SEC Approves Nasdaq Proposal for Alternatives to $4 Minimum Bid Price Test

News Brief

By Cydney Posner

Late last week, the SEC approved, on an accelerated basis, a Nasdaq proposal to adopt, as an alternative to the $4 minimum bid price initial listing requirement for the Nasdaq Capital Market, a closing price of either $2 or $3, if certain other listing requirements are met.  Nasdaq's stated purpose for its proposal is to compete with NYSE Amex for initial listings of companies with securities priced between $2 and $4.

Under the proposed alternative, a security would 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 either of the following:

  • at least $3 per share, if the issuer meets the Equity or Net Income standards.
  • Under the Equity Standard, an issuer would need to meet, among other things:
    • (A) stockholders' equity of at least $5 million;
    • (B) market value of publicly held shares of at least $15 million; and
    • (C) two year operating history.
  • Under the Net Income Standard, an issuer would have to meet, among other things: 
    • (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 $4 million; and 
    • (C) market value of publicly held shares of at least $5 million.
  • or at least $2 per share, if the issuer meets the Market Value of Listed Securities standard. 
  •  Under the Market Value of Listed Securities Standard, an issuer would need to meet, among other things:
    • (A) market value of listed securities of at least $50 million (current publicly traded issuers must meet this requirement and the price requirement for 90 consecutive trading days prior to applying for listing if qualifying to list only under the market value of listed securities standard);
    • (B) stockholders' equity of at least $4 million; and
    • (C) market value of publicly held shares of at least $15 million.

(Note that Nasdaq Rule 5505(b)(2) would be revised to make it consistent with the proposal. In particular, Nasdaq Rule 5505(b)(2)(A) would be revised to delete the specific reference to $4 bid price requirement, since an issuer seeking to initially list its securities under the Market Value of Listed Securities Standard using the proposed alternative price requirement would have to maintain a closing price of at least $2 per share for 90 consecutive trading days.)

The issuer must also demonstrate that it has net tangible assets in excess of $2 million if the issuer has been in continuous operation for at least three years. If the issuer has been in continuous operation for less than three years, then the issuer must demonstrate net tangible assets in excess of $5 million. The issuer could also be listed under the alternative lower $2 or $3 price requirement if the issuer has average revenue of at least $6 million for the last three years.

Currently, Nasdaq-listed securities are not considered penny stocks because of the exception for securities registered on a national securities exchanges that have initial listing standards that meet certain requirements, including a $4 bid price at the time of listing. In new Interpretative Material, Nasdaq states that an issuer that qualifies its securities for initial listing under the alternative price requirement would be monitored and could 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. To facilitate compliance by brokers with the penny stock rules, Nasdaq will publish on its website, and update daily, a list of these companies that initially listed under the alternative price requirement but no longer meet the penny stock exclusion. However, if an issuer initially lists its securities under the alternative price requirement and the securities 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 penny stock exclusion.

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