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On Friday, the SEC approved the rule change Nasdaq proposed in August to modify the delisting process for certain stocks that fail to regain compliance with the minimum bid price requirement. As we noted in November, it wasn’t clear that this proposed change was going to be approved. In the fall, the SEC extended the time period for action on the proposal and then instituted proceedings under Section 19(b)(2)(B) of the Exchange Act seeking additional analysis, which Nasdaq submitted in early January.

The rule change revises 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. As we previously noted, the rule adds risk — of being relegated to trading on OTC markets — especially to publicly traded AI and biotech startups.

Here is additional detail on the changes, paraphrased from the release:

– Suspension After Second Compliance Period. When a company has a minimum bid price deficiency, Nasdaq rules provide an automatic 180-day compliance period and then — if the company notifies Nasdaq of the intent to cure the deficiency with a reverse stock split — a second, not automatic 180-day compliance period. If the deficiency is not cured in that second period, a Delisting Determination is issued, which can be appealed with a hearing request. Typically that hearing request would stay the suspension and delisting action pending the decision of the Hearings Panel, but Nasdaq Rule 5815 is being modified to provide that a request for a hearing shall not stay the trading suspension when the request is made by a company that was afforded the second 180-day period and failed to regain compliance during that time.

– Bid Price Deficiency One Year After Reverse Stock Split. Nasdaq Rule 5810 is being amended to provide that if a company’s security fails to meet the minimum bid price within one year since the company effected a reverse stock split, then the company shall not be eligible for any compliance period and a Delisting Determination will be issued immediately. This will prevent companies from remaining listed if they would have to engage in a pattern of reverse stock splits to maintain the minimum bid price.

Commenters seemed more concerned about the latter of the two changes — and the SEC’s release spends 12+ pages addressing those comments and concerns.

Side note: There are a number of other complexities to these rules and this process that apply in certain circumstances — for example, if a security has a closing bid price of $0.10 or less for 10 consecutive trading days during a bid price compliance period, if a company has effected one or more reverse stock splits in the prior two years with a cumulative ratio of 250:1 or more or if a company’s reverse stock split causes it to be out of compliance with another listing rule (another recent change). See this Cooley PubCo post for more.

– Meredith Ervine