In December 2024, the Nasdaq Stock Market LLC submitted a proposal to the US Securities and Exchange Commission (SEC) to modify its requirements for calculating the minimum Market Value of Unrestricted Publicly Held Shares in connection with an initial listing on Nasdaq.

The SEC published this proposal in the Federal Register for public comment on December 30, 2024. Subsequently, on February 5, Nasdaq submitted Amendment No. 1 to this proposed rule change. The amendment contains necessary clarifications but makes no substantive changes from the originally proposed rule change. On March 12, the SEC released an order granting approval of Amendment No. 1, which was published in the Federal Register on March 18.

Current Rule

Nasdaq Listing Rules 5405 and 5505 require companies listing in connection with an initial public offering (IPO) or an uplisting from the over-the-counter (OTC) market to satisfy applicable minimum Market Value requirements. For an initial listing, these minimums depend on whichever of the following standards the company meets the criteria for:

• Income Standard: Requires an annual income from continuing operations before incomes taxes of at least $1 million in the most recently completed fiscal year or in two of the three most recently completed fiscal years, stockholders’ equity of at least $15 million, and at least three registered and active market makers.
• Equity Standard: Requires stockholders’ equity of at least $30 million, a two-year operating history, and at least three registered and active market makers.
• Market Value Standard: Requires a market value of listed securities of $75 million and current publicly traded companies must meet this requirement and the $4 bid price requirement for 90 consecutive trading days prior to applying for listing under this standard. This standard requires at least four registered and active market makers.
• Total Assets/Total Revenue Standard: Requires a company to have total assets and total revenue of $75 million each for the most recently completed fiscal year or two of the three most recently completed fiscal years, and at least four registered and active market makers.

For an IPO listing on the Nasdaq Global Market, a company must have a minimum Market Value of $8 million under the Income Standard, a minimum of $18 million under the Equity Standard, or a minimum of $20 million under the Market Value or Total Assets/Total Revenue Standard. For an IPO listing on the Nasdaq Capital Market, a company must have a minimum of $5 million under the Income Standard or a minimum of $15 million under either the Equity Standard or Market Value or Total Assets/Total Revenue Standard. To satisfy the minimum Market Value, companies listing in conjunction with an IPO may count, in addition to the shares being sold in the offering itself, previously issued shares registered for resale not held by an officer, director, or 10% shareholder of the company.

For a company trading on the OTC market to list on Nasdaq, the company must have either a minimum daily trading volume of 2,000 shares over the past 30 trading days with trading occurring in at least 50% of those days (the ADV requirement) or list in connection with a firm commitment underwritten public offering of at least $4 million (the firm commitment requirement).

Proposed Changes

Companies listing in conjunction with an IPO must satisfy the minimum Market Value requirement only with the proceeds from the offering and can no longer include Resale Shares in their Market Value calculations under Nasdaq Listing Rules 5405(b) and 5505(b). OTC companies uplisting per the firm commitment requirement must also satisfy the applicable Market Value requirement without counting Resale Shares under Nasdaq Listing Rules 5405(a)(4) and 5505(a)(5). Additionally, the proposed changes increase the minimum public offering raise from $4 million to $5 million for Nasdaq Capital Market applicants and to $8 million for Nasdaq Global Market applicants. If the uplisting company qualifies for a standard other than the Net Income Standard, the minimum raise must satisfy those applicable standards.

Nasdaq has recommended these changes based on its observation that companies which included Resale Shares to meet their Market Value minimum experienced higher volatility on the date of listing than those companies that did not include Resale Shares to meet the requirement. In other words, Resale Shares may not contribute to liquidity to the same degree as shares sold in the public offering.

SEC’s Findings

The SEC found that the proposed rule change is consistent with the requirements of the Exchange Act of 1934, specifically Section 6(b)(5), which requires exchanges to promulgate rules designed, in part, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. Further, the proposed modifications should allow Nasdaq to better determine whether a security has adequate liquidity and is thus suitable for listing and trading on the exchange.

Takeaways

The SEC is currently soliciting comments electronically and by paper. Comments are publicly posted in the Federal Register. Submissions should be made on or before April 8. The SEC has also approved the rule change, as amended, on an accelerated basis. The SEC will approve the rule change prior to April 17. Once approved, the proposed modifications go into effect 30 days after the date of SEC approval.

Nasdaq and the SEC hope this modification ensures the exchange lists only securities with a sufficient market, adequate depth and liquidity, and sufficient investor interest to support an exchange listing. Companies considering listing on Nasdaq either through an IPO or uplisting from the OTC market should ensure they comply with the new rule once in effect and that their Market Value calculations meet applicable minimum requirements.

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Marina Phillips contributed to this article