Eric M. Hellige

On July 5, 2019, the Securities and Exchange Commission (the “SEC”) approved changes to Nasdaq’s initial listing standards to improve liquidity in the market. The revised standards became effective on August 5, 2019. Under the new standards, Nasdaq (i) will now exclude “Restricted Securities” (as defined below) from calculations of an issuer’s public float, market value of public float and round lot holders; (ii) added a new requirement that at least 50% of an issuer’s round lot holders hold unrestricted securities with a market value of at least $2,500; and (iii) added a new requirement of a minimum average daily trading volume for securities trading over-the-counter of at least 2,000 shares over the 30-day period prior to listing (with trading occurring on more than half of those 30 days).

i. Restricted Securities

Prior to the amendments, under the initial listing rules, an issuer was required to have a specified minimum number of publicly-held shares, which number could include restricted securities, to list its equity on any Nasdaq tier, with the applicable number changing based on the tier selected. As revised, Nasdaq now defines “Restricted Securities” as “securities that are subject to resale restrictions for any reason, including, but not limited to, securities: (1) acquired directly or indirectly from the issuer or an affiliate of the issuer in unregistered offerings such as private placements or Regulation D offerings; (2) acquired through an employee stock benefit plan or as compensation for professional services; (3) acquired in reliance on Regulation S, which cannot be resold within the United States; (4) subject to a lockup agreement or a similar contractual restriction; or (5) considered ‘restricted securities’ under Rule 144.” Under the new standards, Nasdaq added a new definition of “Unrestricted Securities”, which are “securities that are not Restricted Securities,” and adopted a new definition of “Unrestricted Publicly Held Shares,” defined as “Publicly Held Shares that are Unrestricted Securities.” 

With respect to ADRs (American Depositary Receipts), Nasdaq will only consider “restrictions that prohibit the resale or trading of the underlying security on the foreign issuer’s home country market.”

As noted above, “Restricted Securities” will now be excluded from calculations of an issuer’s public float, market value of publicly held shares and round lot holders.

ii. Minimum Value Requirement for Holders

Under the new standards, Nasdaq also revised the listing rules related to round lot holders. Under the prior definition of a round lot, a shareholder may be considered a round lot holder by holding exactly 100 shares, which would be worth only $400 in the case of a stock that is trading at the minimum original listing bid price of $4 per share. Nasdaq believes that “this minimal investment is not an appropriate representation of investor interest to support a listing on a national securities exchange.” Under the revised definition, a round lot holder refers to a holder of a normal unit of trading (generally, 100 shares) of Unrestricted Securities. Nasdaq also added a new requirement that at least 50% of an issuer’s round lot holders must each hold Unrestricted Securities with a market value of at least $2,500. Nasdaq believes that this amendment will “help ensure that a majority of the required minimum number of shareholders hold a meaningful value of unrestricted securities and that a company has sufficient investor interest to support an exchange listing.” 

iii. Average Daily Trading Volume (“ADTV”)

Nasdaq also adopted an additional initial listing criteria for primary equity securities previously trading over-the-counter in the United States. The new rules now require such securities to have a minimum average daily trading volume over the 30 trading days prior to listing of at least 2,000 shares (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days (i.e., at least 16 days). Nasdaq believes “this will help ensure a liquid trading market, promote price discovery and establish an appropriate market price for the listed securities.” Nasdaq adopted an exemption from the ADTV requirement for securities listed in connection with a firm commitment underwritten public offering of at least $4 million because it believes that “the sale of securities in an underwritten public offering provides an additional basis for believing that a liquid trading market will likely develop for such securities after listing” and that “the underwriters in a firm commitment underwritten public offering will also generally make a market in the securities for a period of time after the offering, assisting in the creation of a liquid trading market.”

In addition, with respect to an issuer applying to list through a direct listing “that has not had sustained recent trading in a private placement market prior to listing,” Nasdaq will determine that the issuer “has met the Market Value of Unrestricted Publicly Held Shares requirement if the Company satisfies the applicable Market Value of Unrestricted Publicly Held Shares requirement set forth in Nasdaq Rule 5315 and provides a valuation evidencing a Market Value of Publicly Held Shares of at least $250,000,000.” Nasdaq is not excluding restricted securities from the determination of the $250 million minimum valuation.

Nasdaq is not changing the requirements for continued listing at this time, and believes that the heightened initial listing requirements will result in enhanced liquidity for the companies that satisfy them on an ongoing basis.

For more information on how these changes can impact your potential listing on Nasdaq, please contact your Pryor Cashman attorney.