United States: Proposed Nasdaq Rules May Raise Additional Difficulties For Companies In Emerging Markets

On June 8 and 12, 2020, the Securities and Exchange Commission had published in the Federal Register for comment several rule proposals from Nasdaq Stock Market LLC ("Nasdaq") that would apply to companies whose principal businesses are in "a jurisdiction that Nasdaq determines to have secrecy laws, blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S.-listed companies in such jurisdiction" (also known as a "Restrictive Market" as defined under Nasdaq's proposed new definition in Rule 5005(a)(37)):

Nasdaq's proposal to impose a new requirement related to the qualification of management for Restrictive Market companies. Nasdaq proposes to adopt a new listing standard in Rule 5210(c), which requires listing applicants from Restrictive Market companies to have and maintain a "member of senior management or a director [or, in the alternative, an advisor acceptable to Nasdaq] with relevant past employment experience at a U.S.-listed public company or other experience, training or background which results in the individual's general familiarity with the regulatory and reporting requirements applicable to a U.S.-listed public company under Nasdaq rules and federal securities laws." If a company fails to comply with this requirement, it will be required to disclose that fact and must meet compliance standards within 180-days to regain good standing. This proposed rule would only apply to Nasdaq listing applicants and not to those already listed. The comment period for this rule proposal closes on July 6, 2020;

Nasdaq's proposal to apply additional initial listing criteria related to offering size and liquidity of Restrictive Market companies. To address Nasdaq's concern that a small offering size for an IPO may not necessarily reflect a Restrictive Market company's initial valuation and to ensure sufficient liquidity to support trading in the secondary market, Nasdaq proposes to adopt (i) new Rules 5210(k)(i) and (ii) that would require a minimum offering size or public float for Restrictive Market Companies listing on Nasdaq in connection with an IPO or a business combination (as described in Rule 5110(a) or IM-5101-2); and (ii) a new Rule 5210(k)(iii) to permit Restrictive Market Companies to list on the Nasdaq Global Select or Nasdaq Global Markets if they are listing in connection with a Direct Listing (but not on the Nasdaq Capital Market which has lower requirements). The comment period for this rule proposal closes on July 6, 2020; and

Nasdaq's proposal to apply additional, more stringent criteria to a listing applicant or a listed company based on the qualifications of the company's auditor. To increase transparency as to how Nasdaq assesses the qualifications of a Restrictive Market company's auditor, Nasdaq proposes to amend IM-5101-1 to add a new subparagraph (b) that sets forth factors Nasdaq may consider in applying additional and more stringent criteria to an applicant or listed company based on the qualifications of the company's auditor, including (1) whether the auditor has been subject to a PCAOB inspection; (2) if the company's auditor has been inspected by the PCAOB, whether the results of that inspection indicate that the auditor has failed to respond to any requests by the PCAOB or that the inspection has uncovered significant deficiencies in the auditors' conduct in other audits or in its system of quality controls; (3) whether the auditor can demonstrate that it has adequate personnel in the offices participating in the audit with expertise in applying U.S. GAAP, GAAS or IFRS, as applicable, in the company's industry; (4) whether the auditor's training program for personnel participating in the company's audit is adequate; (5) for non-U.S. auditors, whether the auditor is part of a global network or other affiliation of individual auditors where the auditors draw on globally common technologies, tools, methodologies, training and quality assurance monitoring; and (6) whether the auditor can demonstrate to Nasdaq sufficient resources, geographic reach or experience as it relates to the company's audit. The comment period for this rule proposal closes on June 29, 2020.