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SEC Approves Nasdaq Rule Change on Reverse Stock Splits and Minimum Bid Price Compliance Timing

On October 7, 2024, the US Securities and Exchange Commission (SEC) approved a rule change proposed by The Nasdaq Stock Market LLC that affects companies utilizing reverse stock splits to regain compliance with Nasdaq’s minimum bid price requirements.

The new rule, which applies immediately, amends Nasdaq Listing Rule 5810(c)(3)(A) to modify the application of the bid price compliance periods where a listed company takes an action to achieve compliance with the $1.00 minimum bid price continued listing requirement (the bid price requirement) and that action causes non-compliance with another listing requirement.

New Rule

Under the new rule, a company will not be considered to have regained compliance with the bid price requirement if the company takes an action, such as a reverse stock split, to achieve compliance with the bid price requirement and that action results in non-compliance with another Nasdaq listing requirement, such as maintaining a minimum of 300 public holders.

In such event, the company will continue to be considered non-compliant until both (i) the newly created secondary deficiency is cured and (ii) thereafter the company meets the bid price requirement for a minimum of 10 consecutive business days (unless Nasdaq staff, at its discretion, extends the 10-day period). Additional compliance periods otherwise available for the secondary listing requirement are no longer applicable.

If the company does not regain compliance with the bid price requirement and the other deficiency during the compliance period applicable to the initial bid price deficiency, Nasdaq will issue a Staff Delisting Determination Letter.

Background

Under Nasdaq Rule 5550(a)(2) (Primary Equity Security listed on the Nasdaq Capital Market) and Rule 5450(a)(1) (Primary Equity Security listed on the Nasdaq Global or Global Select Markets), listed companies must maintain a minimum bid price of $1.00 per share. If a company’s minimum bid price is below $1.00 per share for 30 consecutive business days, then the company is determined to have failed to meet the Nasdaq bid price requirement, and the company will be promptly notified with a deficiency notice.

The company is automatically given a period of 180 days from the date of the deficiency notice to regain compliance by maintaining a bid price above $1.00 for at least 10 consecutive business days. Nasdaq Rules 5810(c)(3)(A)(i) and (ii) also provide an additional 180-day period to regain compliance for companies listed on the Nasdaq Capital Market or companies listed on the Nasdaq Global Select or Nasdaq Global Market that transfer to the Nasdaq Capital Market prior to expiration of the first 180 day compliance period if certain requirements are met.

Historically, many companies have used reverse stock splits to regain compliance with the bid price requirement. However, reverse stock splits often reduce the number of publicly held shares and public stockholders, which can lead to non-compliance with other Nasdaq listing requirements, such as maintaining a minimum of 500,000 publicly held shares and 300 public stockholders.

Under the previous rule framework, companies could potentially receive additional time to correct these secondary deficiencies, extending the compliance process beyond the initial bid price deficiency period. Nasdaq’s new rule eliminates this possibility by requiring companies to resolve deficiencies caused by a reverse split within the original compliance period. Additionally, the rule clarifies that Nasdaq staff may extend the period during which the company is required to meet the minimum bid price requirement beyond the 10-day compliance period at their discretion but only within the framework of the new requirements. If both the bid price and any other triggered deficiencies are not cured within the allotted time, Nasdaq will issue a delisting notice.

Nasdaq’s amended approach will require listed companies considering reverse stock splits to carefully evaluate the potential impacts of the reverse stock split on their compliance with other listing rules.

For further guidance on how this rule change may impact your company’s listing status or compliance strategy, please contact the authors of this Viewpoints advisory or your regular counsel at Mintz.

 

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Authors

Page R. Hubben

Special Counsel

Page R. Hubben is a Mintz attorney who advises public companies on capital-raising transactions, SEC reporting, and corporate governance. She also counsels public and private companies on a broad range of executive compensation and equity compensation arrangements and programs, including equity and incentive plans and related tax, corporate, and securities law concerns.
Anne L. Bruno is a Member at Mintz who advises clients ranging from start-ups to multinational public companies on issues related to corporate and employment law, including executive compensation, employee benefits, securities law, and corporate governance. She is also a key member of the firm’s multidisciplinary ESG practice, helping corporate boards, companies, and their investors navigate a broad range of environmental, social, and governance considerations.
Dan is a corporate and securities attorney whose practice spans the full gamut of corporate law. He has advised clients for over two decades in public and private equity and debt financings, securities law matters, mergers and acquisitions, and strategic advice on a broad range of other corporate matters. He capably counsels public and private companies with offerings, compliance, and securities questions and leads buyers and sellers throughout the transaction process. Dan represents life sciences companies as well as clients in other technology fields, financial services, and professional services firms.