Document ID: SEC-2022-1429-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2022-11-03T04:00Z

[Federal Register Volume 87, Number 212 (Thursday, November 3, 2022)]
[Notices]
[Pages 66337-66339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-23870]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96176; File No. SR-NASDAQ-2022-057]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt Listing Rule 5732 To 
Provide Listing Standards for Contingent Value Rights on Nasdaq Global 
Market

October 28, 2022.
    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 October 17, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. 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 Listing Rule 5732 to provide listing 
standards for Contingent Value Rights on Nasdaq Global Market.
    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
    Nasdaq proposes to adopt Listing Rule 5732 to provide listing 
standards for Price-Based and Event-Based Contingent Value Rights (each 
a ``CVR'' and collectively, ``CVRs'') on Nasdaq Global Market, which 
are unsecured obligations of the issuer providing for a possible cash 
payment at maturity.\3\ The Exchange believes that the proposed rule 
change will increase competition by providing an additional listing 
venue for CVRs, which can currently be listed on other securities 
exchanges. CVRs are often used to bridge valuation gaps relating to 
uncertain future events that may influence the value of a target 
company and, more generally, may be employed to aid in the completion 
of deals by helping to solve certain of the valuation and closing 
challenges that the parties encounter.
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    \3\ The proposed rule change is based on Section 703.18 of the 
NYSE Listed Company Manual, related to initial listing of CVRs, and 
the provisions of Section 802.01D applicable to ``Specialized 
Securities'', related to continued listing of CVRs. See Securities 
Exchange Act Release No. 26072 (May 30, 1990), 55 FR 23166 (June 6, 
1990) (SR-NYSE-90-15) (adopting NYSE rules related to Price-Based 
CVRs); Securities Exchange Act Release No. 86651 (August 13, 2019), 
84 FR 42967 (August 19, 2019) (SR-NYSE-2019-14) (adopting NYSE rules 
related to Event-Based CVRs).
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    Specifically, the cash payment at maturity for a CVR can be based 
upon the price performance of an affiliate's equity security (a 
``Price-Based CVR'') or upon the occurrence of a specified event or 
events related to the business of the issuer or an affiliate of the 
issuer (an ``Event-Based CVR''). At maturity, the holder of a Price-
Based CVR is entitled to a cash payment if the average market price of 
the related equity security is less than a pre-set target price. The 
target price is established at the time the Price-Based CVR is issued. 
Conversely, should the average market price of the related equity 
security equal or exceed the target price, the Price-Based CVR would 
expire worthless. Price-Based CVRs are generally distributed to 
shareholders of an acquired company who are receiving shares of the 
acquirer as acquisition consideration. The Price-Based CVRs provide the 
acquiree's shareholders with some medium-term protection against poor 
stock price performance of the shares of the acquirer by guaranteeing 
them a specified cash payment if the acquirer's average stock price is 
below a specified level at the time of maturity of the Price-Based CVR.
    Event-Based CVRs are also typically issued to the shareholders of 
an acquired entity as consideration in an acquisition transaction. 
Event-Based CVRs entitle their holders to receive a specified cash 
payment upon the occurrence of a specified event or events related to 
the business of the issuer or an affiliate of the issuer prior to the 
maturity date of the Event-Based CVR. The Event-Based CVR provides the 
shareholders of the acquiree an additional interest in the medium-term 
performance of the merged entity upon occurrence of its specified 
event(s). An example of a typical Event-Based CVR occurs in mergers of 
life sciences companies, when the CVR payment is triggered by the 
receipt of FDA approval of a new drug application. Another example of 
an Event-Based CVR is a CVR issued in connection with a merger whose 
payment triggering event is the achievement of a specified level of 
financial performance by the combined entity or by a division of the 
combined entity representing the assets from the acquired company. 
Event-Based CVRs, which are transferrable, have become increasingly 
common in recent years, especially in connection with mergers of life 
sciences companies.
    For initial listing on the Nasdaq Global Market, the issuer must 
have assets in excess of $100 million, satisfy the requirement of 
Nasdaq Rule 5315(f)(3)(A) \4\ or have at least $200 million in global 
market capitalization and satisfy the requirement of Rule

[[Page 66338]]

5315(f)(2)(A) and (B) \5\ related to Market Value of Unrestricted 
Publicly Held Shares. In order to list a CVR, an issuer of the CVR must 
not be considered non-compliant with the listing standards of the 
national securities exchange where either the equity security to whose 
price performance a Price-Based CVR, or in an Event-Based CVR, where 
the primary equity security is linked or the issuer's common stock is 
listed.
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    \4\ Specifically, to satisfy Nasdaq Rule 5315(f)(3)(A) a 
Company, other than a closed end management investment company, must 
aggregate income from continuing operations before income taxes of 
at least $11 million over the prior three fiscal years, (ii) 
positive income from continuing operations before income taxes in 
each of the prior three fiscal years, and (iii) at least $2.2 
million income from continuing operations before income taxes in 
each of the two most recent fiscal years.
    \5\ See Nasdaq Rule 5315(f)(2)(A) and (B) requiring (i) a Market 
Value of at least $110 million; or (ii) a Market Value of at least 
$100 million, if the Company has stockholders' equity of at least 
$110 million.
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    Also, the CVR issue must have a minimum of 400 holders; a minimum 
of 1 million CVRs outstanding; a minimum of $4 million market value; a 
minimum life of one year; and a minimum $4.00 bid price. While these 
distribution and liquidity standards applicable to CVRs can help to 
ensure there should be adequate depth, liquidity, and investor interest 
to support an exchange listing, the issuer requirements will provide 
some minimum level of indicia that the issuer of a CVR should be able 
to meet any future payment obligations to shareholders of Event-Based, 
as well as Price-Based, CVRs pursuant to the applicable CVR agreement.
    Prior to listing a CVR under the proposed rule, Nasdaq would issue 
a circular as described in proposed Nasdaq Rule 5732(c) reminding its 
members that because CVRs have certain unique characteristics investors 
should be afforded an explanation of such special characteristics and 
risks attendant to trading thereof, as well as the Exchange's know-
your-customer, suitability, and other rules applicable thereto. Nasdaq 
will suggest to its members that transactions in CVRs be recommended 
only to investors whose accounts have been approved for options trading 
or whom the member firm has otherwise ascertained that CVRs are 
suitable for. Like other financial products with unique features 
trading on the Exchange, CVRs combine features of debt, equity, and 
securities derivative instruments. Consequently, this product may be 
more complex than straight stock, bond, or equity warrants. The 
Exchange believes distribution of this information circular will help 
to alert members to the special disclosure and suitability obligations 
that apply to CVRs and that are relevant in making recommendations for 
investors to purchase such securities.\6\
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    \6\ In particular, the circular states, among other things, that 
it is suggested that transactions in CVRs be recommended only to 
investors whose accounts have been approved for options trading and 
that members making recommendations in CVRs should make a 
determination that the customer has such knowledge and experience in 
financial matters that the customer may reasonably be expected to be 
capable of evaluating the risks and special characteristics, and is 
financially able to bear the risks, of a recommendation to invest in 
CVRs. Nasdaq believes these requirements, among others set forth in 
the circular, should help to ensure that members recommend 
transactions only to those customers with an understanding of the 
risks attendant to the trading of CVRs.
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    While listed, the issuer of an Event-Based CVR will be required to 
make public disclosure: (i) upon the occurrence of any event that must 
occur as a condition to the issuer's obligation to make a cash payment 
with respect to the CVR (or if such an event is deemed to have occurred 
pursuant to the terms of the documents governing the CVR); or (ii) at 
any such time as it becomes clear that a condition to the cash payment 
with respect to the CVR has not been met as required by the documents 
governing the terms of the CVR.\7\
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    \7\ IM-5250-1. Disclosure of Material Information, among other 
things, requires Nasdaq companies to notify Nasdaq's MarketWatch 
Department prior to the distribution of certain material news at 
least ten minutes prior to public announcement of the news when the 
public release of the information is made from 7:00 a.m. to 8:00 
p.m. ET. Trading halts are instituted, among other reasons, to 
ensure that material information is fairly and adequately 
disseminated to the investing public and the marketplace, and to 
provide investors with the opportunity to evaluate the information 
in making investment decisions.
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    Nasdaq will delist a CVR pursuant to the provisions of the Listing 
Rule 5800 Series if the CVR fails to maintain any of the following: (1) 
at least 100,000 Publicly Held Shares; (2) at least 100 Holders; or (3) 
at least $1 million Market Value of Listed Securities. In addition, 
Nasdaq would delist the CVR if either the equity security to whose 
price performance a Price-Based CVR is linked or the issuer's common 
stock does not remain listed. Also, Nasdaq would delist an Event-Based 
CVR once the occurrence of the specified event or events related to the 
business of the issuer or an affiliate of the issuer has occurred or 
once it goes beyond the time that the specified event or events should 
have occurred.
    The Exchange will rely on its existing trading surveillances, 
administered by the Exchange, or the Financial Industry Regulatory 
Authority (``FINRA'') on behalf of the Exchange, which are designed to 
detect violations of Exchange rules and applicable federal securities 
laws. The Exchange will monitor activity in CVRs to identify and deter 
any potential improper trading activity in such securities and monitor 
CVRs alongside the common equity securities of the issuer or its 
affiliates, as applicable. In addition, the Exchange will adopt 
enhanced surveillance procedures if necessary. Since news and 
information concerning a company and its primary equity security or 
common stock can have an impact on a company's Event-Based CVRs and 
Price-Based CVRs, the surveillance should help to monitor the trading 
activity in the Event-Based CVRs and Price-Based CVRs. In addition, if 
the underlying security is listed and traded on another U.S. national 
securities exchange, Nasdaq will communicate as needed and may obtain 
information regarding trading from markets and other entities that are 
members of ISG.\8\
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    \8\ For a list of the current members of ISG, see 
www.isgportal.org.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposal to permit the listing of CVRs under proposed Listing 
Rule 5732 is designed to protect investors and the public interest. The 
purpose of the proposed rule change is to provide a transparent 
regulated market for the trading of those securities. The listing of 
Price-Based CVRs has been permitted under Section 703.18 of the New 
York Stock Exchange LLC (``NYSE'') Listed Company Manual (``Section 
703.18'') for many years, and several years ago NYSE also amended 
Section 703.18 to accommodate Event-Based CVRs.\11\ The Exchange notes 
that, with the exception of the payment triggering event, Event-Based 
CVRs are identical in structure to Price-Based CVRs. Listed companies 
have been issuing transferable Event-Based CVRs as acquisition 
consideration for a number of years.\12\
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    \11\ See Securities Exchange Act Release No. 26072 (May 30, 
1990), 55 FR 23166 (June 6, 1990) (SR-NYSE-90-15) (adopting NYSE 
rules related to Price-Based CVRs); Securities Exchange Act Release 
No. 86651 (August 13, 2019), 84 FR 42967 (August 19, 2019) (SR-NYSE-
2019-14) (adopting NYSE rules related to Event-Based CVRs).
    \12\ See, for example, CVRs listed by Sanofi (cash payment tied 
to achieving sales targets of certain drugs) and Wright Medical 
Group N.V. (cash payment tied to FDA approval of a certain drug and 
achieving revenue milestones), which were both listed on the 
Exchange under current Rule 5730. No similar CVRs are currently 
listed at the time of this filing.

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[[Page 66339]]

    The Exchange will distribute a circular as described in proposed 
Listing Rule 5732(c) prior to the commencement of trading of any CVR 
reminding its members that because CVRs have certain unique 
characteristics investors should be afforded an explanation of such 
special characteristics and risks attendant to trading thereof, as well 
as the Exchange's know-your-customer, suitability, and other rules 
applicable thereto. The Exchange believes that the distribution of this 
circular will help address concerns, among others, that the complexity 
of a CVR could lead to investor confusion and create certain risks. In 
addition, the Exchange will monitor activity in CVRs, to identify and 
deter any potential improper trading activity in such securities and 
monitor CVRs together with the common equity securities of the issuer 
or its affiliates, as applicable. The Exchange also will adopt enhanced 
surveillance procedures if necessary. The Exchange believes these 
measures will reduce the risks of manipulative or other improper 
activity in connection with CVRs.
    Proposed Listing Rule 5732 is designed to protect investors and the 
public interest, as it requires that only larger, well capitalized 
companies can list CVRs. The issuer requirements under proposed Listing 
Rule 5732 are those applied to the initial listing of common stocks of 
operating companies on the Nasdaq Global Select Market, and, as such, 
the Exchange believes that they are sufficiently rigorous to be used in 
connection with the listing of CVRs on Nasdaq Global Market. The 
Exchange further believes that issuers that meet the Global Select 
Market issuer qualification requirements are likely to be substantial 
companies capable of meeting their financial obligations under the 
terms of a listed CVR. The Exchange also notes that it will require 
issuers of listed CVRs to have at least $100 million in total assets at 
the time of original listing.
    Nasdaq will delist a CVR pursuant to the provisions of the Listing 
Rule 5800 Series if the CVR fails to maintain any of the following, 
which are set forth in the continued listing requirements of Listing 
Rule 5732(d): (1) at least 100,000 Publicly Held Shares; (2) at least 
100 Holders; or (3) at least $1 million Market Value of Listed 
Securities. In addition, Nasdaq would delist the CVR if either the 
equity security to whose price performance a Price-Based CVR is linked 
or the issuer's common stock does not remain listed. Also, Nasdaq would 
delist an Event-Based CVR once the occurrence of the specified event or 
events related to the business of the issuer or an affiliate of the 
issuer has occurred or once it goes beyond the time that the specified 
event or events should have occurred. This is designed to protect 
investors and the public interest, as it ensures that issuers whose 
CVRs are listed on the Exchange will meet the qualitative and 
quantitative standards for listing on a national securities exchange on 
a continuous basis.

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. The proposed rule change will 
increase competition by providing an additional listing venue for CVRs, 
which can currently be listed on other securities exchanges and does 
not impose any burden on competition.

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 self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the 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-2022-057 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-2022-057. 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-2022-057, and should be submitted 
on or before November 25, 2022.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-23870 Filed 11-2-22; 8:45 am]
BILLING CODE 8011-01-P