Document ID: SEC-2021-1399-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-10-08T04:00Z

[Federal Register Volume 86, Number 193 (Friday, October 8, 2021)]
[Notices]
[Pages 56338-56344]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21988]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93256; File No. SR-NASDAQ-2021-007]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Granting Approval of a 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

October 4, 2021.

I. Introduction

    On February 1, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt additional initial listing criteria for 
companies primarily operating in jurisdictions that do not provide the 
Public Company Accounting Oversight Board (``PCAOB'') with the ability 
to inspect public accounting firms. The proposed rule change was 
published for comment in the Federal Register on February 16, 2021.\3\ 
On March 26, 2021, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On May 17, 2021, the Commission instituted proceedings to 
determine whether to approve or disapprove the

[[Page 56339]]

proposed rule change.\6\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91089 (February 9, 
2021), 86 FR 9549 (``Notice''). Comments on the proposed rule change 
can be found at: https://www.sec.gov/comments/sr-nasdaq-2021-007/srnasdaq2021007.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 91413, 86 FR 17263 
(April 1, 2021). The Commission designated May 17, 2021 as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to approve or disapprove, the 
proposed rule change.
    \6\ See Securities Exchange Act Release No. 91904, 86 FR 27659 
(May 21, 2021).
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II. Description of the Proposed Rule Change

    The Exchange states that the Exchange's rules, in addition to 
federal securities laws, require that a company's financial statements 
included in its initial registration statement or annual report be 
audited by an independent public accountant that is registered with the 
PCAOB.\7\ According to the Exchange, the Exchange 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, and on the PCAOB's critical role in overseeing the 
quality of the auditor's work.\8\ The Exchange states its belief that 
accurate financial statement disclosure is critical for investors to 
make informed investment decisions.\9\
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    \7\ See Notice, supra note 3, at 9549. See also Nasdaq Rules 
5210(b) and 5250(c)(3) (requiring for initial and continued listing 
on Nasdaq that companies must be audited by an independent public 
accountant that is registered as a public accounting firm with the 
PCAOB); 15 U.S.C. 7212(a) (Registration with the PCAOB); 17 CFR 
210.2-01 (Qualifications of Accountants).
    \8\ See Notice, supra note 3, at 9550.
    \9\ See id.
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    The Exchange states that the former Chairman and former Chief 
Accountant of the Commission and the former 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.\10\ The Exchange states that similar concerns have been 
expressed by members of Congress, the State Department, and the 
President's Working Group on Financial Markets.\11\ The Exchange states 
that it shares these concerns and 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 (``Restrictive Market'').\12\
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    \10\ See id. (citing to various statements by former Commission 
Chairman Jay Clayton, former Commission Chief Accountant Wes 
Bricker, and former PCAOB Chairman William D. Duhnke III, available 
at https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other; https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting; and https://www.sec.gov/news/public-statement/clayton-emerging-markets-roundtable-2020-07-09). See id. at 9550, 
n.8.
    \11\ See id. at 9550 (citing to ``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; Former 
Commission 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; Press Statement of Michael R. Pompeo, Former 
Secretary of State, New Nasdaq Restrictions Affecting Listing of 
Chinese Companies (June 4, 2020), available at https://2017-2021-translations.state.gov/2020/06/04/new-nasdaq-restrictions-affecting-listing-of-chinese-companies/index.html; 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). See id. at 9550, nn.9-11.
    \12\ See id. at 9550.
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    The Exchange further states that such concerns can be compounded 
when a company from a Restrictive Market lists on the Exchange through 
an initial public offering (``IPO'') or a 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.\13\ 
According to the Exchange, such 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.\14\ Furthermore, the Exchange states that less liquid securities 
may be more susceptible to price manipulation and that, in particular, 
the risk of price manipulation due to insider trading is more acute 
with respect to a company that principally administers its business in 
a Restrictive Market (``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 
Commission rules and professional standards in connection with its 
performance of audits.\15\ The Exchange states that 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.\16\
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    \13\ See id.
    \14\ See id. The Exchange also states that 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. See id.
    \15\ See id.
    \16\ See id.
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    Nasdaq states that it believes the U.S. capital markets can provide 
Restrictive Market Companies with access to additional capital to fund 
ground-breaking research and technological advancements and that such 
companies provide U.S. investors with opportunities to diversify their 
portfolio by providing exposure to Restrictive Markets.\17\ However, 
Nasdaq further states that it 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.\18\ Nasdaq states that it believes its proposal will 
reduce trading volatility and price manipulation and help to ensure 
that Restrictive Market Companies have sufficient investor base and 
public float to support fair and orderly trading on the Exchange.\19\
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    \17\ See id. at 9553-54. See also Letter from Jeffrey S. Davis, 
Senior Vice President, General Counsel, Nasdaq, Inc. (April 30, 
2021) (``Nasdaq Response Letter''), at 2.
    \18\ See Notice, supra note 3, at 9554.
    \19\ See id. See also Nasdaq Response Letter, supra note 17, at 
3.
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    Specifically, the Exchange proposes to adopt a definition of 
``Restrictive Market'' \20\ and to apply additional initial listing 
requirements to a Restrictive Market Company listing on the Exchange in 
connection with an IPO or a business combination.\21\ The

[[Page 56340]]

Exchange also proposes to prohibit a Restrictive Market Company from 
listing on the Nasdaq Capital Market in connection with a Direct 
Listing,\22\ but to allow a Restrictive Market Company to list on the 
Nasdaq Global Select Market or Nasdaq Global Market in connection with 
a Direct Listing, provided that such company meets all applicable 
initial listing requirements for such market.
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    \20\ See infra note 24 and accompanying text.
    \21\ The Exchange states that, currently, it may rely upon its 
discretionary authority under Nasdaq Rule 5101 to deny initial 
listing or apply additional or more stringent criteria when it is 
concerned that a small offering size for an IPO may not reflect the 
company's initial valuation or may not ensure sufficient liquidity 
to support trading in the secondary market. Pursuant to Nasdaq Rule 
5101, Nasdaq has 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. See Nasdaq Rule 5101.
    \22\ Nasdaq defines ``Direct Listing'' as the listing of 
``companies that have sold common equity securities in private 
placements, which have not been listed on a national securities 
exchange or traded in the over-the-counter market pursuant to FINRA 
Form 211 immediately prior to the initial pricing.'' See Nasdaq Rule 
IM-5315-1.
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A. Definition of Restrictive Market

    The Exchange proposes to adopt a new definition of Restrictive 
Market in Nasdaq Rule 5005(a)(37).\23\ As proposed, a Restrictive 
Market will be defined as a jurisdiction that does not provide the 
PCAOB with access to conduct inspections of public accounting firms 
that audit Nasdaq-listed companies.\24\ Under the proposed rule, 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.\25\
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    \23\ The Exchange proposes to renumber current paragraphs 
(a)(37) through (a)(46) of Nasdaq Rule 5005 in connection with the 
addition of the definition of Restrictive Market. See Notice, supra 
note 3, at 9551.
    \24\ See proposed Nasdaq Rule 5005(a)(37). The Exchange states 
that the PCAOB maintains a map of where it can and cannot conduct 
oversight activities on its website and 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. See Notice, 
supra note 3, at 9551.
    \25\ See proposed Nasdaq Rule 5005(a)(37). The term ``Company'' 
means the issuer of a security listed or applying to list on Nasdaq. 
See Nasdaq Rule 5005(a)(6). The Exchange provides the following 
examples. Company X's books and records are located in Country Y, 
which is not a Restrictive Market, while 90% of its revenues are 
driven from operations in Country Z, which is a Restrictive Market. 
Nasdaq would consider Company X's business to be principally 
administered in Country Z, so Company X would be considered a 
Restrictive Market Company. Alternatively, Company A's books and 
records are 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, so Company A would be 
considered a Restrictive Market Company. See Notice, supra note 3, 
at 9551.
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B. Minimum Offering Size or Public Float Percentage Requirement for an 
IPO

    The Exchange proposes to adopt new Nasdaq Rule 5210(k)(i) to 
require a Restrictive Market Company listing its Primary Equity 
Security \26\ on Nasdaq in connection with its IPO to offer a minimum 
amount of securities in a Firm Commitment Offering \27\ in the U.S. to 
Public Holders \28\ that (i) will result in gross proceeds to the 
Company of at least $25 million or (ii) will represent at least 25% of 
the Company's post-offering Market Value of Listed Securities,\29\ 
whichever is lower. A Restrictive Market Company listing on the 
Exchange in connection with an IPO that is subject to the proposed rule 
would also need to comply with all other applicable listing 
requirements.\30\ The Exchange states that it believes this proposed 
listing requirement for Restrictive Market Companies conducting an IPO 
will provide greater support for the company's price, as determined 
through the offering, and will help assure there will be sufficient 
liquidity, U.S. investor interest, and distribution to support price 
discovery once the security is listed.\31\ In addition, the Exchange 
states 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.\32\
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    \26\ Nasdaq 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).''
    \27\ Nasdaq 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.''
    \28\ Nasdaq 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.''
    \29\ ``Market Value'' means the consolidated closing bid price 
multiplied by the measure to be valued. See Nasdaq Rule 5000(a)(23). 
``Listed Securities'' means securities listed on Nasdaq or another 
national securities exchange. See Nasdaq Rule 5000(a)(22).
    \30\ The Exchange provides the following examples to illustrate 
the proposed rule. First, Company X, which principally administers 
its business in a Restrictive Market, is applying to list on Nasdaq 
Global Market and has an expected post-offering Market Value of 
Listed Securities of $75,000,000. Since 25% of $75,000,000 is 
$18,750,000, which is lower than $25,000,000, pursuant to the 
requirements of the proposed rule, Company X would be eligible to 
list based on a Firm Commitment Offering in the U.S. to Public 
Holders of at least $18,750,000. 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 of at least $8 million. See Notice, supra note 3, at 9551; 
Nasdaq Rule 5405(b)(1)(C). See also Nasdaq Rules 5005(a)(45) 
(definition of ``Unrestricted Publicly Held Shares''), 5005(a)(46) 
(definition of ``Unrestricted Securities''), and 5005(a)(37) 
(definition of ``Restricted Securities''). As another example, 
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 $200,000,000 is 
$50,000,000, which is higher than $25,000,000, pursuant to the 
requirements of the proposed rule, Company Y would be eligible to 
list 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. 
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. See Notice, supra note 3, at 9551-52; Nasdaq Rule 
5315(f)(2)(C).
    \31\ See Notice, supra note 3, at 9552.
    \32\ See id.
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    The Exchange further states that it 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.\33\ The Exchange states that it 
believes the proposed listing requirement for Restrictive Market 
Companies conducting an IPO will mitigate such compliance concerns.\34\
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    \33\ See id. Specifically, the Exchange states that 39 out of 
113 Restrictive Market Companies that listed on Nasdaq through an 
IPO from January 1, 2015 to September 30, 2020 would not have 
qualified under the requirement in proposed Nasdaq Rule 5210(k)(i) 
because they had offering amounts of $25 million or less. According 
to Nasdaq, two of these companies were considered to be Restrictive 
Market Companies 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. Of those companies that would not have 
qualified under the requirement in proposed Nasdaq Rule 5210(k)(i), 
twenty, or 51%, were cited for a compliance issue, which Nasdaq 
states is a significantly higher rate than other Restrictive Market 
Companies (16%). The Exchange also states that, during the same 
period, 25 out of 84 (or 30%) of Restrictive Market Companies that 
had a ratio of offering size to Market Value of Listed Securities of 
25% or less failed to comply with one or more listing standards 
after listing, which, according to the Exchange, is a significantly 
higher non-compliance rate than for other foreign companies (11%) 
and other Restrictive Market Companies (21%) that had such listings. 
The Exchange also found that, during the same period, 35 Restrictive 
Market Companies would not have met either the $25 million offering 
size requirement or the 25% of the company's post-offering Market 
Value of Listed Securities requirement, and 18 of those companies 
were cited for a compliance concern. See id.
    \34\ See id.

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[[Page 56341]]

C. Minimum Market Value of Unrestricted Publicly Held Shares 
Requirement for a Business Combination

    The Exchange proposes to adopt new Nasdaq Rule 5210(k)(ii) to 
require a Company that is conducting a business combination, as 
described in Nasdaq Rule 5110(a) \35\ or IM-5101-2,\36\ with a 
Restrictive Market Company to have a minimum Market Value of 
Unrestricted Publicly Held Shares \37\ following the business 
combination equal to the lesser of (i) $25 million or (ii) 25% of post-
business combination entity's Market Value of Listed Securities. A 
Restrictive Market Company subject to the proposed rule would also need 
to comply with all other applicable listing requirements.\38\
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    \35\ Nasdaq Rule 5110(a) (Business Combinations with non-Nasdaq 
Entities Resulting in a Change of Control) sets forth requirements 
applicable to a Company that engages in a business combination with 
a non-Nasdaq entity, resulting in a change of control of the Company 
and potentially allowing the non-Nasdaq entity to obtain a Nasdaq 
Listing.
    \36\ Nasdaq Rule IM-5101-2 (Listing of Companies Whose Business 
Plan is to Complete One or More Acquisitions) sets forth 
requirements applicable to a Company whose business plan is to 
complete an IPO and engage in a merger or acquisition with one or 
more unidentified companies within a specific period of time.
    \37\ Nasdaq Rule 5005(a)(45) defines ``Unrestricted Publicly 
Held Shares'' as Publicly Held Shares that are Unrestricted 
Securities. ``Publicly Held Shares'' means 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. See Nasdaq Rule 5005(a)(35). ``Unrestricted 
Securities'' means securities that are not subject to resale 
restrictions for any reason, including, but not limited to, 
securities: (i) Acquired directly or indirectly from the issuer or 
an affiliate of the issuer in unregistered offerings such as private 
placements or Regulation D offerings; (ii) acquired through an 
employee stock benefit plan or as compensation for professional 
services; (iii) acquired in reliance on Regulation S, which cannot 
be resold within the United States; (iv) subject to a lockup 
agreement or a similar contractual restriction; or (v) considered 
``restricted securities'' under Rule 144. See Nasdaq Rules 
5005(a)(46) and (37).
    \38\ The Exchange provides the following examples to illustrate 
the proposed rule. First, 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, 
pursuant to the requirements of the proposed rule, to qualify for 
listing the post-business combination entity must have a minimum 
Market Value of Unrestricted Publicly Held Shares of at least 
$25,000,000. The company 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. See Notice, supra note 3, at 9552; Nasdaq Rule 
5315(f)(2)(C). As another example, 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 Nasdaq 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, pursuant to the requirements of the proposed rule, 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. The post-business combination company would also need 
to comply with all other applicable listing requirements of the 
Nasdaq Capital Market, including a Market Value of Unrestricted 
Publicly Held Shares of at least $5 million. See Notice, supra note 
3, at 9552; Nasdaq Rule 5505(b)(3)(C).
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    The Exchange states that it 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, Nasdaq 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.\39\ The Exchange further states that it believes that the proposed 
listing requirement for post-business combination entities 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.\40\
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    \39\ See Notice, supra note 3, at 9553. The Exchange states that 
it found that out of seven business combinations involving 
Restrictive Market Companies from 2015 through September 30, 2020, 
five would not have qualified under proposed Nasdaq Rule 5210(k)(ii) 
to have a minimum Market Value of Unrestricted Publicly Held Shares 
following the business combination of $25 million or 25% of the 
post-business combination entity's Market Value of Listed 
Securities, whichever is lower. The Exchange states that all five of 
these companies have been cited for a deficiency after the 
completion of their business combination. On the other hand, Nasdaq 
states that only one out of the two business combinations involving 
Restrictive Market Companies that would have qualified under 
proposed Nasdaq Rule 5210(k)(ii) during such period was cited for a 
compliance concern. See id.
    \40\ See id.
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D. Direct Listings of Restrictive Market Companies

    The Exchange proposes to adopt new Nasdaq Rule 5210(k)(iii) to 
provide that a Restrictive Market Company that is listing its Primary 
Equity Security on Nasdaq in connection with a Direct Listing, as 
defined in Nasdaq Rule IM-5315-1,\41\ would be permitted to list on: 
(i) The Nasdaq Global Select Market, provided that the Company meets 
all applicable listing requirements for the Nasdaq Global Select Market 
and the additional requirements of Nasdaq Rule IM-5315-1, or (ii) the 
Nasdaq Global Market, provided that the Company meets all applicable 
listing requirements for the Nasdaq Global Market and the additional 
requirements of Nasdaq Rule IM-5405-1.\42\ On the other hand, proposed 
Nasdaq Rule 5210(k)(iii) would provide that a Restrictive Market 
Company would not be permitted to list on the Nasdaq Capital Market in 
connection with a Direct Listing, notwithstanding the fact that the 
Company may meet the applicable initial listing requirements for the 
Nasdaq Capital Market and the additional requirements in Nasdaq Rule 
IM-5505-1.\43\
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    \41\ See supra note 22.
    \42\ See Notice, supra note 3, at 9553.
    \43\ See id.
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    The Exchange's rules currently set forth initial listing 
requirements for companies listing on the Nasdaq Global Select Market, 
Nasdaq Global Market, and Nasdaq Capital Market,\44\ and additional 
listing requirements for Companies conducting a Direct Listing on such 
markets.\45\ The Exchange states that it 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 because such 
companies would be subject to the additional listing requirements set 
forth in Nasdaq Rule IM-5315-1 or IM-5405-1, respectively.\46\ On the 
other hand, the Exchange states that it does not believe that the 
additional requirements for Direct Listing on the Nasdaq Capital 
Market, set forth in Nasdaq Rule IM-5501-1, 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.\47\
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    \44\ See Nasdaq Rules 5315, 5405, and 5505.
    \45\ See Nasdaq Rules IM-5315-1, IM-5405-1, and IM-5505-1.
    \46\ See Notice, supra note 3, at 9553.
    \47\ See id. As an example, the Exchange states that 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. 
See Nasdaq Rules 5315(e)(2), 5315(f)(2)(C), 5405(a)(2), and 
5405(b)(1)(C). In contrast, the Nasdaq Capital Market only 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. See Nasdaq Rules 5505(a)(2) and 5505(b)(3)(C); 
Notice, supra note 3, at 9553, n.34.

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[[Page 56342]]

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\48\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\49\ which requires, among 
other things, that the rules of a national securities exchange be 
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, and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \48\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \49\ 15 U.S.C. 78f(b)(5).
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    The Exchange has proposed to adopt enhanced initial listing 
standards for Restrictive Market Companies conducting an IPO or engaged 
in a business combination in order to help assure the existence of 
adequate investor base and public float to support fair and orderly 
trading for securities issued by Restrictive Market Companies that are 
listing on the Exchange for the first time.\50\ In addition, the 
Exchange has proposed to prohibit Direct Listings on Nasdaq Capital 
Market of securities issued by Restrictive Market Companies due to 
concerns regarding liquidity and fair and orderly trading.\51\ As 
stated by the Exchange, listed companies that are based in 
jurisdictions that do not provide the PCAOB with access to conduct 
inspections of public accounting firms that audit Nasdaq-listed 
companies raise concerns regarding the accuracy of disclosures, 
accountability, and access to information with respect to such 
companies and 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.\52\ The Exchange also states 
that less liquid securities may be more susceptible to price 
manipulation and that, in particular, the risk of price manipulation 
due to insider trading is more acute with respect to Restrictive Market 
Companies, 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 Commission rules and professional standards in 
connection with its performance of audits.\53\
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    \50\ See supra notes 32 and 40 and accompanying text.
    \51\ See supra note 47 and accompanying text.
    \52\ See supra notes 10-12 and accompanying text.
    \53\ See supra note 15 and accompanying text.
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    Further, the Exchange states that 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.\54\ The Exchange states 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 Commission rules and professional standards in connection 
with the auditor's performance of audits.\55\ Absent reasonable 
assurances from an auditor that a company's financial statements and 
related disclosures are free from material misstatements, the Exchange 
states that 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.\56\ The Exchange therefore believes that 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 Restrictive Market Company, thereby 
preventing fraudulent and manipulative acts, protecting investors, and 
promoting the public interest.\57\
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    \54\ See supra note 8 and accompanying text.
    \55\ See Notice, supra note 3, at 9554.
    \56\ See id.
    \57\ See id. See also Nasdaq Response Letter, supra note 17, at 
3.
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    The Commission has consistently recognized that the development and 
enforcement of meaningful listing standards for an exchange is of 
critical importance to financial markets and the investing public.\58\ 
Among other things, the Commission has stated that 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 that have or will have sufficient public float, investor 
base, and trading interest likely to generate depth and liquidity 
sufficient to promote fair and orderly markets.\59\ Meaningful listing 
standards are also 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.\60\
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    \58\ See infra notes 59-60.
    \59\ See, e.g., Securities Exchange Act Release Nos. 81856 
(October 11, 2017), 82 FR 48296, 48298 (October 17, 2017) (SR-NYSE-
2017-31); 81079 (July 5, 2017), 82 FR 32022, 32023 (July 11, 2017) 
(SR-NYSE-2017-11); 65708 (November 8, 2011), 76 FR 70799, 70802 
(November 15, 2011) (``SR-NASDAQ-2011-073 Approval Order''); 63607 
(December 23, 2010), 75 FR 82420, 82422 (December 30, 2010) (``SR-
NASDAQ-2010-137 Approval Order''); and 57785 (May 6, 2008), 73 FR 
27597, 27599 (May 13, 2008) (``SR-NYSE-2008-17 Approval Order''). 
The Commission has stated that adequate listing standards, by 
promoting fair and orderly markets, are consistent with Section 
6(b)(5) of the Act, in that they are, among other things, designed 
to prevent fraudulent and manipulative acts and practices, promote 
just and equitable principles of trade, and protect investors and 
the public interest. See, e.g., Securities Exchange Act Release Nos. 
82627 (February 2, 2018), 83 FR 5650, 5653, n.53 (February 8, 2018) 
(SR-NYSE-2017-30); 87648 (December 3, 2019), 84 FR 67308, 67314, 
n.42 (December 9, 2019) (SR-NASDAQ-2019-059); and 88716 (April 21, 
2020), 85 FR 23393, 23395, n.22 (April 27, 2020) (SR-NASDAQ-2020-
001).
    \60\ See, e.g., SR-NASDAQ-2011-073 Approval Order, supra note 
59, 76 FR at 70802; SR-NASDAQ-2010-137 Approval Order, supra note 
59, 75 FR at 82422; and SR-NYSE-2008-17 Approval Order, supra note 
59, 73 FR at 27599.
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    The Commission has also previously stated that when the PCAOB is 
unable to inspect auditors there is a lack of transparency with respect 
to the audit quality provided by such firms and that the inability of 
the PCAOB to inspect auditors of certain registrants could generate 
uncertainty regarding their financial reporting quality.\61\ The 
Commission has stated that, as a result, there is uncertainty regarding 
the reliability of the financial information of issuers audited by 
firms that are not inspected by the PCAOB, which can potentially lead 
to suboptimal investment decisions by investors.\62\ Given these 
heightened risks identified by the Commission with respect to issuers 
audited by firms that the PCAOB is unable to inspect, the Commission 
concludes that the Exchange's proposal to impose heightened listing 
requirements on companies that principally administer their business in 
a jurisdiction that does not provide the PCAOB with access to conduct 
inspections of public accounting firms that audit Nasdaq-listed 
companies (i.e., Restrictive Market Companies) is consistent with the 
Act and not

[[Page 56343]]

designed to permit unfair discrimination. Furthermore, the Commission 
believes that the objective criteria proposed by the Exchange for 
determining whether a company's business is principally administered in 
a Restrictive Market \63\ should help to ensure that the Exchange 
applies the heightened listing standards to companies in a manner that 
is not designed to permit unfair discrimination consistent with Section 
6(b)(5) of the Act.
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    \61\ See Holding Foreign Companies Accountable Act Disclosure, 
Securities Exchange Act Release No. 91364 (March 18, 2021), 86 FR 
17528 (April 5, 2021), at 17534, 17537.
    \62\ See id. at 17534-35.
    \63\ See supra note 25 and accompanying text.
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    With respect to the proposed heightened initial listing standards, 
the Commission believes that the proposed requirements should allow the 
Exchange to more accurately determine whether a Restrictive Market 
Company conducting an IPO or a post-business combination entity 
involving a Restrictive Market Company does not have adequate 
distribution and liquidity and is thus not suitable for listing and 
trading on the Exchange. The Exchange has provided data showing that it 
has observed that Restrictive Market Companies listing on Nasdaq in 
connection with an IPO and post-business combination entities involving 
Restrictive Market Companies that did not meet the proposed listing 
requirements have more non-compliance issues than similar companies 
that would have met the proposed listing requirements.\64\ The 
Commission has previously stated that a Firm Commitment Offering is 
designed to promote appropriate price discovery and assists in creating 
a liquid market.\65\ In addition, the Commission believes that having a 
minimum Market Value of Unrestricted Publicly Held Shares requirement 
should allow an exchange to more accurately determine whether a 
security does not have adequate distribution and liquidity, and should 
therefore help to ensure that an exchange does not list securities that 
do not have a sufficient market, with adequate depth and liquidity, and 
without sufficient investor interest to support an exchange 
listing.\66\ Thus, the Commission concludes that the proposals to 
require (i) 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 and (ii) a company conducting a business 
combination, as described in Nasdaq Rule 5110(a) or IM-5101-2, with a 
Restrictive Market Company, to have a minimum Market Value of 
Unrestricted Publicly Held Shares following the business combination, 
and the proposed thresholds for such requirements, are consistent with 
the requirements of Section 6(b)(5) of the Act that the rules of the 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, and protect 
investors and the public interest, and not be designed to permit unfair 
discrimination.
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    \64\ See supra notes 33 and 39 and accompanying text.
    \65\ See also Securities Exchange Act Release No. 86314 (July 5, 
2019), 84 FR 33102 (July 11 2019) (SR-NASDAQ-2019-009) (Order 
Approving Revisions to Nasdaq's Initial Listing Standards Related to 
Liquidity), at 33112.
    \66\ See id. at 33111.
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    One commenter states that the proposal is insufficient to address 
the risk that a company may satisfy Nasdaq's listing standards by 
presenting financial statements that contain undetected material 
misstatements and that the proposed rules should include provisions 
that would prohibit Restrictive Market Companies, including companies 
listed prior to the effectiveness of the proposal, from engaging an 
auditor or an accounting firm that is located in a jurisdiction that 
limits the PCAOB's ability to inspect the auditor to assist with the 
company audit.\67\ In addition, this commenter expresses concerns 
raised by academics regarding the vulnerability of U.S. investors to 
``low-ball `take private' transactions'' in Restricted Market 
Companies, where ``[t]he goal is to delist U.S. shares at a depressed 
buyout price and then relist in [a Restricted Market] at a much loftier 
valuation.'' \68\ This commenter states that Nasdaq should promptly 
limit the U.S. investor exposure to potentially unfair take-private 
transactions by adopting provisions to prevent the initial listing of 
Restrictive Market Companies.\69\ In response, the Exchange states 
that, while the commenter may prefer a different proposal, the 
commenter's suggested proposal is not the Exchange's proposal that is 
currently before the Commission.\70\ The Exchange states that, instead, 
to address the concerns Nasdaq has observed arising from the 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 
Restrictive Markets, Nasdaq has proposed heightened liquidity 
requirements designed to ensure that Restrictive Market Companies have 
sufficient investor base and public float to support fair and orderly 
trading on the Exchange, which Nasdaq believes, as structured, are 
consistent with Section 6(b)(5) of the Act.\71\
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    \67\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (February 18, 2021) (``CII Letter 
I''), at 4-5; Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (May 27, 2021) (``CII Letter 
II''), at 1-4.
    \68\ See CII Letter II, supra note 67, at 3 (citing Jesse Fried 
& Matthew J. Schoenfeld, Delisting Chinese Firms: A Cure Likely 
Worse than the Disease, Harv. L. Sch. F. On Corp. Governance (June 
9, 2020), https://corpgov.law.harvard.edu/2020/06/09/delisting-chinese-firms-a-cure-likely-worse-than-the-disease/).
    \69\ See id. at 3-4.
    \70\ See Nasdaq Response Letter, supra note 17, at 3.
    \71\ See id.
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    The proposed provisions suggested by the commenter are not part of 
Nasdaq's proposal, and the Commission must approve the proposal if it 
finds that the proposal is consistent with the Act and rules 
thereunder. The Commission believes the Exchange's proposal is 
reasonably designed to help address compliance concerns regarding 
securities of Restrictive Market Companies and to help ensure fair and 
orderly trading when such companies list on Nasdaq.
    The Commission concludes that it is consistent with the Act to 
prohibit Restrictive Market Companies from listing on the Nasdaq 
Capital Market in connection with a Direct Listing. In support of its 
proposal, the Exchange states that it does not believe the listing 
requirements for Direct Listings on the Nasdaq Capital Market set forth 
in Nasdaq's rules are sufficient to overcome the risks that Restrictive 
Market Companies present with respect to liquidity.\72\ Given the 
heightened concerns enumerated by the Commission regarding companies 
that cannot be inspected by the PCAOB,\73\ the Commission believes that 
the proposal to prohibit Restrictive Market Companies from listing on 
the Nasdaq Capital Market in connection with a Direct Listing is 
consistent with the requirements of Section 6(b)(5) of the Act that the 
rules of the exchange be designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and protect investors and the public interest, and not be 
designed to permit unfair discrimination.
---------------------------------------------------------------------------

    \72\ See supra note 47 and accompanying text. See also Nasdaq 
Rules 5505 and IM-5505-1.
    \73\ See supra notes 61-62 and accompanying text.
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    In sum, the Commission concludes that the proposed new initial 
listing requirements for Restrictive Market Companies, including the 
prohibition on Direct Listings on Nasdaq Capital Market, will help 
maintain fair and orderly markets and are designed to protect investors 
and the public interest, and are not designed to permit unfair

[[Page 56344]]

discrimination given the risks that Restricted Market Companies 
present, and should help the Exchange in determining whether a 
Restricted Market Company will not have a sufficient market, with 
adequate depth and liquidity, and sufficient investor interest to 
support listing on the Exchange. A Restrictive Market Company subject 
to the proposed initial listing requirements for an IPO or business 
combination would also need to comply with all other applicable listing 
requirements for the market tier on which it is listing.\74\
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    \74\ See Nasdaq Rule 5000 Series.
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    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\75\ that the proposed rule change (SR-NASDAQ-2021-007) be, and 
hereby is, approved.
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    \75\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
---------------------------------------------------------------------------

    \76\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21988 Filed 10-7-21; 8:45 am]
BILLING CODE 8011-01-P