float-adjustment.pdf.
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A. Publicly Held Shares
    Nasdaq is proposing to modify its initial listing requirements 
related to publicly held shares so that they are based only on 
unrestricted shares. A company is required to have a minimum number of 
publicly held shares in order to list its primary equity securities 
(including American Depositary Receipts or ``ADRs'') \12\ on all tiers 
of the Exchange. A company is also required to have a minimum number of 
publicly held shares in order to list its preferred stock or secondary 
classes of common stock on Nasdaq's Global and Capital Market tiers; 
\13\ subscription receipts on Nasdaq's Capital Market tier; or paired 
share units on Nasdaq's Global Select Market tier. Currently, Nasdaq 
Rule 5005(a)(35) defines ``publicly held shares'' as ``shares not held 
directly or indirectly by an officer, director or any person who is the 
beneficial owner of more than 10 percent of the total shares 
outstanding. Determinations of beneficial ownership in calculating 
publicly held shares shall be made in accordance with Rule 13d-3 under 
the Act.'' As discussed above, the current definition of publicly held 
shares does not exclude securities subject to resale restrictions, 
which may result in a security with limited liquidity satisfying the 
Exchange's initial listing requirements related to publicly held shares 
and qualifying to list on the Exchange.
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    \12\ 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).''
    \13\ There are no separate listing requirements on the Nasdaq 
Global Select Market for classes of securities other than primary 
equity securities. Instead, pursuant to Rule 5320, if the primary 
equity security is listed on the Nasdaq Global Select Market, 
generally any other security of that same company that qualifies for 
listing on the Nasdaq Global Market is also included in the Nasdaq 
Global Select Market.
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    Nasdaq proposes adding a new definition of ``unrestricted publicly 
held shares'' at Nasdaq Rule 5005(a)(45), which would be defined as 
publicly held shares excluding the newly defined ``unrestricted 
securities.'' Nasdaq proposes to revise references to ``publicly held 
shares'' to ``unrestricted publicly held shares'' in the following 
rules:

------------------------------------------------------------------------
                                                             Current
                        Nasdaq Market                    required number
       Rule No.              tier        Security type      of publicly
                                                           held shares
------------------------------------------------------------------------
5315(e)(2)...........  Global Select..  Primary Equity   At least
                                         Security.        1,250,000.
5405(a)(2)...........  Global.........  Primary Equity   At least
                                         Security.        1,100,000.
5415(a)(1)...........  Global.........  Preferred Stock  At least
                                         or Secondary     200,000.
                                         Class of
                                         Common Stock.
5505(a)(2)...........  Capital........  Primary Equity   At least
                                         Security.        1,000,000.
5510(a)(3)...........  Capital........  Preferred Stock  At least
                                         or Secondary     200,000.
                                         Class of
                                         Common Stock.
5520(g)(3)...........  Capital........  Subscription     At least
                                         Receipts.        1,100,000.
------------------------------------------------------------------------

    As a result, only securities that are freely transferrable will be 
included in the calculation of publicly held shares to determine 
whether a company satisfies the Exchange's initial listing criteria 
under these rules. Nasdaq believes that excluding restricted securities 
will better reflect the liquidity of, and investor interest in, a 
security and therefore will better protect investors.
    In addition to the above, Nasdaq proposes revising references to 
``publicly held shares'' to ``unrestricted publicly held shares'' in 
Rule 5310(d), which states that ``in computing the number of publicly 
held shares for

[[Page 14174]]

Global Select purposes, Nasdaq will not consider shares held by an 
officer, director or 10% or greater Shareholder \14\ of the Company,'' 
and Rule 5226(b) which requires a paired share unit to satisfy the 
security-level requirements of Rule 5315 or 5405, including the number 
of publicly held shares. Nasdaq also proposes to revise Rule 5205(g) to 
reflect the change to ``unrestricted publicly held shares.'' \15\ 
Nasdaq also proposes revising Rule 5215(b) to state that in considering 
whether an ADR satisfies the initial listing requirements, Nasdaq will 
consider the unrestricted publicly held shares of the underlying 
security, and that in determining whether shares of the underlying 
security are restricted for this purpose, Nasdaq will only consider 
restrictions that prohibit the resale or trading of the underlying 
security on the company's home country market, as discussed below.
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    \14\ Rule 5005(a)(40) defines ``Shareholder'' as ``a record or 
beneficial owner of a security listed or applying to list. For 
purposes of the Rule 5000 Series, the term ``Shareholder'' includes, 
for example, a limited partner, the owner of a depository receipt, 
or unit.''
    \15\ Rule 5205(g) currently states that ``The computation of 
Publicly Held Shares and Market Value of Publicly Held Shares shall 
be as of the date of application of the Company.''
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B. Market Value of Publicly Held Shares
    Nasdaq is proposing to modify its initial listing requirements 
related to market value of publicly held shares so that they are based 
only on unrestricted shares. A company is required to have a minimum 
market value of publicly held shares in order to list its primary 
equity securities (including ADRs) on all tiers of the Exchange. A 
company is also required to have a minimum market value of publicly 
held shares in order to list its preferred stock or secondary classes 
of common stock on Nasdaq's Global and Capital Market tiers; 
subscription receipts on Nasdaq's Capital Market tier; or paired share 
units on Nasdaq's Global Select Market tier. The calculation of 
``market value of publicly held shares'' does not exclude stock subject 
to resale restrictions. As discussed above, restricted securities may 
not contribute to liquidity and therefore the current calculation of 
market value of publicly held shares may result in a security with 
limited true liquidity satisfying the listing requirements related to 
the market value of publicly held shares and qualifying to list.
    Nasdaq proposes revising its initial listing requirements so that 
they are based on the market value of unrestricted publicly held 
shares, and therefore exclude restricted securities, in the following 
rules:

----------------------------------------------------------------------------------------------------------------
                                                                                         Current required market
           Rule No.                  Nasdaq Market tier             Security type                 value
----------------------------------------------------------------------------------------------------------------
5315(c)(1)-(3)...............  Global Select................  Primary Equity Security   (i) a total market value
                                                               of a Closed End           of the fund family of
                                                               Management Investment     at least $220 million;
                                                               Company Listed with a     (ii) an average market
                                                               Fund Family.              value of all funds in
                                                                                         the fund family of at
                                                                                         least $50 million; and
                                                                                         (iii) a market of each
                                                                                         fund in the fund family
                                                                                         of at least $35
                                                                                         million.
5315(f)(2)(A)-(D)............  Global Select................  Primary Equity            (i) at least $110
                                                               Securities.               million; (ii) at least
                                                                                         $100 million, if the
                                                                                         company has
                                                                                         stockholders' equity of
                                                                                         at least $110 million;
                                                                                         (iii) at least $45
                                                                                         million in the case of
                                                                                         an initial public
                                                                                         offering or spin-off;
                                                                                         or (iv) at least $70
                                                                                         million in the case of
                                                                                         a closed end management
                                                                                         investment company
                                                                                         registered under the
                                                                                         Investment Company Act
                                                                                         of 1940.
IM-5315-1....................  Global Select................  Direct Listing of         (a) If the Company's
                                                               Primary Equity            security has had
                                                               Securities.               sustained recent
                                                                                         trading in a Private
                                                                                         Placement Market, the
                                                                                         lesser of (i) the value
                                                                                         calculable based on an
                                                                                         independent third-party
                                                                                         valuation and (ii) the
                                                                                         value calculable based
                                                                                         on the most recent
                                                                                         trading price in a
                                                                                         Private Placement
                                                                                         Market; or (b)
                                                                                         $250,000,000 for a
                                                                                         security that has not
                                                                                         had sustained recent
                                                                                         trading in a Private
                                                                                         Placement Market prior
                                                                                         to listing.
5405(b)(1)(C)................  Global.......................  Primary Equity            At least $8 million
                                                               Securities.               (Income Standard).
5405(b)(2)(C)................  Global.......................  Primary Equity            At least $18 million
                                                               Securities.               (Equity Standard).
5405(b)(3)(B)................  Global.......................  Primary Equity            At least $20 million
                                                               Securities.               (Market Value
                                                                                         Standard).
5405(b)(4)(B)................  Global.......................  Primary Equity            At least $20 million
                                                               Securities.               (Total Assets/Total
                                                                                         Revenue Standard).
5415(a)(2)...................  Global.......................  Preferred Stock or        At least $4 million.
                                                               Secondary Classes of
                                                               Common Stock.
5505(b)(1)(B)................  Capital......................  Primary Equity            At least $15 million
                                                               Securities.               (Equity Standard).
5505(b)(2)(C)................  Capital......................  Primary Equity            At least $15 million
                                                               Securities.               (Market Value
                                                                                         Standard).
5505(b)(3)(C)................  Capital......................  Primary Equity            At least $5 million (Net
                                                               Securities.               Income Standard).
5510(a)(4)...................  Capital......................  Preferred Stock or        At least $3.5 million.
                                                               Secondary Classes of
                                                               Common Stock.
5520(g)(2)...................  Capital......................  Subscription Receipts...  At least $100 million.
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    As discussed above, Nasdaq believes that excluding restricted 
securities from the calculation of market value of publicly held shares 
will better reflect the liquidity of, and investor interest in, a 
security and therefore will better protect investors. Specifically, 
market value of publicly held shares is an indication of the size and 
investor interest in a company. When restricted securities are included 
in that calculation, a company could technically meet Nasdaq's 
requirement without actually having sufficient investor interest, 
resulting in a security that is illiquid. Less liquid securities may be 
more susceptible to price manipulation, as a relatively small

[[Page 14175]]

amount of trading activity can have an inordinate effect on market 
prices and a company's market value of publicly held shares.
    In addition to the above, Nasdaq proposes revising references to 
``market value of publicly held shares'' to ``market value of 
unrestricted publicly held shares'' in Rule 5226(b), which requires a 
paired share unit listing on Nasdaq's Global Select or Global Select 
Market tiers to satisfy the security-level requirements of Rule 5315 or 
5405, including the market value of publicly held shares.\16\ Nasdaq 
also proposes to revise Rule 5205(g) to reflect that the computation 
for market value of unrestricted publicly held shares shall be as of 
the date of the application of the company for all market tiers.\17\ 
Nasdaq also proposes revising Rule 5215(b) to state that in considering 
whether an ADR satisfies the initial listing requirements, Nasdaq will 
consider the market value of unrestricted publicly held shares of the 
underlying security, and that in determining whether shares of the 
underlying security are restricted for this purpose, Nasdaq will only 
consider restrictions that prohibit the resale or trading of the 
underlying security on the company's home country market, as discussed 
below.
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    \16\ Nasdaq is also proposing to capitalize defined terms in 
Rule 5226(b) that were previously not capitalized for consistency 
and in order to maintain an organized rule book structure.
    \17\ Rule 5205(g) currently states that ``The computation of 
Publicly Held Shares and Market Value of Publicly Held Shares shall 
be as of the date of application of the Company.''
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C. Round Lot Holders
    Nasdaq is proposing to revise the listing criteria related to the 
minimum number of round lot holders for companies seeking to initially 
list primary equity securities (including ADRs), preferred stock, 
secondary classes of common stock and warrants on the Exchange so that 
they are based on holders of unrestricted securities. Currently, Nasdaq 
defines a ``round lot holder'' as ``a holder of a Normal Unit of 
Trading'' and notes that ``beneficial holders will be considered in 
addition to holders of record.'' \18\ Nasdaq defines a ``round lot or 
normal unit of trading'' as ``100 shares of a security unless, with 
respect to a particular security, Nasdaq determines that a normal unit 
of trading shall constitute other than 100 shares.'' \19\ A company is 
required to have a minimum number of round lot holders in order to list 
securities on the Exchange. While this is another measure of liquidity 
designed to help assure that there will be sufficient investor interest 
and trading to support price discovery once a security is listed, as 
noted above, under the existing rule, all the shares held by a holder 
could be restricted securities that do not contribute to liquidity.
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    \18\ Currently, this is Nasdaq Rule 5005(a)(39) but will be 
converted to Nasdaq Rule 5005(a)(40).
    \19\ Currently, this is Nasdaq Rule 5005(a)(38) but will be 
converted to Nasdaq Rule 5005(a)(39).
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    To address this concern, Nasdaq is proposing to revise the 
definition of ``round lot holder'' to mean a holder of a normal unit of 
trading of unrestricted securities. This change will impact the 
following rules:

----------------------------------------------------------------------------------------------------------------
                                                                                         Current required number
           Rule No.                  Nasdaq Market tier             Security type         of round lot holders
----------------------------------------------------------------------------------------------------------------
5315(f)(1)(C)................  Global Select................  Primary Equity Security.  At least 450 round lot
                                                                                         holders or a minimum
                                                                                         number of total
                                                                                         holders.
5405(a)(3)...................  Global.......................  Primary Equity Security.  At least 400.
5410(d)......................  Global.......................  Warrants................  At least 400 unless such
                                                                                         warrants are listed in
                                                                                         connection with an
                                                                                         initial firm commitment
                                                                                         underwritten public
                                                                                         offering.
5415(a)(4)...................  Global.......................  Preferred Stock or        At least 100.
                                                               Secondary Class of
                                                               Common Stock.
5505(a)(3)...................  Capital......................  Primary Equity            At least 300.
                                                               Securities.
5510(a)(2)...................  Capital......................  Preferred Stock or        At least 100.
                                                               Secondary Class of
                                                               Common Stock.
5515(a)(4)...................  Capital......................  Warrants................  At least 400 unless such
                                                                                         warrants are listed in
                                                                                         connection with an
                                                                                         initial firm commitment
                                                                                         underwritten public
                                                                                         offering.
5520(g)(4)...................  Capital......................  Subscription Receipts...  At least 400.
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    As a result of these changes, a holder of only restricted 
securities would not be considered in the round lot holder count. 
Nasdaq believes that these amendments will help ensure adequate 
distribution and investor interest in a listed security, which will 
result in a more liquid trading market and which will better protect 
investors. 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.
    In addition to the above, Nasdaq proposes revising references to 
``holder'' to ``round lot holders'' in Rule 5226(b), which requires a 
paired share unit applying to list on the Nasdaq Global Select or 
Global Market tiers to meet the security-level requirements of Rule 
5315 or 5405, which includes the number of round lot holders. Nasdaq 
also proposes revising Rule 5215(b) to state that in considering 
whether an ADR satisfies this proposed change that determination of 
round lot holders be based on holders of unrestricted securities, 
Nasdaq will consider whether round lot holders of the underlying 
security hold unrestricted shares of that underlying security, and that 
in determining whether shares of the underlying security are restricted 
for this purpose, Nasdaq will only consider restrictions that prohibit 
the resale or trading of the underlying security on the company's home 
country market, as discussed below. Nasdaq will also apply the new 
minimum value requirement for round lot holders to the underlying 
security, as proposed below, in addition to the minimum number of round 
lot holders required by the applicable tier that the company is seeking 
to list on.
D. American Depositary Receipts
    Lastly, Nasdaq proposes to revise Rule 5215(b) to specify how these 
new requirements apply to ADRs. Specifically, as under the current rule 
for calculating publicly held shares, market value of publicly held 
shares, and round lot holders, Nasdaq will

[[Page 14176]]

continue to consider the underlying security in calculating the 
unrestricted publicly held shares and market value of unrestricted 
publicly held shares and in calculating the new definition of a round 
lot holder. In determining whether shares of the underlying security 
are ``restricted'' for these purposes, only restrictions that prohibit 
the resale or trading of the underlying security on the company's home 
country market would result in those securities being considered 
restricted for purposes of the proposed rules. Thus, if the 
restrictions provided as examples in the new definition of ``restricted 
securities'' would restrict the underlying security from being freely 
sold or tradable on its home country market, Nasdaq would also consider 
such restrictions when calculating ``unrestricted publicly held 
shares.'' Nasdaq believes that this is appropriate because the purpose 
of the Initial Liquidity Calculations, and the proposed changes 
described herein, is to establish investor interest in the company and 
ensure adequate liquidity and distribution of the company's underlying 
security on its home country market, which is held by the depositary 
bank and represented by the ADR. For this reason, existing Rule 5215(b) 
currently looks to the underlying security when calculating publicly 
held shares, market value of publicly held shares, round lot and public 
holders and it is similarly appropriate to consider whether or not the 
underlying security is freely tradable in its home country market when 
determining unrestricted publicly held shares, market value of 
unrestricted publicly held shares, and round lot holders. Excluding 
securities that are only restricted from resale or trading in the 
United States would be not be an appropriate measure of investor 
interest in or liquidity of the underlying security because the 
underlying security will not be listed or trading in the U.S.\20\ 
Moreover, applying the new definition of restricted securities to 
securities trading on a foreign market, if the securities trading on 
the home country market are not already restricted by the examples set 
forth in the new definition of restricted securities, would unduly 
impose the requirements of a U.S. national securities exchange on those 
securities, which will not be listed in the U.S.
---------------------------------------------------------------------------

    \20\ For example, the underlying security may not be eligible to 
trade in the U.S., but that would not cause all shares of that 
security to be considered restricted if they are freely tradable on 
the company's home country market.
---------------------------------------------------------------------------

    In addition, Nasdaq proposes to revise the reference to Form S-12 
in Rule 5215(b) to Form F-6 in order to refer to the current form 
required by the Commission to register ADRs under the Securities Act of 
1933.\21\
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    \21\ Securities Exchange Act Release No. 34-19612 (March 18, 
1983), 48 FR 12346 (March 24, 1983).
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II. Minimum Value Requirement for Holders
    Nasdaq is also proposing to revise the listing rules related to 
round lot holders listed in Part I.C, above, except for those 
applicable to listing warrants, to impose a new requirement related to 
the minimum investment amount held by shareholders. Under the current 
definition of a round lot, a shareholder may be considered a round lot 
holder by holding exactly 100 shares, which would be worth only $400 in 
the case of a stock that is trading at the minimum bid price of $4 per 
share.\22\ Nasdaq believes that this minimal investment is not an 
appropriate representation of investor interest to support a listing on 
a national securities exchange. To address this concern, Nasdaq 
proposes to require that for initial listing at least 50% of a 
company's required round lot holders must each hold shares with a 
market value of at least $2,500. Nasdaq does not propose to impose this 
requirement on initial listings of warrants, however, because warrants 
do not have a minimum price requirement and may have little value at 
the time of issuance.\23\ Nonetheless, warrants are often issued as 
part of a unit and the common stock component of the unit would be 
required to satisfy the minimum value requirement. Further, in all 
cases, the security underlying a warrant must be listed on Nasdaq or be 
a covered security, as defined in Section 18(b) of the Securities Act 
of 1933.\24\ Nasdaq has not observed problems with the trading of 
warrants.
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    \22\ On the Nasdaq Capital Market, certain companies are also 
eligible to list at $2 or $3 and the minimum value held by such a 
holder would be only $200 or $300, respectively. See Listing Rule 
5505(a)(1)(B).
    \23\ Warrants issued as part of a unit must satisfy the initial 
listing requirements for warrants applying to list on the applicable 
market tier in accordance with Rule 5225.
    \24\ 15 U.S.C. 77r(b).
---------------------------------------------------------------------------

    Nasdaq believes that adopting this amendment will help ensure that 
a majority of the required minimum number of shareholders hold a 
meaningful value of stock and that a company has sufficient investor 
interest to support an exchange listing.
III. Average Daily Trading Volume
    Nasdaq is proposing to adopt an additional initial listing criteria 
for primary equity securities (including ADRs), preferred stock, 
secondary classes of common stock and paired share units, previously 
trading OTC. The new rules will require such securities to have a 
minimum average daily trading volume over the 30 trading days prior to 
listing of at least 2,000 shares a day (including on the primary market 
with respect to an ADR), with trading occurring on more than half of 
those 30 days (i.e., at least 16 days). Nasdaq believes that this will 
help ensure a liquid trading market, promote price discovery and 
establish an appropriate market price for the listed securities.
    Nasdaq is proposing to implement this new requirement by making 
identical amendments to Rule 5315(e) to add a new Rule 5315(e)(4); Rule 
5405(a) to add a new Rule 5404(a)(4); Rule 5415(a) to add a new Rule 
5415(a)(6); Rule 5505(a) to add a new Rule 5505(a)(5); and Rule 5510(a) 
to add a new Rule 5510(a)(6). In connection with the foregoing 
amendments, Nasdaq is proposing to revise the cross-references in Rules 
5415(a) and 5510(a) to add new Rules 5415(a)(6) and 5510(a)(6), 
respectively, and renumber the remaining provisions of Rule 5505(a) to 
maintain an organized rule structure. In addition, Nasdaq is proposing 
to revise Rule 5226(b) to clarify that the average daily trading volume 
requirement would apply to companies seeking to list paired share units 
on the Exchange.
    As noted above, the average daily trading volume requirement will 
also apply to ADRs. Currently, Nasdaq considers the underlying security 
of an ADR when determining annual income from continuing operations, 
publicly held shares, market value of publicly held shares, 
stockholders' equity, round lot or public holders, operating history, 
market value of listed securities, total assets and total revenue. 
Nasdaq is proposing [sic] amend Rule 5215(b) to state that the average 
daily trading volume of the underlying security of an ADR will be 
considered in the Exchange's computations for this new requirement too. 
Nasdaq believes that this will help demonstrate adequate investor 
interest in the company and the underlying security, which will help 
promote price discovery and establish an appropriate market price for 
the ADR.\25\
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    \25\ ADR shares trade separately from the underlying securities, 
and often have slightly different values. However, ADR share values 
usually track closely with the value of the underlying security.
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    Nasdaq is proposing to adopt an exemption from the proposed average 
daily trading volume requirement for securities (including ADRs) listed 
in connection with a firm commitment

[[Page 14177]]

underwritten public offering of at least $4 million. Nasdaq believes 
that the sale of securities in an underwritten public offering provides 
an additional basis for believing that a liquid trading market will 
likely develop for such securities after listing, since the offering 
process is designed to promote appropriate price discovery. Moreover, 
the underwriters in a firm commitment underwritten public offering will 
also generally make a market in the securities for a period of time 
after the offering, assisting in the creation of a liquid trading 
market. For these reasons, in part, Nasdaq's rules already provide 
similar exemptions in other situations involving a firm commitment 
underwritten offering.\26\ Nasdaq believes that the process of a firm 
commitment underwritten offering similarly supports an exception from 
the proposed average daily trading volume requirement. Nasdaq also 
notes that the same volume requirement is being proposed for each of 
Nasdaq's Global Select, Global and Capital Market tiers, and that it is 
therefore appropriate to base the exemption on the same minimum $4 
million offering in each case, notwithstanding the different listing 
criteria generally applicable to companies seeking to list on each 
tier. Finally, Nasdaq believes that the proposed minimum $4 million 
firm commitment underwritten public offering is large enough to 
represent a fundamental change in how the company will trade following 
the offering, such that the prior trading volume will not be 
representative of the volume following the offering. In that regard, 
Nasdaq notes that the minimum $4 million offering would be sufficient 
to satisfy Nasdaq's one million share public float requirement at the 
minimum $4 price for listing on Capital Market. This exemption will be 
included in new Rules 5315(e)(4), 5404(a)(4), 5415(a)(6), 5505(a)(5), 
and 5510(a)(6).
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    \26\ For example, Rules 5410(d) and 5515(a)(4) provide an 
exemption from the minimum round lot holder requirement for warrants 
listed in connection with an initial firm commitment underwritten 
public offering. Rule 5110(c)(3) provides an exemption from the 
requirements applicable to a company that was formed by a reverse 
merger if the company completes a firm commitment underwritten 
public offering where the gross proceeds to the company will be at 
least $40 million.
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    Nasdaq proposes that this change be effective 30 days after 
approval by the SEC. Nasdaq notes that it had originally solicited 
comment on a similar proposal in October 2018,\27\ which provided 
companies with notice that Nasdaq was considering adopting the proposed 
changes to the Exchange's Initial Liquidity Calculations. The proposed 
30-day delay from approval until operation of the proposed rule will 
allow companies a short opportunity to complete an offering or 
transaction before the new rules become effective if they have 
substantially completed the Nasdaq review process or are near 
completion of an offering or transaction, and have relied on the 
existing rules.
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    \27\ See https://listingcenter.nasdaq.com/assets/Liquidity_Measures_Comment_Solicitation.pdf.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\28\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\29\ in particular, in that it is designed 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, as set forth below. Further, the Exchange believes that this 
proposal is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
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    The Commission has previously opined on the importance of 
meaningful listing standards for the protection of investors and the 
public interest.\30\ In particular, the Commission stated:

    \30\ 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).
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    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.\31\

    \31\ Id. at 70802.
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    As described below, Nasdaq believes that the proposed rule changes 
in this filing are consistent with the investor protection requirement 
of Section 6(b)(5) of the Act because they each will enable Nasdaq to 
help ensure that issuers seeking to list on the Exchange have 
sufficient public float, investor base, and trading interest likely to 
generate depth and liquidity. 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.
I. Restricted Securities
    The proposed amendments will adopt new definitions of ``restricted 
securities'' and ``unrestricted securities'' in order to exclude 
securities that are subject to resale restrictions from the Exchange's 
Initial Liquidity Calculations. The Exchange believes that these 
amendments will bolster the Exchange's quantitative shareholder 
requirements, and as a result, better reflect and safeguard the 
liquidity of a security. The Commission has previously noted the 
importance of adequate liquidity in a security and the consequences for 
investors when a security is thinly traded. In In the Matter of the 
Application of Rocky Mountain Power Company, the Commission observed:

    We note that the requirement concerning the number of 
shareholders is not only an important listing criterion but is also 
a standard used in conjunction with other standards to ensure that a 
stock has the investor following and liquid market necessary for 
trading. In response to the Panel's questions, the Company's 
president acknowledged that the market for Rocky Mountain's shares 
would be initially ``very, very small,'' and that fewer than 20,000 
of the Company's over 700,000 shares outstanding were freely 
tradeable. While Rocky Mountain, as a technical matter, complied 
with the shareholder requirement, it failed to demonstrate an 
adequate market for its shares, which is at the heart of this and 
other [Nasdaq] inclusion requirements.\32\
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    \32\ See Rocky Mountain Power Co., Securities Exchange Act 
Release No. 40648, 1998 SEC LEXIS 2422; 53 SEC. 979 (November 9, 
1998).

    Nasdaq believes that adopting the new definitions of restricted 
securities and unrestricted securities will promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national market system, and protect 
investors and the public interest because securities subject to resale 
restrictions are not freely transferrable and therefore excluding 
restricted securities from the Exchange's Initial Liquidity 
Calculations will help ensure that Nasdaq lists only companies with 
liquid securities and sufficient investor interest to support an 
exchange listing meeting the Exchange's listing criteria, which will 
better protect investors.

[[Page 14178]]

A. Publicly Held Shares
    The proposed amendments will adopt a new definition of 
``unrestricted publicly held shares'' which excludes restricted 
securities and revise Nasdaq's initial listing standards to conform the 
minimum number of publicly held shares to the new definition. Nasdaq 
believes that these changes will promote just and equitable principles 
of trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest because it will help ensure that a security to be 
listed has adequate liquidity and is thus suitable for listing and 
trading on an exchange, which will reduce trading volatility and price 
manipulation, thereby protecting investors and the public interest.
B. Market Value of Publicly Held Shares
    The proposed amendments will revise the definition of ``market 
value'' to exclude restricted securities from the calculation of 
``market value of unrestricted publicly held shares'' and revise 
Nasdaq's initial listing standards to conform the minimum market value 
to the new definition. Nasdaq believes that these changes will promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and protect investors and the public interest because it will 
help ensure that a security to be listed has adequate liquidity and 
investor interest and is thus suitable for listing and trading on an 
exchange, which will reduce trading volatility and price manipulation, 
thereby protecting investors and the public interest.
C. Round Lot Holders
    The proposed amendments will exclude restricted securities from the 
calculation of the number of round lot holders required to meet the 
Exchange's initial listing criteria by revising the definition of 
``round lot holder'' to exclude restricted securities. Nasdaq believes 
that this amendment will promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest by helping ensure adequate distribution, shareholder 
interest and a liquid trading market of a security.
D. American Depositary Receipts
    The proposed amendments will modify Nasdaq's rules to state that 
when considering the security underlying an ADR, Nasdaq will only 
consider restrictions that prohibit the resale or trading of the 
underlying security on the company's home country market. However, any 
restrictions, including those provided as examples in the new 
definition of ``restricted securities,'' which would restrict the 
underlying security from being freely sold or tradable on its home 
country market would be considered by Nasdaq when calculating 
``unrestricted publicly held shares.'' Nasdaq believes that this is 
appropriate because the purpose of the Initial Liquidity Calculations, 
and the proposed changes described herein, is to establish investor 
interest in the company and ensure adequate liquidity and distribution 
of the company's underlying security on its home country market, which 
is held by the depositary bank and represented by the ADR. For this 
reason, existing Rule 5215(b) currently looks to the underlying 
security when calculating publicly held shares, market value of 
publicly held shares, round lot and public holders and it is similarly 
appropriate to consider whether or not the underlying security is 
freely tradable in its home country market when determining 
unrestricted publicly held shares, market value of unrestricted 
publicly held shares, and round lot holders. Excluding securities that 
are only restricted from resale or trading in the United States would 
be not be an appropriate measure of investor interest in or liquidity 
of the underlying security because the underlying security will not be 
listed or trading in the U.S. Moreover, applying the new definition of 
restricted securities to securities trading on a foreign market, if the 
securities trading on the home country market are not already 
restricted by the examples set forth in the new definition of 
restricted securities, would unduly impose the requirements of a U.S. 
national securities exchange on those securities, which will not be 
listed in the U.S. For the foregoing reasons, Nasdaq believes that this 
provision will promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
    Further, the Exchange believes that this provision is not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers. While the Exchange's Initial Liquidity Calculations for ADRs 
would be calculated differently than other securities, these 
differences are not unfair because they recognize the unique structure 
of ADRs, as already reflected in the existing treatment of ADRs under 
Nasdaq's rules, where Nasdaq looks to the underlying security in order 
to ensure sufficient investor interest and adequate liquidity and 
distribution of the company's underlying security, which is represented 
by the ADR.
II. Minimum Value Requirement for Holders
    The Exchange proposes adopting a new requirement that at least 50% 
of a company's round lot holders hold securities with a market value of 
at least $2,500. Nasdaq believes that the proposed $2,500 minimum value 
is reasonable because the Exchange has noticed problems with companies 
listing where a large number of round lot holders hold exactly 100 
shares, which would be worth only $400 in the case of a stock that is 
trading at the minimum bid price of $4 per share, or as little as $200 
in the case of a stock listing under the alternative price criteria. 
Nasdaq notes that the proposed $2,500 threshold is from 6.5 times to 
12.5 times larger than the existing minimum investment, and Nasdaq 
believes that this increased amount is a more appropriate 
representation of genuine investor interest in the company and will 
make it more difficult to circumvent the requirement through share 
transfers for no value. As such, Nasdaq believes that these amendments 
will promote just and equitable principles of trade, remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest by 
requiring more than half of the required number of shareholders hold a 
more significant investment in the company, and that the company will 
therefore have an adequate distribution, shareholder interest and a 
liquid trading market of a security.
    Nasdaq does not propose to impose this requirement on the initial 
listings of warrants because warrants do not have a minimum price 
requirement and may have little value at the time of issuance. The 
value of warrants is derived from the value of the underlying security, 
which must be listed on Nasdaq or be a covered security and Nasdaq has 
not observed problems with the trading of warrants. As such, Nasdaq 
believes that it is not unfairly discriminatory to treat warrants 
differently under this proposal and that excluding warrants avoids 
imposing an unnecessary impediment to the mechanism of a free and open 
market.

[[Page 14179]]

III. Average Daily Trading Volume
    The proposed amendments will generally impose a minimum average 
daily trading volume over the 30 trading days prior to listing of at 
least 2,000 shares a day (including on the primary market with respect 
to an ADR), with trading occurring on more than half of those 30 days 
(i.e., at least 16 days). This will apply to primary equity securities, 
preferred stock, secondary classes of common stock and ADRs previously 
trading OTC that apply to list on the Exchange. Nasdaq believes this 
proposed change will promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and protect investors and the 
public interest by helping to assure adequate liquidity and price 
discovery of a security. The Exchange believes that companies trading 
at least 2,000 shares a day over a period of 30 trading days prior to 
listing, with trading occurring on more than half of those 30 days, can 
demonstrate sufficient investor interest to support sustained trading 
activity when listed on a national stock exchange.
    The proposed rule change will provide a limited exemption to this 
requirement for securities (including ADRs) listed in connection with a 
firm commitment underwritten public offering of at least $4 million. 
Nasdaq believes that it is consistent with the protection of investors 
and the public interest, and not unfairly discriminatory, to exempt 
from the proposed average daily trading volume requirement securities 
satisfying this exemption because underwriters facilitate appropriate 
price discovery and will generally make a market in the securities for 
a period of time after the offering, assisting in the creation of a 
liquid trading market. Further, Nasdaq believes that this exemption is 
consistent with the protection of investors and the public interest, 
and not unfairly discriminatory, because the proposed minimum $4 
million firm commitment underwritten public offering is large enough to 
represent a fundamental change in how the company will trade following 
the offering, such that the prior trading volume will not be 
representative of the volume following the offering.
    Under the proposed rule, Nasdaq would consider trading in the 
security underlying an ADR in determining whether a foreign company 
seeking to list ADRs satisfies the requirement. Nasdaq believes that 
this distinction is not unfairly discriminatory because the trading 
volume in the underlying security represents interest in the company's 
security and that interest is reasonably likely to be indicative of 
investor interest in the ADR.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. All domestic and foreign 
companies seeking to list primary equity securities, preferred stock, 
secondary classes of common stock or subscription receipts would be 
affected in the same manner by these changes, across all market tiers. 
As discussed above, companies listing ADRs would be treated differently 
in some respects than companies listing other primary equity 
securities, but those differences reflect the unique characteristics of 
ADRs and does [sic] not impose an unnecessary burden on competition.
    To the extent that companies prefer listing on a market with these 
proposed listing standards, other exchanges can choose to adopt similar 
enhancements to their requirements. As such, these changes are neither 
intended to, nor expected to, impose any burden on competition between 
exchanges.

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

    On October 5, 2018, Nasdaq launched a formal comment solicitation 
on proposals to exclude restricted securities from the Exchange's 
Initial Liquidity Calculations and adopt a new initial listing criteria 
related to prior trading volume for securities that are currently 
trading OTC (``2018 Solicitation''), a copy of which is attached hereto 
as Exhibit 2.\33\ No comments were received in response to the comment 
solicitation.
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    \33\ The Commission notes that Exhibit 2 is attached to the 
Exchange's Form 19b-4 relating to the proposed rule change and not 
to this notice.
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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 [email protected]. Please include 
File Number SR-NASDAQ-2019-009 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-2019-009. 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 such 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-2019-009, and should be submitted 
on or before April 30, 2019.

[[Page 14180]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06935 Filed 4-8-19; 8:45 am]
 BILLING CODE 8011-01-P