SEC Obtains Final Judgment Against Municipal Advisor Brandon L. Comer Charged with Breaching Fiduciary Duty

On January 30, 2024, the Securities and Exchange Commission secured a final judgment against Comer Capital Group, LLC, and Brandon L. Comer. The SEC had previously charged them with violating their fiduciary duty concerning a $6 million municipal bond issuance for the Harvey Public Library District in Harvey, Illinois.

Case Summary

The Securities and Exchange Commission (SEC) states the following:

Nature Of Action

This case concerns a breach of fiduciary duty by a municipal advisor and its principal about a $6 million bond issuance by the Harvey Public Library District (referred to as "the District") on January 16, 2015.

Municipal advisors guide municipal entities, particularly regarding municipal bond issuance. As fiduciaries, they have obligations of care and loyalty to their clients, and they must act in their client's best interests with honesty and good faith, putting the client's interests above their own.

The District, a relatively inexperienced issuer that had never issued bonds before, hired Comer Capital Group, LLC (Comer Capital) in late 2014 as their municipal advisor for bond issuance to finance the expansion and renovation of their library. Comer Capital is primarily owned and operated by Brandon L. Comer. The District relied on Comer Capital to offer guidance, represent its interests, and advise on selecting an experienced underwriter for the bonds, researching and analyzing bond pricing, assisting in setting prices and negotiating on the District's behalf to secure competitive pricing.

However, Comer Capital and Comer failed to fulfill these responsibilities, breaching their fiduciary duty to the District. Instead, they deferred entirely to IFS Securities (IFS), the bond underwriter, for the sale and pricing of the bonds. IFS, lacking relevant experience, provided inadequate marketing, neglected to reach appropriate buyers, and mishandled the order period, ultimately selling the bonds at an unfair and unreasonable price to the District. This mismanagement is expected to cost the District an extra $500,000 in interest over the bonds' lifetime.

The SEC alleges that these actions by Comer Capital and Comer violate Section 15B(c)(1) of the Securities Exchange Act of 1934.

Relief Sought

The SEC seeks a court judgment to:

(a) Determine that Comer Capital and Comer violated the law;

(b) Permanently prevent them from future breaches of Section 15B(c)(1);

(d) Impose civil monetary penalties as per Section 21(d)(3) of the Exchange Act.

Defendants

1. Comer Capital Group, LLC

Comer Capital Group, LLC ("Comer Capital") is a limited liability company based in Jackson, Mississippi, where it operates as a registered municipal advisor with the Commission and the Municipal Securities Rulemaking Board (MSRB). Registered firms must file Form MA-I with the Commission to disclose details of individuals involved in municipal advisory activities. Brandon L.

2. Comer

Comer, 37, resides in Jackson, Mississippi. He is the Managing Partner, Chief Compliance Officer, and principal owner of Comer Capital, listed as an associated individual on its Form MA-I.

Relevant Third Parties

1. The Harvey Public Library District

The Harvey Public Library District ("District"), based in Harvey, Illinois, has independent authority and taxation powers under Illinois law. It is a distinct government unit from the City of Harvey, though geographically aligned with it. The District’s seven-member Board of Trustees is elected, and Cook County handles its tax billing and collection.

2. IFS Securities

IFS Securities ("IFS"), headquartered in Atlanta, Georgia, is a broker-dealer registered with the Commission.

Statement of Facts

I. Roles in a Negotiated Offering

The District issued the Bonds through a "negotiated sale." In such a sale, the issuer aims to secure the lowest borrowing cost for the bonds, meaning minimizing the interest payments over the bond's duration. The borrowing cost is influenced by the bond's price, yield, and coupon. Price and yield are inversely related; if the bond price is lower, its yield is higher, and vice versa. A higher yield and lower price result in increased interest payments for the issuer throughout the bond's life. The coupon represents the fixed annual interest rate paid by the issuer, expressed as a percentage of the bond's face value.

In a negotiated sale, the issuer chooses an underwriter or a group of underwriters (underwriting syndicate) to market and sell the bonds to investors. The lead or sole underwriter negotiates critical terms, such as price, yield, and coupon, with the issuer. The underwriting syndicate buys the bonds from the issuer under those terms and then sells them to their investor clients. The underwriter maintains an arm's-length relationship with the municipal issuer.

State and local government entities, like the District, typically hire a municipal advisor to assist in the bond offering process. The advisor provides guidance on underwriter selection, financing options, and bond pricing. Acting as a fiduciary to the issuer, the advisor must work in the issuer's best interest. The municipal advisor, as a representative of the issuer, also has an arm's-length relationship with the underwriter. With regard to bond pricing, the municipal advisor and issuer may be at odds with the underwriter.

To secure the lowest borrowing cost, the issuer's goal in selecting an underwriter is to find one best suited to minimize borrowing expenses, typically one with proven experience in handling similar bonds. To aid in this selection, it is generally considered best practice for an issuer, particularly an inexperienced one like the District, to hire a municipal advisor before choosing an underwriter. This ensures that the issuer benefits from professional advice when selecting an underwriter experienced with the type of bonds to be issued.

II. IFS Was Engaged Without a Competitive Process

In April 2011, the District’s voters passed a referendum permitting the issuance of bonds to finance the renovation of the District's library and acquire updated equipment. By late 2013 or early 2014, the District decided to proceed with issuing these bonds.

The District, being inexperienced in issuing bonds, had never done so prior to the issuance of the Bonds under this action. The District’s Director was a librarian without prior experience in the bond offering process. IFS became involved after a member of the District’s Board of Trustees, who knew someone affiliated with IFS, invited that person to attend Board meetings to discuss the Bonds.

On September 30, 2014, the District selected IFS as the underwriter for the Bonds without a competitive selection process or hiring a municipal advisor. At that time, IFS had acted as the sole or co-lead underwriter for only five prior municipal offerings, none of which involved long-term credit-rated bonds.

The District formalized its choice by signing a "letter of intent" with IFS, confirming their intention to engage IFS as the Bonds' underwriter. This agreement was non-binding, allowing the District to terminate it at any time. Moreover, it explicitly stated that the District was free to choose a different or additional underwriter(s) for the Bonds.

III. Comer Capital Was Engaged Based on IFS's Recommendation, and IFS Assisted in Negotiating Comer Capital's Fees

The District's legal counsel advised hiring a municipal advisor for the bond offering. In an unusual arrangement that contrasted with the typical practice of an advisor helping an issuer choose an underwriter, IFS suggested that the District engage Comer Capital as its municipal advisor. IFS had previously collaborated with Comer Capital on other bond offerings. An IFS representative contacted Comer, informed him that IFS had referred the District to Comer Capital for advisory services, and provided him with the Director's contact information. On September 30, 2014, Comer was interviewed by the Board and was hired as the District's municipal advisor that same day. No other advisors were interviewed.

Initially, Comer Capital proposed a flat fee of $20,000 for its services, but the Board asked Comer to accept a lower fee during the interview. He agreed to reduce it to $15,000. A few days later, Comer asked IFS to help negotiate a higher fee with the District. Over the next few months, an IFS representative discussed increasing Comer Capital's fee with at least one Board member and stated that he would speak with another. Due to IFS's involvement, Comer Capital's fee was restored to $20,000. After the bond sale was finalized, Comer further negotiated to increase the fee to $40,000.

As previously stated, a municipal advisor owes a fiduciary duty to the issuer and must act with honesty and good faith, prioritizing the client's best interests over their own financial gain. As the issuer's representative, a municipal advisor is expected to have an arm's-length relationship with the underwriter. Therefore, it was inappropriate and a breach of fiduciary duty for Comer to ask IFS to intervene and renegotiate Comer Capital's fee. This request created a conflict of interest for Comer Capital as the District's municipal advisor because it now felt indebted to IFS for increasing its fee.

IV. Comer Capital Agreed to Deliver Specific Services and Guidance to the District

The service agreement between Comer Capital and the District, signed by Comer, detailed the services Comer Capital committed to providing. These included: (1) collaborating with the District to draft a request for underwriting proposals to "identify firms most experienced in marketing this type of security," (2) "negotiating on behalf of the District to ensure aggressive pricing in line with current market conditions," and (3) "helping the District determine the appropriate pricing levels" by performing "historical pricing analyses and market evaluations," and "establishing clear pricing benchmarks or targets." Comer was the primary individual at Comer Capital responsible for providing municipal advisory services to the District.

However, Comer Capital and Comer did not fulfill these commitments. As detailed below, their failure to deliver these services had significant implications, resulting in the District accepting a price for its bonds that was neither fair nor reasonable. Consequently, the District's borrowing costs were significantly higher than necessary.

V. The Defendants Did Not Advise the District on Underwriter Selection

As previously mentioned, the District chose IFS to underwrite its bonds before appointing Comer Capital as its municipal advisor. However, this didn't obligate the District to rely on IFS for underwriting services. The letter of intent with IFS explicitly stated that the District could choose a different underwriter. Comer also acknowledged that the District was not bound to IFS and could switch underwriters at any time before the bond transaction's closing.

Therefore, Comer Capital and Comer: (1) were aware that the District was a first-time issuer lacking sophistication, having chosen an underwriter without the guidance of a municipal advisor; (2) had explicitly agreed to help the District identify underwriters experienced in marketing the type of bonds being considered; and (3) understood that the District was not compelled to use IFS.

Despite this knowledge, after being hired by the District, Comer Capital and Comer did not evaluate IFS's qualifications or experience in handling the bonds. They didn't investigate how the District had selected IFS, nor did they check if other underwriters were considered. While they had collaborated with IFS on previous transactions, those involved short-term bonds from distressed issuers. By contrast, the District's bonds were long-term, and the District itself wasn't distressed.

Failing to provide the District with advice on underwriter selection, as agreed, amounted to a breach of fiduciary duty by the Defendants.

VI. Overview of the District's Bonds

The District’s Bonds possessed several characteristics that made them attractive to a wide range of investors.

1. Insurance

The Bonds were insured, enhancing the likelihood that bondholders would receive timely payments of principal and interest. The District secured an insurance policy guaranteeing scheduled payments even in the event of a default by the District, thereby significantly reducing investor risk.

2. Investment-Grade Rating

The Bonds had an "investment grade" rating. Standard & Poor’s, which assesses bonds on a scale from AAA to D for creditworthiness and risk, rated the Bonds "AA" when insured, with an underlying "BBB" rating and a stable outlook.

3. Lock-Box Feature

The Bonds included a "lock-box" provision. The District pledged that tax proceeds would be directed to a tax escrow agent, who would then distribute the funds to bondholders. This feature, similar to insurance, ensures that bondholders receive principal and interest payments promptly, making the Bonds appealing to investors.

4. Bank-Qualified Status

The Bonds were "bank qualified" under the Internal Revenue Code. This status is advantageous because it allows commercial banks holding these bonds to deduct a portion of their interest costs from taxes. Generally, bank-qualified bonds attract smaller banks and potential buyers, as these bonds are also sought after in the secondary market.

VII. The Roles of the Underwriter and Municipal Advisor in Pricing An Offering

In a negotiated sale, the lead or sole underwriter handles the pricing process. If the issuer hires a municipal advisor, the advisor typically oversees pricing, providing analysis, guidance, and recommendations throughout.

To determine the price, yield, and coupon for a negotiated bond offering, the underwriter leverages its market expertise, assesses current market conditions, examines comparable bond issues, and gathers feedback from customers and other prospective investors.

During the marketing phase, which can last for a week or more, the underwriter disseminates relevant information about the bond offering to potential investors. The underwriter then collects their insights on how much they are willing to invest and at what prices and yields. This data is used to analyze and establish a fair price for the bonds.

The underwriter will then release initial pricing terms, which have been agreed upon with the issuer, to interested investors. There is a limited window, known as the "order period," during which investors can place provisional orders. Before suggesting a final price to the issuer, the underwriter might adjust these proposed terms. The municipal advisor typically offers input and analysis to ensure the pricing terms are fair and reasonable.

Once both parties agree on pricing, the issuer and underwriter finalize a bond purchase agreement, through which the underwriter acquires the bonds from the issuer. The underwriter then sells the bonds to the investors who placed orders during the order period.

VIII. The Underwriter's Inadequate Management of the Offering

As previously mentioned, IFS lacked sufficient experience acting as the sole or lead underwriter for long-term, credit-rated bonds like the District's Bonds. Several aspects of its management were subpar, including:

1. Limited Identification of Banks

IFS failed to identify smaller banks interested in purchasing the "bank qualified" Bonds. At the time of the offering, the firm had only handled one bank-qualified transaction. Additionally, the employee responsible for finding buyers was unfamiliar with the benefits that banks receive from acquiring these bonds.

2. Poor Marketing Strategy

IFS mismanaged the marketing period. The order period was initially set for Tuesday, January 13, 2015. The firm waited until January 8 or 9 to begin marketing to investors—just days before the scheduled order period. Furthermore, the bond insurance, which would increase the bonds' rating, wasn't confirmed until the evening of January 13. Such a brief marketing window was unreasonable, particularly for a first-time issuer like the District.

3. Last-Minute Investor Search:

When IFS couldn't secure any investors by or during the order period, it rescheduled for January 14. Late that day, IFS reached out to a broker-dealer known for purchasing large lots of bonds from them. The broker-dealer, due to the late hour, suggested contacting them the following day.

4. Failed Negotiation and Acceptance

On January 15, IFS made two offers to the broker-dealer, both of which were rejected. By January 16, the broker-dealer found a customer interested in the bonds and countered with a demand for a 5.05% yield, which was worse for the District as it resulted in higher borrowing costs. Without negotiating further or seeking other buyers, IFS accepted this counteroffer. In consultation with Comer Capital and IFS, the District agreed. The bond purchase agreement was signed on January 16, 2015, at a price of $115.73, a fixed annual interest rate of 7.10%, and a yield of 5.05%. The transaction closed on January 30, 2015.

Two days before closing, Comer negotiated an increase in Comer Capital’s fee with the District from $20,000 to $40,000 without adding any additional responsibilities to justify the fee hike.

IX. The Bond Price Was Unfair and Unreasonable for the District

Despite Comer's assurances, the price and yield of the Bonds were neither fair nor reasonable for the District, as demonstrated by three factors: (1) a comparison with IFS's internal pricing projections before the sale, (2) a comparison with contemporary bond offerings of a similar nature, and (3) the sharp price increase and yield decrease that occurred after IFS sold the Bonds to the sole buyer they could find.

The Yield Significantly Exceeded IFS's Pre-Sale Internal Estimates

A month before the issuance, IFS projected the Bonds would yield 3.79%. Even in the days before the order period, IFS anticipated a yield in the upper 3% range. Ultimately, the Bonds were sold at a yield of 5.05%, 126 basis points higher than expected, which was far less advantageous for the District.

The Yield Was Significantly Higher Than Comparable Bond Issues

The yield was also substantially higher compared to similar bond issuances during the same period. A table comparing the District’s Bonds with five similar issuances in Illinois highlights this discrepancy, given their comparable size, credit rating, and maturity.

Claim For Relief

Violation of Section 15B(c)(1) of the Exchange Act

The Commission reiterates and fully incorporates the claims made in paragraphs 1-66 as if presented here verbatim.

The Bonds qualify as "securities" under Section 3(a)(10) of the Exchange Act [15 U.S.C. § 78c(a)(10)].

According to Section 15B(c)(1) of the Exchange Act [15 U.S.C. § 78o-4(c)(1)], municipal advisors, along with anyone associated with them, are considered to have a fiduciary duty to any municipal entity they serve. Thus, no municipal advisor can engage in practices that violate this fiduciary responsibility.

As described earlier, the Defendants Comer Capital and Comer served as municipal advisors and associated persons, as outlined in Sections 15B(e)(4)(A) and 15B(e)(7) of the Exchange Act [15 U.S.C. §§ 78o-4(e)(4) and (7)]. They were therefore obligated to act in the District's best interest.

However, through their conduct and the practices mentioned above, Comer Capital and Comer breached their fiduciary duty to the District, violating Section 15B(c)(1) of the Exchange Act [15 U.S.C. § 78o-4(c)(1)].

Prayer For Relief

In light of the preceding information, the Commission respectfully requests that the Court:

1. Issue a Permanent Injunction

Prevent Defendants Comer Capital, Comer, their agents, employees, attorneys, and any individuals working in active coordination with them, who receive direct notice through personal service, fax, or express delivery, from future breaches of Section 15B(c) of the Exchange Act [15 U.S.C. § 78o-4(c)].

2. Disgorge Ill-Gotten Gains

Order Defendant Comer Capital to return any unjust profits, including prejudgment interest.

3. Impose Civil Penalties

Direct Defendants Comer Capital and Comer to pay appropriate civil penalties as stated under Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].

4. Maintain Jurisdiction

Retain jurisdiction over this matter to enforce and administer all issued orders and decrees.

5. Grant Additional Relief

Provide any further relief that the Court finds fair and appropriate.

Final Judgment

The SEC secured a final judgment against Comer Capital Group, LLC and Brandon L. Comer, who had been charged by the SEC for violating their fiduciary duty in relation to a $6 million municipal bond issuance by the Harvey Public Library District in Harvey, Illinois.

Key Takeaways For Investors

Key takeaways for investors from this case include:

1. Fiduciary Responsibility is Crucial

Municipal advisors have a legal obligation to prioritize the interests of their clients above their own. Breaches can lead to significant legal and financial consequences.

2. Due Diligence Matters

Investors should scrutinize the qualifications and track record of municipal advisors and underwriters to ensure they are capable of effectively managing the sale and pricing of bonds.

3. Transparency and Communication:

Open communication between issuers, advisors, and underwriters is essential. Lack of transparency or withholding critical information can lead to unfavorable pricing and increased borrowing costs.

4. Benchmark Comparisons:

Investors should expect advisors to conduct thorough market analyses and comparisons with similar bond issues to secure fair and reasonable pricing.

Conflict of Interest: Situations where conflicts of interest arise must be disclosed and addressed. Unchecked conflicts can compromise the integrity of the transaction and lead to regulatory scrutiny.

5. Legal Compliance and Regulatory Oversight:

Compliance with securities regulations is vital. Municipal advisors must adhere to their fiduciary duties to avoid litigation and penalties from regulatory bodies like the SEC.

6. Monitoring Market Conditions

Staying informed about changing market conditions is crucial to ensure favorable pricing. This includes understanding how insurance, credit ratings, and lock-box features can impact bond demand and pricing

Gayatri GuptaMay 9, 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.

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