July 09, 2019
On July 5th, 2019 the Securities and Exchange Commission published Amendment No. 3 to proposed changes by the Nasdaq Stock Market LLC (“Nasdaq” or the “Exchange”) to its Initial Listing Standards. Nasdaq stated in its proposed rule change that it believes that these amendments are necessary in order to ensure that Nasdaq only lists securities with a sufficient market, with adequate depth and liquidity, and with sufficient investor interest to support an exchange listing. The proposed rules will take effect on an expedited basis prior to the thirtieth day following its publication in the Federal Register.
In order to assure adequate liquidity for listed securities, Nasdaq proposes 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. To do so, Nasdaq proposes to add three new definitions to define “restricted securities,” “unrestricted publicly held shares” and “unrestricted securities” and proposes to amend the definition of “round lot holder.” The proposed changes, together with Nasdaq’s recently released FAQs, single Nasdaq’s intention to tighten up its initial listing requirements and promote greater liquidity and transparency for companies listed on the Exchange.
The proposed rule changes mean that companies seeking a new listing on Nasdaq, either through an Initial Public Offering (“IPO”), an uplisting from OTC Markets or through listing American Depository Receipts (“ADRs”), will need to evaluate whether they are able to meet the requirements as to “Market Value of Publicly Held Shares” and “Shareholders” (defined as “round lot holders”). Under the current Initial Listing Standards, Market Value of Publicly Held Shares includes shares that are held by non-affiliates even if such shares are restricted securities or subject to a contractual lock-up agreement with the company. Under the proposed revised Initial Listing Standards, restricted securities and securities subject to lock-up or other restrictions are excluded from the calculation of Market Value of Publicly Held Shares, even if held by non-affiliates. Similarly, the proposed rule change would require that at least 50% of “round lot holders” (persons holding at least 100 shares), be required to hold shares in the company with an aggregate value of at least $2,500.
The proposed amendments would also modify Nasdaq’s rules to state that when considering the security underlying an ADR, Nasdaq will only consider restrictions that prohibit the resale or trading of the underlying security on the foreign issuer’s home country market. However, any restrictions, including those provided as examples in the new definition of “restricted securities,” which would restrict the underlying security from being freely sold or tradable on its home country market would be considered by Nasdaq when calculating “unrestricted publicly held shares.”
From a practical standpoint this means that certain smaller IPOs that would otherwise have qualified for initial listing on Nasdaq may not qualify under the proposed rule changes. Companies considering an IPO, uplisting or cross listing on Nasdaq should carefully consider the proposed rule changes and the potential impact that the revised Initial Listing Standards will have on their public market strategies. Although it is too early to predict the full impact of these changes on the small cap markets, we believe it is fair to say that once the proposed changes take effect that it will cause some smaller companies to wait longer prior to seeking an IPO and will cause the average size of smaller IPOs to increase in order to meet the new standards.
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 https://listingcenter.nasdaq.com/Material_Search.aspx?mcd=LQ (see Identification Nos. 416 and 1696)