The SEC recently approved a proposal by The NASDAQ Stock Market LLC’s to adopt an alternative to listing requirements for the Nasdaq Capital Market (“Nasdaq”) that will permit Nasdaq to list equity securities on its exchange whose securities are in the $2-$4 price range. Prior to this amendment, in order to be listed on the Nasdaq Capital Market, an equity security was required to have a minimum closing price of $4 per share.  With this amendment, two alternatives now exist in addition to the $4 threshold.

$3 Closing Price alternative:

If an equity security maintains a closing price of at least $3 per share for five consecutive business days, it may qualify for initial listing on the Nasdaq Capital Market if it satisfies either the Equity or Net Income Standards, as defined below.

The Equity Standard requires:

  • Stockholder equity of at least $5 million;
  • Market value of publicly held shares of at least $15 million; and
  • Two years of operating history.

The Net Income Standard requires:

  • 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;
  • Stockholder equity of at least $4 million; and
  • Market value of publicly held shares of at least $5 million.

$2 Closing Price alternative:

If an equity security maintains a closing price of at least $2 per share for five consecutive business days, it may qualify for initial listing on the Nasdaq Capital Market if it satisfies the Market Value of Listed Securities Standard, as defined below.

The Market Value of Listed Securities standard requires:

  • Market Value of Listed Securities of at least $50 million (current publicly traded Companies 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);
  • Stockholders’ equity of at least $4 million; and
  • Market value of publicly held shares of at least $15 million.

Both the $3 closing price alternative and the $2 closing price alternative require the issuer to demonstrate that it has net tangible assets of at least $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 it must demonstrate net tangible assets of at least $5 million.  In either case, this requirement will be satisfied if the issuer has had average revenues of at least $6 million for the previous three years.

Continued Monitoring of Alternative Pricing Qualifiers – Issue Relating to Penny Stocks

Since Nasdaq was not included in the “grandfathered” exclusion of companies whose securities are not considered to be “penny stocks” set forth in Rule 3a51-1(a)(1), Nasdaq will be continuously monitoring the issuers who qualify under the alternative pricing methods and publish on its website a daily updated list of those issuers who fall below the net tangible assets and revenue requirements and do not otherwise qualify for an exclusion under Rule 3a51-1. Specifically, if an issuer qualifies its securities under the $2 or $3 alternative listing methods, and subsequently falls below the net tangible assets and revenue requirements, and does not satisfy any of the other exclusions in Rule 3a51-1 of the Act, it could be considered a  penny stock for purposes of the Act.  Broker-dealers who transact in securities listed pursuant to the alternative pricing methods will need to review the issuer’s current financial statements to verify such an issuer still qualifies under the net tangible asset or average revenue requirements, and thus is not a penny stock.

Moreover, as part of Nasdaq’s monitoring of those issuers who qualified under the alternative pricing method, if such an issuer were to subsequently achieve a $4 closing price over a period of five consecutive business days, and satisfies all other initial listing requirements, their securities would no longer be considered as having been listed under the alternative pricing method and would no longer be monitored.  Nasdaq will notify an issuer of such a circumstance.

Summary

NASDAQ’s new alternative listing requirements have been proposed and adopted to allow Nasdaq to compete with the NYSE Amex with respect to the listing of equity securities on its exchange in the $2-$4 price range. As described above, the new rules have been structured in such a way as to avoid having the equity securities listed on Nasdaq be considered “penny stocks” pursuant to the Securities Exchange Act of 1934 (the “Act”) so as to avoid the additional disclosure requirements imposed on brokers and dealers who transact in such securities.  Currently, the NYSE Amex exchange benefits from a clause in the penny stock rules which effectively exempts securities listed on the NYSE Amex from penny stock regulation.  The Act states any equity securities listed on a national exchange, which has been continuously registered as a national exchange since April 20, 1992, are exempt from penny stock regulations.  NYSE Amex meets this requirement, but the Nasdaq Capital Market does not.

Conclusion

This amendment, as approved by the SEC, will certainly make it possible for issuers who are not yet trading at a $4 per share closing price to apply and potentially be permitted to list on the Nasdaq Capital Market.  This amendment should level the playing field slightly between the Nasdaq Capital Market and the NYSE Amex as well as open up the benefits of a national exchange to additional issuers.