Securities Law Blog

Consideration of a More Measured Approach for Smaller Public Companies

Since early 2023, there has been an avalanche of smaller public companies faced with delisting for non-compliance with Nasdaq and NYSE American continued listing requirements. Chief among the deficiencies has been the failure to maintain at least a $1.00 closing bid price per share for 30 consecutive business days. As of December 8, 2023, 557 companies listed on these exchanges were trading below $1.00 per share, up from fewer than a dozen in early 2021, according to Dow Jones market data. Of these companies, 464 were listed on the Nasdaq Stock Market and subject to possible delisting. Many of these companies are in the technology space, with some well-known names that would normally be thought of as promising emerging growth companies.

As stock prices of many smaller public companies stagnated or declined in the uncertain economic, financial and geopolitical environment this year, companies with low-price stocks have been under immense pressure to address their listing status. Nasdaq and NYSE American monitor deficiencies closely, contending that non-compliant companies are more likely to engage in fraudulent practices and have their stock manipulated, with shareholders bearing the losses.

An initial bid price deficiency notification from Nasdaq sets in motion a sequence of events from which many companies have found it difficult to rebound.

Nasdaq provides a compliance period of 180 calendar days to regain compliance by maintaining a $1.00 closing bid price for a minimum of ten consecutive days during the 180 day period. Boards of directors routinely consider a number of aggressive moves in response, including reverse stock splits, stock buybacks, stock issuances, ramped-up investor relations and business combinations. These steps are frequently counter-productive and serve as a temporary band-aid rather than a long-term solution.

A reverse stock split increases a company’s share price while similarly reducing the number of outstanding shares. Reverse splits rarely achieve a lasting solution to the bid price deficiency for struggling companies, ultimately resulting in other deficiencies based on the company’s market value when the company’s stock price sinks to near pre-split levels. For that reason, Nasdaq will wait for the reverse split price to settle in the market before lifting the bid price deficiency.

Some companies consider a stock repurchase program as a means to boost the company’s stock price. This approach, however, becomes more complicated under state corporate law, which prohibits companies from repurchasing shares when the company’s capital is or may become impaired.

Many Nasdaq companies with reduced stock prices that wish to address stock price and stockholders’ equity deficiencies by raising capital will run into the 20% stockholder approval limit. Instead of a straight equity infusion, these companies are typically offered high-interest convertible debt that turns into equity at some discount to future market prices. This leads to a large number of additional shares to be issued and seriously dilutes existing shareholders. For companies that are eligible to utilize a Form S-3 shelf registration, if a company’s market capitalization is less than $75 million, it is subject to a one-third public float limit on the amount of securities it can sell.

Other Nasdaq companies consider strategic opportunities to steer their stock price upward. But since any stock-for-stock merger would require the use of a joint proxy-prospectus on Form S-4, its onerous requirements in terms of SEC review time and professional fees make it inappropriate for more troubled companies.

If a company does not regain compliance, it may be eligible for a second 180 calendar day period if it meets all other continued listing requirements, including the $2.5 million in stockholders’ equity and $1.0 million of market value of publicly traded shares tests. Nevertheless, Nasdaq can accelerate delisting and shorten the compliance period for stocks with a closing bid price at or below $0.10 for ten consecutive trading days or for stocks that have had one or more reverse stock splits with a cumulative ratio of 1-for-250 or more shares over the prior two-year period.

Nasdaq should consider a less harsh enforcement option for delisting than the continuous threat of suspended trading. Issuing a public reprimand letter or adding an extra letter to a listed company’s ticker symbol may be sufficient for many companies. More drastic sanctions could be saved for companies with repeated and flagrant listing standard violations, such as delinquent SEC filings and failures to maintain a company’s audit committee composition.

An edited version of this blog post previously appeared in Bloomberg Law.