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In December, the WSJ reported that “557 stocks listed on U.S. exchanges were trading below $1 a share, up from fewer than a dozen in early 2021, according to Dow Jones Market Data. The majority of these stocks—464 of them—are listed on the Nasdaq Stock Market.” As John shared in December, the article attributed the increase to the SPAC market and Nasdaq’s grace period for compliance with the minimum bid price rule:

Many of today’s sub-$1 stocks went public in 2020 and 2021 during a boom in initial public offerings and deals with special-purpose acquisition companies. Mergers with SPACs were a popular way for startups to go public until a regulatory crackdown in 2021 slowed the SPAC craze. […]

Under Nasdaq rules, a company whose shares fall below $1 for 30 days gets a warning stating that it is noncompliant and has 180 days to get its share price back above the threshold. At the end of that period, many companies get an additional 180-day grace period if they say they are considering a reverse split or some other way to get back above $1.

Last August, Nasdaq filed a proposed rule with the SEC to establish listing standards related to notification and disclosure of reverse stock splits, citing the significant increase in reverse splits the exchange has seen in the last two years, often involving issuers trying to regain compliance with the minimum bid price requirement. The SEC approved that proposal in November.

Since all signs point to reverse stock splits remaining popular, and August 2023 DGCL amendments are also at play here, companies in this conundrum should check out this Honigman memo on reverse stock splits, which includes a post-shareholder approval implementation timeline with helpful reminders of all the third parties that need to be contacted or coordinated with in addition to Delaware and Nasdaq — like DTC, CUSIP Global Services and, of course, your transfer agent.

Keith Bishop recently shared thoughts on the application of state securities laws — specifically in California — to reverse stock splits.

– Meredith Ervine