Document ID: SEC-2020-0667-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2020-04-27T04:00Z

[Federal Register Volume 85, Number 81 (Monday, April 27, 2020)]
[Notices]
[Pages 23393-23396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08814]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88716; File No. SR-NASDAQ-2020-001]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Approving a Proposed Rule Change To Modify the Delisting Process for 
Securities With a Bid Price at or Below $0.10 and for Securities That 
Have Had One or More Reverse Stock Splits With a Cumulative Ratio of 
250 Shares or More to One Over the Prior Two-Year Period

April 21, 2020.

I. Introduction

    On January 2, 2020, The Nasdaq Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange

[[Page 23394]]

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 modify the delisting process 
for securities with a bid price at or below $0.10 in certain 
circumstances as described below and for securities that have had one 
or more reverse stock splits with a cumulative ratio of 250 shares or 
more to one over the prior two-year period. The proposed rule change 
was published for comment in the Federal Register on January 22, 
2020.\3\ On March 5, 2020, 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\ The Commission received no comment letters on the proposed 
rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 87982 (January 15, 
2020), 85 FR 3736.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 88325, 85 FR 14264 
(March 11, 2020). The Commission designated April 21, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange has proposed to modify its delisting process for 
securities with a closing bid price at or below $0.10 for ten 
consecutive trading days during any bid price compliance period and for 
securities that have had one or more reverse stock splits with a 
cumulative ratio of 250 shares or more to one over the prior two-year 
period (i.e., in cases where following such reverse stock split(s) an 
investor would hold one share for every 250 shares or more owned at the 
start of the two-year period).
    Nasdaq's current rules require that primary equity securities, 
preferred stocks, and secondary classes of common stock maintain a 
minimum bid price of at least $1.00 per share for continued listing.\6\ 
Under Rule 5810(c)(3)(A), a security is considered deficient with this 
bid price requirement if its bid price closes below $1.00 for a period 
of 30 consecutive business days. Under Nasdaq Rule 5810(c)(3)(A), a 
company with a bid price deficiency has 180 calendar days from 
notification of the deficiency to regain compliance. A company 
generally can regain compliance with the bid price requirement by 
maintaining a $1.00 closing bid price for a minimum of ten consecutive 
business days during the 180-day compliance period.\7\ Under Rule 
5810(c)(3)(A)(ii), a company that lists its security on the Nasdaq 
Capital Market, or transfers its listing to that market, may be 
eligible for a second 180 calendar day period to regain compliance, 
provided that on the last day of the first compliance period the 
company meets the market value of publicly held shares requirement for 
continued listing as well as all other applicable standards for initial 
listing (except for the bid price requirement) on the Nasdaq Capital 
Market and notifies the Exchange of its intent to cure the bid price 
deficiency.\8\ If a company is able to avail itself of this second 180-
day bid price compliance period when listed on, or transferring to, 
Nasdaq's Capital Market, the total compliance period to cure a bid 
price deficiency would be up to 360 calendar days.\9\
---------------------------------------------------------------------------

    \6\ See Rules 5450(a)(1), 5460(a)(3), 5550(a)(2), and 
5555(a)(1).
    \7\ Under Rule 5810(c)(3)(G), Nasdaq staff could extend this 
ten-day period to a maximum of 20 days.
    \8\ If it does not appear to Nasdaq that it is possible for the 
company to cure the deficiency with the bid price requirement, it 
will not be eligible for this second 180-day period to achieve 
compliance. See Rule 5810(c)(3)(A)(ii). See also Rule 
5810(c)(3)(A)(i), which describes the conditions for a company 
transferring from the Nasdaq Global Market to the Nasdaq Capital 
Market to avail itself of the additional 180-day compliance period 
set forth in Rule 5810(c)(3)(A)(ii).
    \9\ See Notice, supra note 3, 85 FR at 3737. See also Rule 
5810(c)(3)(A).
---------------------------------------------------------------------------

    According to the Exchange, it believes that there are certain 
situations where a company may be facing more serious issues for which 
a compliance period of up to 360 days may not be appropriate.\10\ The 
Exchange stated that these situations involve securities with very low 
prices (as proposed, at or below $0.10) and securities where the 
company has completed one or more reverse stock splits over the prior 
two-year period that, when considered cumulatively, result in a ratio 
of 250 shares or more to one and then fails to satisfy the bid price 
requirement. According to the Exchange, the challenges facing the 
company in these situations are generally not temporary and may be so 
severe that the company is not likely to regain compliance within the 
prescribed compliance period.\11\ The Exchange also stated that these 
companies often become subject to delisting for other reasons during 
the compliance periods.\12\ Accordingly, the Exchange has proposed to 
modify its listing rules so that companies that fit into the categories 
specified above are subject to shortened compliance periods, which, in 
the Exchange's view, could lead to earlier delisting and enhanced 
review procedures.
---------------------------------------------------------------------------

    \10\ See Notice, supra note 3, 85 FR at 3737.
    \11\ See id.
    \12\ See id.
---------------------------------------------------------------------------

    With respect to securities with very low prices, the Exchange has 
proposed to modify its listing rules to provide that a company in any 
bid price compliance period under Rule 5810(c)(3)(A) as described above 
(i.e., the company's security has already traded below $1.00 for thirty 
consecutive business days) will immediately receive a Staff Delisting 
Determination if the security has a closing bid price of $0.10 or less 
for a period of ten consecutive trading days, which would end any 
otherwise applicable compliance period.\13\ The Exchange also has 
proposed to amend its rules to not permit a company to avail itself of 
any bid price compliance periods under Rule 5810(c)(3)(A), and instead 
require the issuance of a Staff Delisting Determination, if a company 
falls out of compliance with the $1.00 minimum bid price after 
completing one or more reverse stock splits resulting in a cumulative 
ratio of 250 shares or more to one over the two-year period immediately 
prior to such non-compliance.\14\ According to the Exchange, it 
believes it would be inappropriate to permit such securities to remain 
listed while relying on very large reverse stock splits to maintain 
compliance with the $1.00 minimum bid price.\15\
---------------------------------------------------------------------------

    \13\ The Exchange noted that such a company could request review 
of the Staff Delisting Determination by a Hearings Panel, and the 
Hearings Panel could grant the company additional time to complete a 
reverse stock split or otherwise regain compliance. See id. See also 
infra note 16 and accompanying text, noting that the Hearings Panel 
can grant up to an additional 180 days.
    \14\ The Exchange stated, for example, that a company could 
effect a reverse stock split in a ratio of 25 shares to one, 
followed within the two-year period by a second reverse stock split 
in a ratio of ten shares to one, resulting in a cumulative ratio of 
250 shares to one. See Notice, supra note 3, 85 FR at 3737 n.7. 
Alternatively, a company could affect three reverse stock splits in 
the two-year period, with ratios of ten shares to one, five shares 
to one, and five shares to one, respectively, resulting in a 
cumulative ratio of 250 shares to one. See id.
    \15\ See id. at 3737. See also supra note 13 (noting that the 
Hearings Panel could grant the company up to an additional 180 
days).
---------------------------------------------------------------------------

    The Exchange stated that a company that is not eligible for a 
compliance period under the proposed rule change would receive a Staff 
Delisting Determination, which it could appeal to a Hearings Panel. The 
Hearings Panel could grant the company an exception to remain listed 
for a period not to exceed 180 days from the date of the Staff 
Delisting Determination if, according to the Exchange, it believes the 
company will be able to achieve and maintain compliance with the bid 
price

[[Page 23395]]

requirement.\16\ However, the Exchange also proposed to modify its 
listing rules so that following such a Hearings Panel exception the 
company would be subject to the procedures applicable to a company with 
recurring deficiencies as described in Rule 5815(d)(4)(B). As a result, 
if within one year of the date a company regained compliance (i.e., in 
those cases where the company was not granted a compliance period under 
proposed Rule 5810(c)(3)(A)(iii) and (iv) but the Hearings Panel had 
granted an exception during which time the company came into 
compliance) the company again fails to maintain compliance with the bid 
price requirement, the company would not be eligible for a compliance 
period and instead the Listing Qualifications Department will issue a 
Staff Delisting Determination, which can be appealed to the Hearings 
Panel.
---------------------------------------------------------------------------

    \16\ See Rule 5815(c)(1)(A).
---------------------------------------------------------------------------

    The Exchange has proposed to begin to implement the proposed rule 
change for companies that first receive notification of non-compliance 
with the bid price requirement after the date of this approval order. 
Accordingly, a company that has already received notification of such 
non-compliance would be permitted to regain compliance under the 
existing rule, in the manner that the notification of non-compliance 
would have described.\17\
---------------------------------------------------------------------------

    \17\ See Notice, supra note 3, 85 FR at 3738. The Exchange noted 
in its proposal that under Rule 5810(c)(3)(A)(ii), a company is not 
eligible for the second compliance period ``if it does not appear to 
Nasdaq that it is possible for the Company to cure the deficiency.'' 
See id. at 3738 n.8. The Exchange stated that, as is currently the 
case, it may rely upon this language to deny the second compliance 
period to a company with a very low stock price or that has engaged 
in significant prior reverse stock splits, even though the company 
is not yet subject to the proposed rule change. See id. See also 
Rule 5810(c)(3)(A)(i), which states that following a transfer from 
Nasdaq Global Market to Capital Market a company will be afforded 
the remainder of the applicable compliance period in Rule 
5810(c)(3)(A)(ii) ``unless it does not appear to Nasdaq that it is 
possible for the Company to cure the deficiency.''
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, 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.\18\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\19\ 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. In addition, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(7) of the Act,\20\ which requires, among other things, 
that the rules of a national securities exchange provide a fair 
procedure for the prohibition or limitation by the exchange of any 
person with respect to access to services offered by the exchange.
---------------------------------------------------------------------------

    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    The development and enforcement of meaningful listing standards 
\21\ for an exchange is of critical importance to financial markets and 
the investing public. Among other things, such listing standards help 
ensure that exchange-listed companies will have sufficient public 
float, investor base, and trading interest to provide the depth and 
liquidity to promote fair and orderly markets.\22\ 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.\23\
---------------------------------------------------------------------------

    \21\ The Commission notes that this reference to ``listing 
standards'' is referring to both initial and continued listing 
standards.
    \22\ The Commission has consistently recognized the importance 
of exchange listing standards. 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. In addition, once a security 
has been approved for initial listing, maintenance criteria allow an 
exchange to monitor the status and trading characteristics of that 
issue to ensure that it continues to meet the exchange's standards 
for market depth and liquidity so that fair and orderly markets can 
be maintained. 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). The Commission notes that, in general, 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 No. 80933 (June 15, 2017), 82 FR 28200 (June 
20, 2017) (SR-NYSE-2017-30).
    \23\ See supra note 22.
---------------------------------------------------------------------------

    The proposed amendments would shorten the compliance periods 
available to listed companies to cure a bid price deficiency in certain 
circumstances, which could lead to earlier delisting of the company. In 
particular, rather than being able to take advantage of the compliance 
periods under the Exchange's rules of 180 calendar days or 360 calendar 
days for companies that so qualify, companies in a bid price compliance 
period that have a closing bid price at or below $0.10 for ten 
consecutive trading days would have that compliance period end and be 
issued an immediate Staff Delisting Determination, which could then be 
appealed. Similarly, companies that have had reverse stock splits with 
a cumulative ratio of 250 shares to one over the prior two-year period 
would not be able to take advantage of any of the compliance periods 
under Rule 5810(c)(3)(A) if they fail the bid price requirement and the 
company would receive an immediate Staff Delisting Determination, which 
could then be appealed.
    The Exchange noted in its proposal that the compliance periods are 
designed to allow adequate time for a company that faces temporary 
business issues, temporary decreases in the market value of its 
securities, or temporary market conditions to come back into compliance 
with a bid price deficiency.\24\ According to the Exchange, however, in 
those situations where securities have a very low security price (i.e., 
$0.10 or below) or the company has undertaken large reverse stock 
splits over a two-year period but then fails the bid price requirement, 
a compliance period of up to 360 calendar days may not be appropriate. 
The Exchange has found that companies meeting such criteria often have 
problems so severe that they are not likely to regain compliance during 
either the 180 or 360 calendar day compliance periods. In Nasdaq's 
experience, such companies are not usually experiencing temporary 
problems, have other compliance issues, and frequently need to raise 
additional capital to fund their business operations and often do so by 
engaging in extremely dilutive transactions. The Commission believes 
that, in such circumstances, there are investor protection concerns 
with allowing the securities identified in the Exchange's proposal to 
have an extended period of time to regain compliance with the bid

[[Page 23396]]

price requirement, as provided under Nasdaq's current rules, prior to 
commencing delisting proceedings. The Commission believes that 
shortening the available compliance periods in the described 
situations, and immediately commencing delisting proceedings, should 
therefore help to ensure that only those securities that are suitable 
for continued Exchange trading remain listed on the Exchange.
---------------------------------------------------------------------------

    \24\ See Notice, supra note 3, 85 FR at 3737.
---------------------------------------------------------------------------

    Further, the low-priced stocks identified in the criteria raise 
concerns about their susceptibility to manipulation and the prevention 
of fraudulent and manipulative acts and practices as well as the 
ability to promote fair and orderly markets on the Exchange in such 
securities. As Nasdaq stated in its proposal, securities listed on the 
Exchange are exempt from the Penny Stock Rules, which provide enhanced 
investor protections, among other things, to prevent fraud and 
safeguard against potential market manipulation.\25\ The Exchange 
stated in support of its proposal that it believes such exemption may 
not be appropriate for abnormally low-priced securities and securities 
that are trading below $1.00 after completing one or more reverse stock 
splits with a cumulative ratio of 250 shares to one or more over the 
prior two-year period because these securities, in the Exchange's view, 
may have similar characteristics to penny stocks.\26\ Given the 
historical concerns regarding penny stocks, the Commission believes 
Nasdaq's proposal to commence delisting proceedings sooner in the 
process for those companies meeting the criteria identified in the 
proposed rule that fail to satisfy the bid price requirement is 
appropriate.
---------------------------------------------------------------------------

    \25\ See 17 CFR 240.3a51-1(a)(1); 17 CFR 240.15g-1 to -9. In 
particular, the Penny Stock Rules provide protections to investors 
in low-priced stocks requiring, among other things, that broker-
dealers provide a disclosure document to their customers describing 
the risk of investing in penny stocks and approve customer accounts 
for transactions in penny stocks.
    \26\ See Notice, supra note 3, 85 FR at 3738.
---------------------------------------------------------------------------

    The Commission also notes that companies that have shortened 
compliance periods as a result of the proposed changes being approved 
herein will still be able to appeal the Staff Delisting Determination 
to the Hearings Panel.\27\ The Hearings Panel, as noted above, can 
grant the company an additional 180 days to comply with the bid price 
requirement should the Hearings Panel determine that the facts warrant 
such additional time. The Commission believes that the shortening of 
the 180 or 360 calendar day period to regain compliance with a bid 
price deficiency in the situations described above is appropriate in 
light of the need to protect investors and the public interest and that 
the Hearings Panel review process should continue, as it currently 
does, to provide a fair procedure for the review of the Staff Delisting 
Determination in accordance with Section 6(b)(7) of the Act.
---------------------------------------------------------------------------

    \27\ A timely request for a hearing shall ordinarily stay the 
suspension and delisting action pending the issuance of a written 
Panel Decision. See Rule 5815(A)(1)(b).
---------------------------------------------------------------------------

    Finally, the Commission notes that, for the same reasons discussed 
above, it is appropriate and consistent with the protection of 
investors for Nasdaq to amend its recurring deficiency provisions to 
include companies that fall out of compliance with the bid price 
requirement within a year of regaining such compliance after being 
granted an exception from the Hearings Panel, in those cases where such 
companies were previously not eligible for a compliance period due to a 
low stock price or excessive reverse stock splits. The Commission 
believes it is reasonable for the Exchange to determine that such 
recurrent violators of the bid price requirement may not be able to 
regain compliance during the compliance periods and as such should be 
subject to an immediate Staff Delisting Determination, which can then 
be appealed to the Hearings Panel.\28\
---------------------------------------------------------------------------

    \28\ See Notice, supra note 3, 85 FR at 3738.
---------------------------------------------------------------------------

    The Exchange's proposal identifies securities listed on its market 
that have had serious and recurrent issues in meeting and regaining 
compliance with the $1.00 bid price continued listing requirement and 
proposes to prohibit such companies from utilizing the compliance 
periods and instead commence immediate delisting proceedings. This 
should help to protect investors and the public interest, while at the 
same time providing a fair procedure for companies to appeal the Staff 
Delisting Determination to the Hearings Panel. Based on the above, the 
Commission believes that the proposed rule change can help to ensure 
that the Exchange lists only securities with a sufficient market, with 
adequate depth and liquidity, and with sufficient investor interest to 
support an exchange listing.
    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASDAQ-2020-001) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08814 Filed 4-24-20; 8:45 am]
 BILLING CODE 8011-01-P