TheCorporateCounsel.net

As Liz shared, Nasdaq posted a proposed rule change back in August to modify the delisting process in Nasdaq Rules 5810 and 5815 for stocks that fail to regain compliance with the exchange’s bid price requirement — or fall out of compliance again one year after effecting a reverse stock split. The proposal presents risk — of being relegated to trading on OTC markets — especially to publicly traded AI and biotech startups. In October, the SEC extended the time period for action on the proposal, and yesterday, the day before the Commission was required to take action, an order was posted instituting proceedings under Section 19(b)(2)(B) of the Exchange Act.

What does that mean? It means the Commission is providing Nasdaq with notice of potential grounds for disapproval and soliciting additional comment on specific areas of concern — with a new deadline for those additional comments (21 days after publication in the Federal Register) and rebuttals (35 days after publication in the Federal Register). It does not indicate that the Commission has reached any conclusions, but it notes the institution of proceedings is appropriate in light of the legal and policy issues raised by the proposed rule change. As Dave noted in a blog about a recent NYSE proposal, these orders are pretty unusual.

In terms of further input, the order asks, in particular, that commenters “address whether the proposal includes sufficient data and analysis to support a conclusion that the proposal is consistent with the requirements of Section 6(b)(5) of the Exchange Act” — which requires “that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.”

Beginning on page 8, the order reviews the comments received to date, which it says were generally supportive, although some said the proposal didn’t go far enough and at least one commentator expressed concern that the amendments could incentivize market manipulative trading strategies and negatively impact access to capital for a segment of Nasdaq-listed small companies, including biotech.

– Meredith Ervine