New Nasdaq $2 / $3 Initial Price Listing Standards

As a quick follow up on this topic from a few months ago (prior post can be read here), the SEC has approved alternatives to Nasdaq's historical $4 minimum bid price listing standard.  Under the new alternative listing standards, a security may qualify for listing on the Nasdaq Capital Market if: 

• $3/share price -- for at least five consecutive business days prior to approval, the security has a minimum closing price of at least $3 per share and the issuer has either:
  • Equity Standard:  (A) stockholders' equity of at least $5M; (B) market value of publicly held shares of at least $15M; and (C) a two year operating history; or
  • Net Income Standard:  (A) net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years; (B) stockholders' equity of at least $4M; and (C) market value of publicly held shares of at least $5 million; or
• $2/share price -- for at least five consecutive business days prior to approval, the security has a minimum closing price of at least $2 per share and the issuer has (A) market value of listed securities of at least $50M; (B) stockholders' equity of at least $4M; and (C) market value of publicly held shares of at least $15M.

In addition, the issuer must also demonstrate that it has:

• Net tangible assets in excess of $2M if it has been in continuous operation for at least three years;
• Net tangible assets in excess of $5M if it has been in continuous operation for less than three years; or
• Average revenue of at least $6M for the last three years.

Nasdaq-listed securities have historically not been regulated as "penny stocks" (which subject broker-dealers trading in them to additional disclosure and other requirements) because of the exception for securities registered on a national securities exchange that, among other things, required a minimum bid price of $4 per share at initial listing.  NYSE Amex benefits from a "grandfather" exception that permits lower initial prices.  With Nasdaq's new alternative listing standards, it can compete with the NYSE Amex for listings in the $2-3 range.  However, it is possible that companies listing under these lower standards may become "penny stocks."

To address this, new Nasdaq interpretive guidance (IM-5505) provides that an issuer listing under the alternative price requirements may become a "penny stock" if the issuer fails the net tangible assets and revenue tests after listing and does not satisfy any of the other exclusions from being a penny stock contained in Rule 3a51-1 under the 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 exclusion from being a penny stock.  If a security subsequently has a $4 closing price for at least five consecutive business days, it can be reevaluated under the regular Nasdaq qualitative and quantitative initial listing standards and deemed listed under these standards.  Nasdaq has represented that its review of the issuer's compliance at this stage will be "robust" and "wholesale."  In addition, Nasdaq has represented that enhanced surveillance procedures will be used to monitor anomalous trading in securities listed under these alternatives.

With Nasdaq now competing with NYSE Amex for listings in the $2-3 range (and the relaxed registration requirements under the IPO "on-ramp" provisions of the JOBS Act), mid-sized IPO candidates have additional options for accessing the capital markets.

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