Nasdaq Responds to Rising Reverse Stock Splits with Proposed Rule Revisions (2024)

In light of Nasdaq 's ongoing efforts to enhance transparency, disclosure practices, and market stability since the "pause" of Fall 2022, the exchange is now putting forth a proposal to revise its regulations concerning reverse stock splits. This move comes as part of Nasdaq's commitment to maintaining a robust and fair market environment. The proposed rule adjustments are designed to address the surge in reverse stock splits and streamline the notification and disclosure processes, ensuring more timely and straightforward procedures.

Background: Reverse Stock Splits on the Rise

The primary driver behind companies resorting to reverse stock splits is to satisfy Nasdaq's minimum bid price ongoing listing requirement, stipulating that a company's stock price should remain above the $1 minimum bid price threshold. Through a reverse stock split, companies can elevate their stock price without making substantial alterations to their fundamental attributes. This strategy becomes particularly valuable during bear or challenging markets, as it offers a means to boost the bid price without necessitating significant structural changes. The upshot of this approach is evident in the considerable increase in reverse stock splits, with the count during the bearish market of 2023 surpassing that of the bullish market in 2021 by over five times.

Proposed Rule Changes: Notification and Disclosure

At present, reverse stock splits are classified as “Substitution Listing Events,” demanding that companies inform Nasdaq at least 15 days prior to executing the split. While public disclosure is not explicitly mandated, companies are expected to promptly share crucial information that could influence their securities' value and investor decisions – including details concerning reverse stock splits. The proposed rule changes intend to eliminate the classification of reverse stock splits as “Substitution Listing Events.” Instead, Nasdaq's suggested amendment in rule 5250(e)(7) necessitates companies to furnish Nasdaq with a comprehensive Company Event Notification Form by 12:00 p.m. ET, five days prior to the anticipated market activation. This form should encompass essential information such as the split ratio, effective date, new CUSIP number, and the dates of board and shareholder approvals. Moreover, according to the proposed Listing Rule 5250(b)(4), companies are obliged to publicly announce reverse splits in accordance with the standards of Regulation Fair Disclosure (Reg FD) by 12:00 p.m. ET, two days ahead of the intended market activation. In situations that are not time-sensitive, advanced notice via Nasdaq's electronic submission system to the MarketWatch Department is a requirement.

Expected Benefits and Objectives of the Proposed Rule Changes

Nasdaq is confident that the proposed amendments will continue its commitment to enhancing clarity and transparency for businesses and market participants alike. The underlying objective of these rule modifications is to equip Nasdaq with the requisite information to process reverse stock splits efficiently. The proposed abbreviated disclosure period is designed to enable the incorporation of all necessary information within a single submission form. Furthermore, by mandating public disclosure, alignment between investors and companies is ensured. Nasdaq also intends to notify the market through the Nasdaq Trader website in advance of the market activation date, granting ample time for system adjustments. In addition to these proposed changes, Nasdaq has hinted at potential future rule submissions that target regulatory halts for Nasdaq-listed securities undergoing reverse stock splits. This indicates Nasdaq's sustained dedication to upholding a robust and equitable market ecosystem.

Conclusion

To sum up, Nasdaq's proposed revisions to reverse stock split listing rules seek to streamline notification processes, facilitate efficient disclosure procedures, and elevate market stability. These changes are aimed at harmonizing corporate actions with Nasdaq's requisites, fostering increased clarity, transparency, and equity for all stakeholders involved.

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