News

SEC proposes to designate Nasdaq NCM securities as "covered securities"

News Brief
November 17, 2006

By: Cydney Posner

The SEC has proposed to designate securities listed on the Nasdaq Capital Market ("NCM"), formerly the Nasdaq SmallCap Market, as covered securities for purposes of Section 18 of the Securities Act (NSMIA). Covered securities under Section 18 are exempt from state law registration requirements.

Covered securities are defined in Section 18(b)(1) to include those securities listed, or authorized for listing, on the NYSE, AMEX and the Nasdaq Global Market (formerly, the Nasdaq National Market) (the "Named Markets"). In addition, covered securities also include securities listed, or authorized for listing, on a national securities exchange (or tier or segment thereof) that has listing standards that the SEC determines by rule are "substantially similar" to the Named Markets. Securities of the same issuer that are equal in seniority or senior to a security listed on a Named Market or designated similar market are also covered securities for purposes of Section 18. Nasdaq has petitioned the SEC to amend Rule 146(b) to designate securities listed on the NCM as covered securities for purposes of Section 18(b). If the SEC makes this determination, then securities listed on the NCM would be exempt from blue sky registration requirements

In its preliminary review, the SEC determined that the listing standards for securities traded on the NCM overall were not substantially similar to those of a Named Market. However, Nasdaq then filed a proposed rule change to amend its quantitative listing standards for NCM securities. Specifically, Nasdaq’s proposed modification would require an issuer to have:

  • shareholder’s equity of $4 million and net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years;
  • shareholder’s equity of $4 million and a market value of listed securities of $50 million; or
  • shareholder’s equity of $5 million and a two-year operating history.
Nasdaq’s proposal also would increase the aggregate market value of publicly held shares from $5 million to $15 million required for the last two alternatives above. Assuming these rule changes were approved, the SEC "preliminarily believes that it could make a finding that the NCM’s listing standards are substantially similar to those of a Named Market, and thus amend Rule 146(b) to include securities listed on the NCM." (NCM’s qualitative listing standards are identical to those applicable to Global Market securities.) .Although the NCM does not have the same continued listing provisions as a Named Market (AMEX in this case), Nasdaq does also look at the financial condition and operating results of the issuer, and the SEC preliminarily believes that the differences are not material. Nasdaq has also proposed a number of rule changes applicable to listing standards for preferred and secondary classes of common, as well as convertible debt and warrants, to allow the SEC to make a comparable determination of similarity.

Finally, the SEC proposes to amend Rule 146 to change the term "Nasdaq/NMS" to refer instead to the Nasdaq Global Market, reflecting the name change that occurred on July 1, 2006. .

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