On October 7, 2024, the SEC approved amendments to Nasdaq Rule 5810(c)(3)(A), introducing a stricter and more accelerated delisting process for companies that fail to meet listing standards after using reverse splits to regain compliance. This rule change, alongside additional proposed amendments to Rules 5810 and 5815, reflects Nasdaq’s ongoing efforts to tighten compliance requirements and maintain the integrity of its listing standards.

Key Changes to Nasdaq Rule 5810(c)(3)(A)

Under the amended rule, companies addressing bid price deficiencies through actions like reverse splits that subsequently lead to new deficiencies—such as falling below the minimum number of round lot holders or publicly held float requirements—will no longer receive an additional 180-day cure period for the new deficiency. Instead, companies must cure both deficiencies in sequence before regaining compliance:

1. Resolve the new deficiency.
2. Meet the bid price standard for a minimum of 10 consecutive business days (or up to 20 days at Nasdaq’s discretion).

This amendment eliminates the possibility of misleading shareholders into believing that compliance has been restored when additional deficiencies remain unresolved.

Proposed Changes to Rules 5810 and 5815

Nasdaq has also proposed amendments to further accelerate the delisting process for non-compliant companies:

1. Suspension After 360 Days

Companies failing to meet the $1.00 minimum bid price requirement for more than 360 days will face immediate trading suspension, regardless of ongoing appeal processes. While companies may appeal the delisting determination, their securities will trade on OTC Markets during the appeal period.

2. Reverse Split Restrictions

Companies falling below the minimum bid price requirement within one year of a reverse stock split will receive immediate delisting notices without a 180-day compliance period. This change aims to address patterns of repeated reverse splits to temporarily inflate stock prices without achieving sustainable compliance.

3. Existing Accelerated Delisting Criteria

The proposed rules complement existing provisions allowing immediate delisting when:

• A security’s bid price falls below $0.10 for 10 consecutive days.
• A company has effected reverse splits with a cumulative ratio of 250-to-1 or more over the past two years.

Nasdaq’s Rationale for the Changes

Nasdaq asserts that the 360-day compliance period is sufficient for companies to meet the bid price requirement. Extending compliance through appeals or repeat reverse splits undermines market integrity and allows companies to circumvent penny-stock rules while trading on a national exchange.

By accelerating delisting for chronic non-compliance, Nasdaq seeks to:

• Reduce the number of ultra micro-cap companies trading on its platforms.
• Enhance investor confidence by maintaining high listing standards.

What This Means for Listed Companies

These rule changes place greater pressure on companies to promptly address compliance issues and discourage reliance on reverse splits as a short-term fix. Companies must develop robust plans to achieve sustainable compliance and maintain eligibility for Nasdaq listing.

For investors, these changes provide greater transparency and assurance that listed companies meet the rigorous standards of a national exchange.

For a detailed analysis of the new rules and their implications, visit the original source: Securities Law Blog.