On October 7, 2024, the US Securities and Exchange Commission approved Nasdaq's proposed modification to Nasdaq Listing Rule 5810(c)(3)(A), which limits the ability of a company whose shares are trading under Nasdaq's $1.00 minimum bid price to regain bid price compliance by means that cause non-compliance with another listing requirement. This rule, which became effective upon approval, comes shortly after the New York Stock Exchange (NYSE) advanced its own proposal to limit the use of reverse stock splits to regain compliance with its minimum listing price criteria, indicating a regulatory shift in the industry.
Nasdaq listing rules require that listed companies maintain a minimum closing bid price of $1.00 per share, and Nasdaq staff will issue a deficiency notice if a company's minimum bid price falls below $1.00 and the deficiency continues for 30 consecutive business days. The company has 180 days from the date of notice to regain compliance, with an additional 180 days for companies listed on or transferred to the Nasdaq Capital Market if certain requirements are met. If the company fails to regain compliance by closing at or above $1.00 for at least ten consecutive business days during the applicable compliance period, Nasdaq will initiate delisting procedures.
Under the old Nasdaq framework, a company could regain compliance with the $1.00 minimum bid price requirement by taking a corporate action (such as a reverse stock split aimed at consolidating its outstanding shares and increasing the price per share) even if that action would result in the company failing to meet another Nasdaq listing requirement (such as falling below the required threshold for the number of publicly held shares or the number of stockholders). The company could then be granted up to 180 additional calendar days to regain compliance with respect to the new deficiency. Under the new rule, the company will not be considered to have regained compliance with Nasdaq's minimum bid price requirement until (i) any newly created deficiency has been cured and (ii) thereafter the company maintains bid price compliance for ten consecutive business days (although Nasdaq staff may exercise discretion to extend this period). As a result, compliance with all listing rules, including any deficiencies created by actions to solve initial deficiencies, must now be achieved within the original timeframe. These new requirements are in addition to Nasdaq's previously adopted rule that provides for immediate delisting procedures for securities that fail to meet required minimum closing bid prices when the company has effected one or more reverse stock splits with a cumulative ratio of 250:1 or higher within the past two years.
On September 30, 2024, shortly before the approval of changes to the Nasdaq rule, the NYSE filed its own proposal that imposes limitations on the use of reverse stock splits to regain compliance with its minimum pricing requirements. Section 802.01C of the NYSE Listed Company Manual currently provides that a listed company will be considered non-compliant if the average closing price of its security is less than $1.00 over 30 trading days. Following receipt of notice of non-compliance, the company has ten business days to notify the NYSE of its intent to cure the deficiency and whether it has determined to take action to cure the deficiency that will require stockholder approval (e.g., a reverse stock split). The company has six months to cure the deficiency and will regain compliance if, at any time during the six-month cure period, the company has a closing share price of at least $1.00 on the last trading day of a calendar month and an average closing price of at least $1.00 over the 30-trading day period ending on the last trading day of that month. The company must obtain any required stockholder approval to cure the deficiency by the next annual meeting and implement the action promptly thereafter.
The NYSE's proposed rule amendment provides for immediate delisting procedures for a company whose securities fall below the minimum price requirement if it has undergone a reverse stock split in the previous year or has affected reverse stock splits with a cumulative ratio of 200:1 or higher within the past two years. The NYSE's proposal also prohibits and provides for immediate delisting procedures for reverse stock splits that would violate other continued listing requirements. In any case, the company can seek a review of the delisting determination.
Both exchanges are focused on enhancing market quality and protecting investors through faster actions against financially distressed companies and reducing opportunities for excessive reverse stock splits and manipulation of compliance periods. These related regulatory changes signal a clear shift toward stricter oversight of bid price compliance strategies, with less tolerance for temporary fixes and a greater emphasis on maintaining sustainable financial health among listed companies.
As a result of these changes, companies will need to adopt a more comprehensive approach to exchange listing compliance. Specifically, companies must carefully evaluate the impact of reverse stock splits on all listing requirements and plan for simultaneous compliance across multiple criteria.
Originally published 28 October 2024
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