In January, John blogged about Nasdaq’s proposal to impose a $5 million minimum market cap requirement on companies listed on Nasdaq’s Global and Capital Markets. It then extended the time to act on this proposal back in March, 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 to determine whether to approve or disapprove the proposed rule change.

I should point out that the new minimum would be added to Rules 5450(a) and 5550(a), which apply across the board for all listed companies regardless of which continued listing standard they qualify for (Equity, Market Value of Listed Securities or Net Income). Currently, companies that satisfy the Equity Standard or the Net Income Standard do not need to meet a minimum Market Value of Listed Securities. So, if the tables on pages 3 and 4 of this continued listing guide were updated to reflect this proposed change, I believe we’d see the $5 million Market Value of Listed Securities requirement across all three columns on both pages.

As Dave noted, these orders are pretty unusual — although we’ve had this happen with a few in recent years. Basically, 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 finds institution of proceedings is appropriate in light of the legal and policy issues raised by the proposed rule change.

Beginning on page 7, the order reviews the comments received to date. While two were supportive, other comment letters expressed many concerns, including:

– That the proposal doesn’t provide evidence in support of the proposed $5 million threshold, “such as evidence demonstrating that issuers below the proposed threshold are financially distressed or pose heightened risks to investors that are not already addressed by existing Nasdaq and Commission requirements”

– That other recently adopted rule changes were already designed to address the same “low-valuation risk factors identified in the proposal,” such as the reverse stock split and bid price requirements

– That the minimum MVLS would hurt listed companies’ ability to raise capital

– That the rule change might encourage companies to “seek listing on less regulated venues, rely more heavily on private capital markets with reduced transparency, or delay or forgo public listing” or “engage in value-distorting actions,” including “reverse stock splits, overly dilutive financings, excessive marketing campaigns or premature asset sales”

– That the minimum MVLS and automatic suspension after 30 days might increase manipulative trading

– That removing the stay during a hearing request renders the appeal rights “illusory”

In terms of further input sought, the order says:

The Commission asks that commenters address the sufficiency of the Exchange’s statements in support of the proposal, which are set forth in the Notice, in addition to any other comments they may wish to submit about the proposed rule change. In particular, the Commission seeks comment on whether the proposal includes sufficient analysis to support a conclusion that the proposal to immediately suspend and delist companies that fail to comply with the MVLS Requirement, to maintain the suspension of such companies’ securities from trading during the pendency of an appeal to the Hearings Panel, and to limit the Hearings Panel’s discretion to reverse a delisting decision to circumstances involving a factual error is designed to be consistent with the requirements of Section 6(b)(5) and Section 6(b)(7) of the Act or raises any new or novel concerns not previously contemplated by the Commission.

– Meredith Ervine