SEC approves Nasdaq and NYSE revisions to reverse stock split rules: What public companies need to know

Nasdaq

Under Nasdaq Listing Rule 5810(c)(3)(A), if a company’s security closes below the $1.00 minimum bid price requirement for 30 consecutive business days, the company will receive a Nasdaq deficiency notice. Companies are then granted an initial 180-day period to regain compliance. If compliance is not regained during this 180-day period, then the company may be eligible for an additional 180-day compliance period if it satisfies certain conditions, including being listed on (or transferring to) the Nasdaq Capital Market and notifying Nasdaq of its intent to cure the deficiency (e.g., by effecting a reverse stock split).

Prior Nasdaq automatic stay period

Under prior Nasdaq Listing Rule 5815(a)(1)(B) (the Nasdaq Automatic Stay Rule), even if a company failed to regain compliance by the end of the second 180-day compliance period, it could request a hearing before a Nasdaq Listing Qualifications Hearings Panel (Hearings Panel), which would automatically stay any suspension and delisting action, allowing the company’s security to continue trading on Nasdaq while the appeal was pending. 

Now, no automatic stays during Nasdaq delisting appeals

Under the amended Nasdaq Automatic Stay Rule, Nasdaq has adopted Nasdaq Listing Rule 5815(a)(1)(B)(ii)d, which eliminated the automatic stay described above for a company that was afforded the second 180-day compliance period. Now, if a company fails to regain compliance with the minimum bid price requirement by the end of the second compliance period, the security at issue will be immediately suspended from Nasdaq. Under the amended Nasdaq Automatic Stay Rule, a company whose security is suspended from trading on Nasdaq may still appeal the delisting determination to a Hearings Panel, but such security would trade in the over-the-counter (OTC) market while that appeal is pending; and such suspension and looming threat of delisting often results in a negative impact on stock price and liquidity. Nasdaq also clarified that compliance is achieved by the security maintaining a minimum closing bid price of $1.00 for at least 10 consecutive business days, unless Nasdaq staff exercises discretion to extend this period.

Restrictions on reverse stock splits

Under amended Nasdaq Listing Rule 5810(c)(3)(A)(iv) (the Nasdaq Excessive Reverse Stock Split Rule), companies are now limited by how many times they can effect reverse stock splits within a certain time period to regain compliance with the minimum bid price requirement. Under the Nasdaq Excessive Reverse Stock Split Rule, if a company’s security fails to meet the minimum bid price requirement and the company has effected a reverse stock split within the prior one-year period, it will not be eligible for any compliance period to address a bid price deficiency. This restriction applies even if the company was in compliance with the minimum bid price requirement at the time of its prior reverse stock split. Accordingly, if a company effects a reverse stock split but its security subsequently falls out of compliance with the minimum bid requirement within a one-year period, it will be issued a delisting determination rather than being granted a compliance period. Under these circumstances, the company can appeal the delisting determination to a Hearings Panel, during which time any suspension or delisting action will be stayed. This amendment builds upon a 2020 rule change, which established an automatic delisting threshold for companies that have conducted one or more reverse stock splits within a two-year period with a cumulative ratio of 250 shares or more to one. Companies that meet this threshold are also ineligible for a compliance period and are subject to delisting (subject to a stay pursuant to the appeal processes). 

Additionally, companies should be aware of Nasdaq Listing Rule 5810(c)(3)(A)(iii), introduced in 2020, which established another automatic delisting threshold for stocks trading below $0.10 for 10 consecutive business days during a compliance period imposed as a result of noncompliance with the minimum bid price requirement. Under these circumstances, the company is ineligible for any additional compliance period, but suspension of trading of the security will be stayed while any appeal is pending. 

Nasdaq Listing Rule 5810(c)(3)(A) also provides that if a company takes a corporate action, such as a reverse stock split, to regain compliance with the minimum bid price requirement, and that action causes the company to fall below the numeric threshold for another Nasdaq listing requirement (e.g., having at least 500,000 publicly held shares for a company listed on the Nasdaq Capital Market), the company will not be granted a compliance period for the new deficiency. Instead, the company must cure both deficiencies within the compliance period(s) applicable to the bid price deficiency. If compliance is not restored, Nasdaq will issue a delisting determination, and no additional compliance periods will be available.

New filing and notification requirements for reverse stock splits

Amended Nasdaq Listing Rule 5250(e)(7) and IM-5250-3 require companies to submit an updated Company Event Notification Form to Nasdaq no later than 12:00 PM ET at least 10 calendar days before the anticipated market effective date of the reverse stock split, which will be significantly more burdensome for companies than the prior notice requirement of 5 business days. Nasdaq clarified that failure to comply with the 10-calendar-day notification deadline will result in a trading halt. 

The required Company Event Notification Form must include, among other things:

• The new CUSIP number for the post-reverse stock split stock;
• Evidence that the new CUSIP number has been made eligible at The Depository Trust Company (DTC);
• The dates of board and stockholder approval for the reverse stock split;
• The reverse stock split ratio; and
• A draft of the required public disclosure announcing the reverse stock split required by Nasdaq Listing Rule 5250(b)(4), which must be issued 2 business days prior to the proposed market effective date of the reverse stock split.

Given that the CUSIP DTC-eligibility piece has customarily been one of the largest lead time items in effecting a reverse stock split, companies should carefully factor this into their planning. Nasdaq requires evidence that the new CUSIP has been made DTC-eligible at least 10 calendar days before the reverse stock split market effective date, but DTC will not grant eligibility until after shareholder approval (if required) has been obtained. Accordingly, companies may not submit the Company Event Notification Form to Nasdaq until after DTC clears the CUSIP, which extends the overall timeline. Companies should account for this sequencing to ensure compliance with Nasdaq’s new 10-calendar-day notification requirement to avoid potential delays.

NYSE

NYSE rules

NYSE companies are out of compliance if their average closing share price is less than $1.00 for 30 consecutive business days. In order to regain compliance with the NYSE minimum bid requirement, the company must have had, on the last trading day of any calendar month during the prescribed six-month cure period, a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the prior 30 business days. Pursuant to amended Section 802.01C of the NYSE Listed Company Manual, the circumstances under which a company may be granted a compliance period have been significantly restricted. Companies generally are now no longer eligible for any compliance period if the company has (i) effected a reverse stock split over the past year or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one. In either scenario, NYSE will immediately begin the delisting process. Importantly, companies are also now prohibited from effecting a reverse stock split if it would result in the company being out of compliance with any other continued NYSE listing requirement, such as maintaining at least 600,000 publicly held shares.

Planning ahead

1. Compliance strategy. Companies should review their overall securities exchange compliance strategy to confirm they reflect the new Nasdaq or NYSE rules, as applicable, including Nasdaq’s extended 10-day notification requirement for reverse stock splits, as well as other listing requirements. Companies should also confirm that they have the proper procedures in place to respond promptly to a Nasdaq delisting notice or NYSE deficiency notice while factoring in the revised compliance timelines.
2. Follow-on offerings. Companies with share prices between $1.00/share and $2.00/share that are planning to do a dilutive follow-on offering should proactively review their compliance strategy and consult with legal counsel regarding maintaining compliance with the Nasdaq or NYSE minimum bid price requirements, as applicable.
3. Reverse stock split planning. Nasdaq and NYSE-listed companies planning for a reverse stock split should consider the new rules regarding multiple reverse stock splits within a one-year period in considering the ratio at which the reverse stock split should be effected. For example, the applicable ratio should seek to avoid the possibility of falling out of compliance with the minimum bid price requirement in the short-term following the contemplated reverse stock split.
4. Risk factors. Companies that have effected a reverse stock split in the past, have volatile share prices and/or have prices trading below or at reasonable risk of falling below $1.00/share should work with legal counsel to make sure their public disclosure risk factors are updated to reflect the new Nasdaq or NYSE rules and/or potential delisting risks.

Authored by Steven Abrams, Stephen Nicolai, Amanda Brown, Tyler Glass, Kayvon Paul, and Audrey Wang.