Document ID: SEC-2019-0560-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-04-24T04:00Z

[Federal Register Volume 84, Number 79 (Wednesday, April 24, 2019)]
[Notices]
[Pages 17224-17226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08205]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85687; File No. SR-NASDAQ-2019-017]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt Additional 
Requirements for Listings in Connection With an Offering Under 
Regulation A of the Securities Act

April 18, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 5, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt an additional listing requirement 
for companies listing in connection with an offering under Regulation A 
\3\ under the Securities Act of 1933 (``Securities Act'').\4\
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    \3\ 17 CFR 230.251-230.263.
    \4\ 15 U.S.C. 77a et seq.
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    The text of the proposed rule change is set forth below. Proposed 
new language is in italics.
* * * * *
    The Nasdaq Stock Market Rules
* * * * *
5210. Prerequisites for Applying to List on The Nasdaq Stock Market
    All Companies applying to list on The Nasdaq Stock Market must meet 
the following prerequisites:
    (a)-(i) No change.
    (j) Regulation A Offerings
    Any Company listing on Nasdaq in connection with an offering under 
Regulation A of the Securities Act of 1933 must, at the time of 
approval of its initial listing application, have a minimum operating 
history of two years.
* * * * *
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange is proposing to adopt a new initial listing 
requirement that would require a company applying to list on the 
Exchange in connection with an offering under Regulation A of the 
Securities Act to have a minimum operating history of two years at the 
time of approval of its initial listing application. Regulation A was 
amended in 2015 to implement provisions of the Jumpstart Our Business 
Startups Act \5\ and to reflect the desire of Congress and

[[Page 17225]]

the SEC to facilitate smaller companies' access to capital and provide 
investors with more investment choices.\6\ As amended, Regulation A 
provides an exemption from registration under the Securities Act for 
offerings up to $50 million, for ``Tier 2'' offerings, and permits a 
company to sell securities to ``non-accredited'', or retail, 
investors.\7\ A company offering securities under Tier 2 may register 
its securities under the Exchange Act concurrently with the 
qualification of its Regulation A offering statement and list those 
securities on a national securities exchange, such as Nasdaq, if it 
meets applicable listing standards.\8\
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    \5\ Securities Exchange Act Release No. 74578 (March 25, 2015), 
80 FR 21805 (April 20, 2015).
    \6\ See, e.g., ``SEC Adopts Rules to Facilitate Smaller 
Companies Access to Capital'' (March 25, 2015), available at https://www.sec.gov/news/pressrelease/2015-49.html.
    \7\ 17 CFR 230.251-230.263.
    \8\ See General Instruction A(a)(2) of Form 8-A for Registration 
of Certain Classes of Securities pursuant to Section 12(b) or (g) of 
the Securities Exchange Act of 1934, available at https://www.sec.gov/about/forms/form8-a.pdf. A company may apply to list on 
any of the Nasdaq Global Select Market, Global Market or Capital 
Market tiers in connection with an offering under Regulation A of 
the Securities Act.
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    To rely on the exemption under Regulation A, a company must file a 
Form 1-A with the SEC along with an offering statement, financial 
statements and other exhibits. The offering statement is reviewed and 
qualified by the SEC but requires less burdensome accounting and 
disclosure standards than a traditional initial public offering on Form 
S-1. For example, a Regulation A company qualifying its offering 
statement nine months after its most recently completed fiscal year can 
include balance sheets for its last two fiscal years, with no interim 
financial statements.\9\ In contrast, a company conducting its initial 
public offering on Form S-1 at that same time would be required to 
include balance sheets for its last two fiscal years, in the case of 
emerging growth and smaller reporting companies, or three fiscal years, 
in the case of all other companies, and interim financial statements 
dated no later than 134 days prior to effectiveness.\10\ As a result, 
the financial information presented to investors in Regulation A 
offerings may not be as current as the financial information presented 
to investors traditional public offerings.
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    \9\ See Part F/S (b)(3)(A) and (c)(1)(i) of Form 1-A Regulation 
A Offering Statement under the Securities Act of 1933 available at 
https://www.sec.gov/about/forms/form1-a.pdf.
    \10\ 17 CFR 210.3-12.
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    The Exchange has observed problems with certain Regulation A 
companies.\11\ Most significantly, the Exchange believes that companies 
seeking to list in conjunction with a Regulation A offering are 
generally less mature companies with less developed business plans than 
other companies seeking to list. In addition, the Exchange believes 
that the Regulation A offering process may not adequately prepare 
companies for the rigors of operating a public company and satisfying 
the SEC and Exchange's reporting and corporate governance requirements. 
The Exchange also notes that the financial press,\12\ Congress (prior 
to the adoption of Regulation A) \13\ and others \14\ have raised 
concerns about the potential for fraud by companies conducting 
offerings under Regulation A.
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    \11\ See, e.g., Securities and Exchange Commission vs. Longfin 
Corp., Case No. 18-cv-2977 (DLC) (S.D.N.Y., filed April 4, 2018), 
available at https://www.sec.gov/litigation/complaints/2018/comp-pr2018-61.pdf.
    \12\ See, e.g., ``Most Mini-IPOs Fail the Market Test'', 
Barron's (February 13, 2018), available at https://www.barrons.com/articles/most-mini-ipos-fail-the-market-test-1518526753. See also, 
``Longfin Collapse Puts Focus on Lax IPO Rules'', Wall Street 
Journal (April 3, 2018), available at https://www.wsj.com/articles/longfin-collapse-puts-focus-on-lax-ipo-rules-1522788520?mod=cx_picks&cx_navSource=cx_picks&cx_tag=contextual&cx_artPos=5#cxrecs_s.
    \13\ See, e.g., H.R. Rep. No. 206, 112th Cong. 1st Sess. at 13 
(2011), available at https://www.congress.gov/congressional-report/112th-congress/house-report/206. See also Congressional Record 
Volume 157, Number 166 (Wednesday, Nov. 2, 2011), p. H7231, 
available at https://www.congress.gov/congressional-record/2011/11/02/house-section/article/H7229-1.
    \14\ See, e.g., Letter from the North American Securities 
Administrators Association, Inc., to Elizabeth M. Murphy (March 24, 
2014), available at http://www.nasaa.org/wp-content/uploads/2011/07/NASAA-Comment-File-S7-11-13-03242014.pdf.
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    In response to these concerns, Nasdaq staff has adopted heightened 
review procedures for companies applying to list on the Exchange in 
connection with an offering under Regulation A. However, the Exchange 
also believes that additional requirements for listing such companies 
are appropriate to help ensure that adequate safeguards are in place to 
better protect investors. Accordingly, Nasdaq proposes to enhance its 
initial listing standards by adopting a new requirement at Listing Rule 
5210(j) that a company listing in connection with an offering under 
Regulation A must, at the time of approval of its initial listing 
application, have a minimum operating history of two years. Nasdaq 
believes that this proposed requirement will help assure that companies 
have more established business plans and a history of operations upon 
which investors can rely. In addition, the proposed operating history 
requirement will help assure that the company has been able to fund the 
initial phase of its operations. Further, Nasdaq believes that these 
more seasoned companies are more likely to be ready for the rigors of 
being a public company, including satisfying the SEC and Exchange's 
reporting and corporate governance requirements. Nasdaq believes that 
these are important benefits given the lighter disclosure requirements 
otherwise associated with a Regulation A offering.\15\
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    \15\ Nasdaq has also proposed to revise its initial listing 
criteria to exclude restricted securities from the Exchange's 
calculations of a company's publicly held shares, market value of 
publicly held shares and round lot holders in another filing, and 
these requirements would also apply to Regulation A companies. See 
Securities Exchange Act Release No. 85503 (April 3, 2019) (SR-
NASDAQ-2019-009) (``Notice of Filing of Proposed Rule Change to 
Revise the Exchange's Initial Listing Standards Related to 
Liquidity'').
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    Nasdaq proposes that this change be effective 30 days after 
approval by the SEC. Nasdaq notes that it had originally solicited 
comment on a similar proposal in October 2018,\16\ which provided 
companies with notice that Nasdaq was considering adopting a minimum 
operating history requirement for companies listing in connection with 
a Regulation A offering. The proposed 30-day delay from approval until 
operation of the proposed rule will allow companies that have 
substantially completed the Nasdaq review process, or are near 
completion of their offering, a short opportunity to complete that 
offering and list before the new rules become effective.
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    \16\ See https://listingcenter.nasdaq.com/assets/Liquidity_Measures_Comment_Solicitation.pdf.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Exchange Act,\17\ in general, and furthers the objectives 
of Section 6(b)(5) of the Exchange Act,\18\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest; and is not designed to permit unfair discrimination between 
issuers, because it is reasonably designed to enhance investor 
protection by imposing an additional requirement on a category of 
companies that are able to sell securities to non-accredited investors 
with limited accounting and disclosure requirements.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    Nasdaq believes that the addition of an operating history 
requirement will protect investors and the public interest by helping 
to assure that a company listing in conjunction with a Regulation

[[Page 17226]]

A offering will be more likely to have a developed business plan upon 
which investors can rely, was able to successfully fund its initial 
phase of operations, and will be better prepared to satisfy public 
company requirements, including reporting and corporate governance 
requirements.
    The Exchange believes that this proposal does not result in unfair 
discrimination between companies because companies relying on 
Regulation A are subject to limited accounting and disclosure 
requirements, which exposes investors, many of which may be non-
accredited, to increased risk. The Exchange believes that this proposal 
will help lower the risk to such investors by helping to assure that a 
company was able to fund its initial phase of operations, has an 
established business plan and a history of operations upon which 
investors can rely and is more likely to be ready for the rigors of 
being a public company. For the foregoing reasons, the Exchange 
believes it is not unfair to impose the requirement for a minimum 
operating history of at least two years only on companies relying on 
Regulation A and not on companies conducting a traditional initial 
public offering on Form S-1.

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 Exchange Act. All companies seeking 
to list on the Exchange in connection with an offering under Regulation 
A would be affected in the same manner by this change. While this is an 
additional requirement that would not apply to a company that does not 
rely upon Regulation A, Nasdaq believes that to the extent this 
distinction places a burden on competition between companies, such 
burden is necessary and appropriate to enhance investor protection from 
companies with limited accounting and disclosure requirements in 
furtherance of the investor protection purposes of the Exchange Act. 
Moreover, Nasdaq also notes that companies have a choice as to whether 
or not to rely upon Regulation A and, therefore, can control whether 
they are subject to the proposed requirement.

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

    On October 5, 2018, Nasdaq launched a formal comment solicitation 
on proposals to adopt additional initial listing criteria for companies 
applying to list on the Exchange in connection with an offering under 
Regulation A (``2018 Solicitation''), a copy of which is attached 
hereto as Exhibit 2.\19\ No comments were received in response to the 
comment solicitation.
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    \19\ The Commission notes that Exhibit 2 is attached to the 
Exchange's Form 19b-4 relating to the proposed rule change and not 
to this notice.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2019-017 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2019-017. 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-2019-017, and should be submitted 
on or before May 15, 2019.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08205 Filed 4-23-19; 8:45 am]
 BILLING CODE 8011-01-P