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Client Brief | Nasdaq Issues Guidance on Additional, Stricter Criteria for Continued Listing

July 3, 2019 | Last month, Nasdaq issued additional guidance on its application of Rule 5101, which provides the exchange with “broad discretionary authority over the initial and continued listing of securities” to maintain an orderly trading market and public confidence in the Nasdaq market.

The guidance comes after frequently asked questions on the application of Rule 5101. In issuing the guidance, Nasdaq noted that it would be impossible to list all of the factors that could cause it to exercise its discretion, but offered the following as examples that could result in the application of more stringent criteria:

  • in companies that have not yet commenced operations, turning over IPO proceeds to third parties as a means of advancing the company’s business plan;
  • failure to make meaningful progress on a company’s business plan two years after listing if the company has not generated any revenues;
  • failure of a company to have management experienced in public company operations and familiarity with Nasdaq listing requirements;
  • engaging an auditor that has not been inspected by or subject to inspection by the Public Company Accounting Oversight Board or that has not demonstrated sufficient resources and experience to audit the company;
  • circumstances in which the company proposes a small IPO but insiders will still hold a large portion of the company’s securities. In this case Nasdaq is concerned that the IPO price may not reflect actual valuation of the company’s stock and that the trading market may be too thin;
  • circumstances in which the company has not demonstrated sufficient nexus to the U.S. capital markets, including few U.S. shareholders, no U.S. operations or no U.S. management or board members.

As mentioned above, application of these factors is subjective, but they provide meaningful insight into the listing and continued listing process for smaller companies that possess one or more of these traits.

For more information, contact Geoff Morgan or Jessica Fairchild.

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