SEC Suspends New Share Repurchase Disclosure Rules

In a win for conservatives, the recent amendments to the share repurchase rules are officially on hold. Adopted on May 3, 2023 (see HERE) the new disclosure requirements would have taken effect for inclusion in the upcoming 10-K season. Following a successful court challenge, on November 22, 2023, the SEC issued an order postponing the effective date of the new rules pending further SEC action.

Background

On May 3, 2023, the SEC adopted amendments to Securities Exchange Act Rule 10b-18, which provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, as amended (“Exchange Act”) when issuers bid for or repurchase their common stock.

The SEC allows for limited methods that an issuer can utilize to show confidence in its own stock and assist in maintaining or increasing its stock price. One of those methods is Exchange Act Rule 10b-18, which provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Exchange Act Sections 9(a)(2), 10(b) and Rule 10b-5 when issuers bid for or repurchase their common stock in accordance with the Rule’s manner, timing, price and volume conditions. Each of the four main conditions of Rule 10b-18 must be satisfied on each day that a repurchase is made. For more on Rule 10b-18, see HERE.

Showing confidence in a stock and price support are not the only reasons for enacting a share repurchase program. A company may have excess cash and believe providing a return of capital to investors is the most efficient use of such cash. A repurchase program can also be used in lieu of a dividend, providing such benefits as tax advantages for some investors, greater flexibility, and limiting the dilutive effect of future issuances. On the flip side, the SEC has concerns that repurchase programs may also be used to influence accounting metrics (such as earnings per share (EPS) by lowering the total outstanding shares), to impact executive compensation (especially EPS tied compensation), and to increase returns on insider equity sales, all without adequate public disclosure.

Sections 9 and 10 of the Exchange Act are the general anti-fraud and anti-manipulation provisions under the Act. Section 9(a)(2) of the Exchange Act makes it unlawful for any person to, directly or indirectly, create actual or apparent active trading in a security or raise or depress the price of such security for the purpose of inducing the purchase or sale of such security by others.

Section 10(b) of the Exchange Act makes it unlawful for any person to, directly or indirectly, “use or employ, in connection with the purchase or sale of any security… any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Rule 10b-5, promulgated under Section 10(b), provides that “[I]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

Companies and affiliates may repurchase the company’s shares through, among other means, open market purchases, tender offers, private negotiated transactions, and accelerated share repurchases. Issuers typically disclose repurchase plans or programs at the time that the share repurchases are authorized by the board of directors. However, up until now, most share repurchases are executed over time through open market purchases through share repurchase plans or programs and the company is not required to, and generally does not, disclose the specific dates on which trades are executed. Investors and other market participants normally do not become aware of a company’s actual share repurchase-related trading activity until they are reported in the company’s quarterly periodic reports, long after the trades have been executed.

Currently Item 703 of Regulation S-K requires companies to disclose any purchase of shares made on its behalf or by an affiliated party on a quarterly basis in Forms 10-Q and 10-K and on an annual basis in Form 20-F for foreign private issuers. The disclosure requirement applies to both open market and private transactions. In general, Item 703 required disclosure of: (i) the total number of shares purchased reported on a monthly basis by class of security; (ii) whether purchases are made other than through a publicly announced plan or program and the nature of the transaction; (iii) the average price paid per share; (iv) the total number purchased as part of a publicly announced share repurchase plan or program; and (iv) the maximum number of shares that may yet be purchased under the plans or programs.

Item 703 also required a footnote disclosure of the terms of all publicly announced repurchase plans or programs, including: (i) the date the plan or program was announced; (ii) the dollar amount approved; (iii) the expiration date (if any) of each plan or program; (iv) each plan or program that has expired during the reporting period; and (v) each plan or program that has been terminated prior to expiration during the reporting period. As noted below, Item 703 is being completely eliminated and replaced by the new disclosure rules.

Although Rule 10b-18 provides a safe harbor from the liability provisions of Section 9(a)(2), 10 and Rule 10(b)(5), like most securities rules, the rule does not provide protection from liability where it is utilized as part of a plan or scheme to evade the securities laws. In addition, an issuer must consider the interaction of insider trading laws when attempting to rely on Rule 10b-18, such as whether it is in possession of material non-public information.

New Share Repurchase Rules

The new rules require an issuer to file a new Form SR or F-SR, on a quarterly basis disclosing daily repurchase activity during the covered disclosure period (registered investment companies must disclose on a semi-annual basis). The new Forms must be included as exhibits to Forms 10-Q and 10-K for domestic issuers and to Forms 20-F and 6-K for foreign issuers. The frequency of reporting is much more palatable than the proposed rule, which would have required daily disclosure filings on the new Forms. To avoid duplication, the new rules eliminate current Item 703 of Regulation S-K, which required monthly repurchase data in periodic reports.

The required disclosures include, the number of shares repurchased that day, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

Companies will also be required to include a checkbox indicating whether certain officers and directors traded in the company securities in the four business days before or after the announcement of the repurchase plan or program (the proposed rule had a ten-day look-back). Domestic issuers will need to include any Section 16(a) officers and directors and foreign private issuers will include any person identified pursuant to Item 1 of Form 20-F.

Moreover, new Item 408(d) to Regulation S-K will require quarterly disclosure in periodic reports on Forms 10-Q and 10-K about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.

The new rules also revise and expand on narrative repurchase disclosures to include: (i) the objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases; and (ii) any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.

Foreign private issuers (FPIs) that file on FPI forms will disclose the quantitative data in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024, and provide the narrative disclosure starting in the first Form 20-F filed after their first Form F-SR has been filed. FPIs will also have to disclose the daily quantitative repurchase data at the end of every quarter in the new Form F-SR, within 45 days after the end of each fiscal quarter. This requirement has been somewhat controversial as it is the first SEC reporting rule that requires quarterly information from an FPI regardless of home country rules (for more on FPI reporting requirements, see HERE).

Registered closed-end management investment companies that are exchange traded will disclose the quantitative data and provide the narrative disclosure on Form N-CSR beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024. All other companies will be required to include the quantitative data as an exhibit to their Forms 10-Q and 10-K and provide the narrative disclosure in their Forms 10-Q and 10-K beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.

The amended rules make several conforming changes to rules and forms. Per usual, the new Forms SR and F-SR require inline XBRL tagging. Finally, in a change from the proposed rule, the Forms SR and F-SR will be “filed” instead of “furnished.”

Form SR/F-SR

The rules add new Exchange Act Rule 13a-21 and Forms SR and F-SR that requires all companies, including foreign private issuers and certain registered closed-end funds, to report any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to Exchange Act Section 12 (for more on Section 12 registration, see HERE).

The Form SR and F-SR require the following disclosure in tabular format, by date, for each class or series of securities: (i) identification of the class of securities purchased; (ii) the total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs; (iii) the average price paid per share (or unit); (iv) the aggregate total number of shares (or units) purchased on the open market; (v) the aggregate total number of shares (or units) purchased in reliance on the safe harbor in Rule 10b-18; and (vi) the aggregate total number of shares (or units) purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (see HERE).

Court Challenge

Following adoption of the new repurchase rules, a lawsuit was filed by the U.S. Chamber of Commerce challenging the rule on multiple grounds. In a big win for conservatives, the Fifth Circuit found that the new rules are arbitrary and capricious. In particular the court found that: (i) the SEC’s assertion that the rules economic effects are unquantifiable is inaccurate; (ii) the SEC failed to demonstrate that its conclusion that the proposed rule “promote[s] efficiency, competition, and capital formation” is “the product of reasoned decision making;” and (iii) the SEC does not support the supposed benefits of the rule including failing to show that opportunistic or improperly motivated buybacks are a genuine problem.

The court gave the SEC thirty days to fix the problems, but the SEC did not do so. As mentioned on November 22, 2023, the SEC issued an order suspending the effectiveness of the new rules pending further SEC action.

Gayatri GuptaFebruary 26, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

Securities Lawyer Blog

SEC Suspends New Share Repurchase Disclosure Rules

Listing Criteria For NasdaqFor a company to list its securities on Nasdaq, it must satisfy the following criteria:

Licensed in District of Columbia, State of Colorado, US District Court for the District of Columbia, US District Court for the District of Colorado, with pro hac vice Admission for the State of Maryland and Virginia.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria: