CLIENT ALERT – NASDAQ FAQ 416
July 09, 2019
On June 10, 2019, in response to the proposed bill, “Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges” (“EQUITABLE Act”), Nasdaq released a FAQ (identification number 1696) clarifying listing standards for an applicant’s initial or continued listing based on a company’s financial statements. For more information, please read our previous alert dated June 25, 2019.
Nasdaq released another FAQ (identification number 416) on June 20, 2019, discussing particular circumstances under which it would apply additional and more stringent criteria, and suspend and/or delist a company’s securities, pursuant to its discretionary authority. Pursuant to Listing Rule 5101, Nasdaq has broad discretionary authority over listings of securities on its market, “to maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest.” It is important to note that the rule allows Nasdaq to delist, apply additional and more stringent criteria, or suspend a specific security that is inadvisable in its opinion regardless of the security’s adherence to the enumerated criteria for listing.
Nasdaq cited to IM-5101-1 describing instances where a company may be denied initial or continued listing on the exchange. Some examples include when a company is associated with an individual who has a history of regulatory misconduct, files for bankruptcy protection, provides noncompliant financial statements, fails to submit requested information, makes any material misrepresentation, or omits material information necessary to prevent misleading communication to Nasdaq.
Lastly, Nasdaq lists specific instances where it has exercised its discretionary authority. These instances include –
- Based on the embryonic nature of the company’s business, where the company had not commenced operations and would turn over most proceeds from its IPO to third parties to advance the company’s business plan.
- Where the company failed to make any meaningful progress on its business plan two years after listing and had not generated any revenue. Where the company’s management did not appear to have adequate prior public company experience or an understanding of the requirements to be a public company listed on Nasdaq.
- Where the company engaged an auditor that has not been subject to an inspection by the Public Company Accounting Oversight Board (PCAOB), an auditor that PCAOB cannot inspect, or an auditor that has not demonstrated sufficient resources, geographic reach or experience to adequately perform the company’s audit. See also FAQ 1696.
- Where the company planned a small public offering, which would result in insiders holding a large portion of the company’s listed securities. Nasdaq was concerned that the offering size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public market for the company. As a result, Nasdaq has proposed changes to its Listing Rules, which will, among other things: 1. exclude restricted securities from the calculation of a company’s publicly held shares and market value of publicly held shares; 2. exclude restricted securities from the calculation of a company’s round lot holders; and 3. require that at least 50% of a company’s round lot holders must each hold unrestricted securities with a market value of a least $2,500. See also FAQ 1415 and the proposed changes to the Listing Rules contained in SR-NASDAQ-2019-009.
- Where the company did not demonstrate sufficient nexus to the U.S. capital market, including having no U.S. shareholders, operations or members of the board of directors or management.
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