NASDAQ Relaxes $4 Bid Price Listing Standard

On April 18, 2012, the SEC approved a rule change proposed by The NASDAQ Stock Market LLC (“NASDAQ”), establishing an alternative to the historical $4 minimum bid price initial listing requirement for the NASDAQ Capital Market. The new rule permits listing on NASDAQ with an initial minimum bid price of $2 or $3, if certain other listing requirements are met.

Historical Initial Listing Requirements

Prior to the adoption of the new rule, issuers seeking to list their securities on the NASDAQ Capital market were required to satisfy one of three quantitative listing standards, each of which required a minimum bid price of $4:

NASDAQ Capital Market Initial Listing Requirements Standard 1

Equity Standard

(Listing Rules 5505(a) and 5505(b)(1)) Standard 2

Market Value of Listed Securities Standard

(Listing Rules 5505(a) and 5505(b)(2)2) Standard 3

Net Income Standard

(Listing Rules 5505(a) and 5505(b)(3))

Stockholders’ equity1 $5 million $4 million $4 million

Market value of publicly held shares $15 million $15 million $5 million

Operating history 2 years N/A N/A

Market value of listed securities N/A $50 million N/A

Net income from continuing operations

(in the latest fiscal year or in two of the last three fiscal years) N/A N/A $750,000

Bid price $42 $43 $4

Publicly held shares4 1 million 1 million 1 million

Shareholders (round lot holders) 5 300 300 300

Market makers6 3 3 3

1 Stockholders’ equity is based on the company’s most recent balance sheet.

2 A company’s whose shares are listed on the OTCBB is required to satisfy the $4 bid price requirement within 5 business days of receipt of NASDAQ’s listing approval.

3 Companies already listed on another market that are qualifying under the Market Value standard must meet the market value of listed securities and the bid price requirements for 90 consecutive trading days prior to applying for listing.

4 Publicly held shares is defined as total shares outstanding, less any shares held directly or indirectly by officers, directors, or 10% holders.

5 Round lot holders are shareholders of 100 shares or more. The company is required to submit documentation from the company’s transfer agent confirming that the company satisfies the minimum number of shareholders.

6 The company is required to submit letters from 3 market makers.

The Rule Change

Pursuant to the new rule, a security may qualify for listing on the NASDAQ Capital market if, for at least five consecutive business days prior to approval, the security has a minimum closing price of:

• $3 per share, if the issuer meets the Equity (Standard 1) or Net Income (Standard 3) standards; or

• $2 per share, if the issuer meets the Market Value of Listed Securities (Standard 2) standard.

For an issuer to qualify its securities for listing under this lower bid price requirement, the issuer must demonstrate:

• net tangible assets in excess of $2 million, if it has been in continuous operation for at least three years;

• net tangible assets in excess of $5 million, if it has been in continuous operation for less than three years; or

• average revenue of at least $6 million for the last three years.

Purpose of Rule Change

NASDAQ’s stated purpose for the new alternative price requirement is to enable NASDAQ to compete with NYSE Amex for initial listing of companies with securities priced below $4. Currently, NYSE Amex is able to list companies priced between $2 and $4 without their securities being considered “penny stocks” because NYSE Amex benefits from the “grandfather” exclusion set forth in Rule 3a51-1(a)(1) under the Securities Exchange Act, which does not apply to NASDAQ. As a result, in order to compete with NYSE Amex for listing securities priced between $2 and $4, and to avoid such securities being considered “penny stocks”, NASDAQ has incorporated in its new rule the net tangible assets and average revenue tests contained in the alternative penny stock exclusion set forth in Rule 3a51-1(g) under the Securities Exchange Act.

Penny Stock Regulation

It is important to note that an issuer listing under this alternative price requirement will continue to be monitored for compliance with the above conditions, even after the successful listing of its securities . Such an issuer may become a “penny stock” if the issuer fails the net tangible assets or revenue tests after listing and does not satisfy any of the other exclusions from being a penny stock contained in Rule 3a51-1 of the Securities Exchange Act. NASDAQ will monitor issuers whose securities are listed under the alternative price requirement and publish on its website on a daily basis a list of those companies that no longer satisfy the net tangible assets or revenue tests, nor any other exclusions from being a penny stock under Rule 3a-51-1.

Transition to $4 minimum bid price requirement

In the event that the securities of an issuer that initially listed its securities under the alternative price requirement subsequently achieve a $4 closing price over at least five consecutive business days, and satisfy all other initial listing criteria, the securities would no longer be considered as having listed under the alternative price requirement and would no longer be monitored for compliance with the net tangible assets or revenue tests.

Please contact us if you would like to discuss this alert or receive additional information regarding NASDAQ listing requirements.

By: Steve Kronengold and David C. Zuckerbrot. © May 2012. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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