Introduction

Issuers listed on the Nasdaq Stock Market and the New York Stock Exchange (NYSE) often conduct reverse stock splits to maintain compliance with each exchange’s US$1.00 minimum share price requirement. A reverse stock split typically increases the price for a share of stock by consolidating outstanding shares at a ratio selected by the issuer such that, following the reverse split, each stockholder maintains its approximate ownership percentage and overall investment value, but the issuer has fewer shares outstanding with a higher price per share. Over the past several years, Nasdaq has implemented a series of rule changes making it more difficult to use reverse stock splits to regain compliance with its minimum share price requirement and that otherwise impact the process for executing a reverse split. Recently, the NYSE proposed a new rule of its own that restricts an issuer’s ability to use a reverse split to regain compliance with its minimum share price requirement. Issuers with stock prices near or below US$1.00 per share need to understand how these rule changes may affect whether, when, and how they can implement a reverse stock split to maintain their stock exchange listings.

Nasdaq Stock Market Rules

A Nasdaq-listed issuer’s primary equity security must maintain a minimum bid price of US$1.00. If the trading price of a primary equity security closes under US$1.00 per share for 30 consecutive business days, the issuer will generally have 180 days to regain compliance with the minimum bid price requirement. At the end of the 180-day compliance period, the issuer can be granted an additional 180-day compliance period by notifying Nasdaq of its intent to cure the deficiency, including by effecting a reverse stock split. Prior to recent rule changes, if the issuer had not cured the minimum bid price deficiency by the end of the second compliance period, it could appeal delisting of its stock by requesting a review by a hearings panel. Such a request would automatically stay any suspension or delisting action, up to an additional 180 days, pending the hearing and the expiration of any additional compliance period granted by the hearings panel following the hearing. Under the prior Nasdaq rules, it was possible for a company to be out of compliance with the bid price requirement for 540 days, or approximately 18 months, if all the possible compliance periods were exhausted.

Removal of Stay Period After Second 180-Day Compliance Period

Nasdaq’s most recent rule change relating to reverse stock splits was approved by the US Securities and Exchange Commission (SEC) on 17 January 2025. Under the new Nasdaq Listing Rule 5815(a)(1)(B)(ii)d, when an issuer has been afforded a second 180-day compliance period and does not regain compliance by the bid price of its stock closing at US$1.00 per share or greater for a minimum of 10 consecutive business days prior to the end of the second 180-day period, a request for a hearing no longer stays the suspension and delisting of the security pending the Nasdaq panel’s decision. Instead, effective upon the expiration of the second 180-day compliance period, trading of the issuer’s securities on Nasdaq will be automatically suspended and move to the over-the-counter (OTC) market while any appeal is pending. 

Reduced Availability of Compliance Periods for Use of Multiple Reverse Splits

An amendment to Nasdaq Listing Rule 5810(c)(3)(A)(iv) included in the 17 January 2025 rule changes provides that an issuer is not eligible for any compliance period to cure a deficiency under the minimum bid price requirement if it has effected a reverse stock split over the prior one-year period. This change follows another recent amendment to Rule 5810(c)(3)(A)(iv), effective in 2020, not allowing a compliance period in the event the issuer has effected one or more reverse stock splits with a cumulative ratio of 250 shares or more to one during the two-year period preceding noncompliance with the minimum bid price requirement. Any issuer that receives a delisting determination under these circumstances can appeal for a hearing before a Nasdaq panel (during which time the suspension of trading of its securities will be stayed).

Accelerated Delisting for Trading Price at or Below US$0.10

Rule 5810(c)(3)(A)(iii), which was included in the 2020 rule changes, provides that Nasdaq will issue a delisting determination with respect to a security that has a closing share price of US$0.10 or less for 10 consecutive business days. Under these circumstances, the issuer is ineligible for any compliance period, but suspension of trading of its securities will be stayed while any appeal is pending.

Updated Process for Effecting Reverse Stock Split

In November 2024, the SEC approved an amendment to Nasdaq Listing Rules 5250(e)(7) and IM-5250-3, advancing the deadline by which an issuer executing a reverse stock split must submit a Company Event Notification Form to Nasdaq to no later than 12:00 PM ET at least 10 calendar days prior to the proposed market effective date of the split. Previously, the rules only required the form to be submitted five business days in advance. The Company Event Notification Form is required to include, among other things, the dates of board approval and stockholder approval of the reverse stock split, the ratio for the reverse stock split, and the new CUSIP number for the post-split stock, as well as a draft of the public disclosure of the reverse stock split, which must be issued by 12:00 PM ET at least two business days prior to the effective date of the split. Nasdaq will not process a reverse stock split, and will halt trading in the stock, if an issuer does not satisfy the requirements of Rules 5250(b)(4) and (e)(7). This amendment becomes effective on 30 January 2025.

New York Stock Exchange Rules

Under Section 802.01C of the NYSE Listed Company Manual (Manual), an issuer is out of compliance if the average closing price of its listed security is less than US$1.00 per share over a consecutive 30 trading-day period (Price Criteria). The issuer can regain compliance with the Price Criteria if, on the last trading day of any calendar month during a six-month cure period, the listed security has a closing share price of at least US$1.00 and an average closing share price of at least US$1.00 over the prior 30 trading-day period. If an issuer determines to cure the Price Criteria deficiency by a reverse stock split, it must obtain shareholder approval by no later than its next annual meeting. The Price Criteria deficiency will be cured if the price remains above US$1.00 for at least 30 trading days following the split.

On 15 January 2025, the SEC approved a rule amendment proposed by the NYSE to address concerns over the excessive use of reverse stock splits to maintain minimum listing prices. Specifically, Section 802.01C of the Manual is amended to provide that an issuer that fails to meet the Price Criteria is not eligible for any compliance period if it has effected a reverse stock split over the past one-year period or has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, and in such case the NYSE will instead immediately commence suspension and delisting procedures. Additionally, the amendment precludes issuers from conducting a reverse stock split if it would result in the company’s security falling out of compliance with any of the continued listing requirements of Section 802.01A of the Manual. 

Conclusion

Issuers listed on the Nasdaq or NYSE that are out of compliance with the minimum bid price rule or at risk of falling below a US$1.00 share price should be proactive in confirming that a reverse stock split will be effective to cure the deficiency in the event that their stock price does not increase organically. Additionally, these issuers should prepare a timeline for the reverse stock split prior to scheduling their shareholder meetings in order to accommodate the more complex processes and advance notice requirements under stock exchange rules.