NYSE Approves Change To Delist Companies That Change Primary Business

On July 24, 2024, the U.S. Securities and Exchange Commission (SEC) approved a new rule proposed by the New York Stock Exchange (NYSE), which enables the delisting of companies that significantly change their primary business focus after their initial public offering (IPO). This rule change represents an important update to the NYSE’s existing continued listing standards and highlights the Exchange's efforts to maintain the integrity of its listed companies.

The rule amendment requires that companies notify the NYSE in writing if they change their primary business focus from what was originally disclosed when they first listed on the exchange. After receiving the notification, the NYSE will conduct a thorough review to determine whether the company should remain listed based on the new business activities. This new delisting rule adds a layer of scrutiny aimed at ensuring that companies remain in line with the criteria that qualified them for listing in the first place.

Background: NYSE Continued Listing Standards

The NYSE has always had rigorous standards for listing and maintaining listing status on the exchange. These standards are designed to protect investors and maintain the quality and integrity of the market. According to Section 802.01 of the NYSE Listed Company Manual, companies must meet a variety of financial and operational benchmarks, such as having a certain number of shareholders, meeting market capitalization thresholds, and complying with asset and equity requirements.

Prior to the rule change, the NYSE could already take action to delist companies under certain conditions, including but not limited to:

Distribution of Capital Stock: The company must maintain a minimum number of stockholders and adequate liquidity in its shares. This includes either 400 total stockholders or at least 1,200 stockholders and a monthly trading volume of less than 100,000 shares.
Market Value: The company must meet a minimum market value. For example, if a company's average global market capitalization drops below $50 million and its stockholders' equity falls below $50 million for 30 consecutive trading days, the company could face delisting.
Disposal of Assets or Ceasing Operations: If a company sells its principal operating assets, ceases to operate as a functional business, or enters bankruptcy or liquidation, the NYSE has the authority to delist the company.
Failure to Comply with Listing Agreement or SEC Rules: This includes non-compliance with rules requiring timely financial reporting, hosting annual shareholder meetings, and maintaining proxy solicitation standards. Companies failing to file reports with the SEC or facing allegations of fraud could be delisted.
Other Events: The NYSE can also delist a company due to other events, such as a company's stock trading at a low price for an extended period without implementing a reverse stock split, failure to pay listing fees, or the company no longer meeting executive compensation clawback rules.

The newly approved rule supplements these existing listing standards by focusing on companies that change their core business model after becoming publicly traded.

New Rule: Delisting for Change in Primary Business Focus

The key component of the new rule is that companies that undertake a change in their primary business focus must promptly notify the NYSE of this change. The NYSE will then perform a comprehensive review of the company’s operations and assess whether the company’s new business direction would have been sufficient for initial listing. This review process is largely qualitative and involves examining the nature of the company’s new business operations, management structure, board composition, voting power, and financial framework.

Factors the NYSE Will Consider:

New Business Suitability: The Exchange will evaluate whether the company’s newly adopted business would have met the qualitative and quantitative standards required for initial listing had it been the company’s primary business at the time of listing.
Management and Governance Changes: Any shifts in management, changes to the board of directors, or alterations in voting power and ownership structure will be reviewed as part of the assessment.
Financial Structure: The NYSE will also take into account any material changes in the company’s financial structure, including shifts in capital allocation, significant new liabilities, or changes in equity holdings.
Qualitative Considerations: While the NYSE has established quantitative standards for listing, such as minimum shareholder counts and market capitalization, this new rule emphasizes qualitative factors, including whether the new business strategy aligns with the standards of corporate governance and operational transparency expected from publicly listed companies.

Although the rule introduces an avenue for the delisting of companies that change their primary business focus, it is important to note that the NYSE considers this a last-resort option. The Exchange has stated that it does not expect delisting due to business changes to be routine. Instead, delisting would only occur in "extraordinary circumstances" where the new business model does not meet the Exchange's standards.

Timing and Implementation: A Look at the Phase-In Period

Under the new rule, any company that has already filed for an IPO or is actively listed on the NYSE must act quickly if it undergoes a major business shift. The company must notify the NYSE of the change as soon as practicable to allow the Exchange sufficient time to conduct its continued listing analysis. Failure to do so may result in immediate suspension and eventual delisting.

Importantly, the NYSE will not apply this rule retroactively to companies that have already significantly changed their business focus prior to the rule change, unless new changes occur post-July 24, 2024. Companies that are currently planning or undergoing changes in their business model should be especially mindful of this new rule, as it could impact their listing status if not properly navigated.

What Does This Mean for Companies Considering a Shift in Focus?

For companies considering changing their core business model, the new rule presents both challenges and opportunities. The prospect of delisting could deter some companies from pivoting into new markets or industries. However, for others, the rule provides clarity on the expectations of continued listing, allowing for better strategic planning and governance adjustments.

Key Takeaways for Companies:

Prepare for NYSE Scrutiny: Companies that are planning to change their primary business model must be prepared for heightened scrutiny from the NYSE. A failure to notify the NYSE or adequately address its concerns could lead to suspension or delisting.
Re-Evaluate Initial Listing Requirements: Companies considering a shift in their business focus should review the original standards under which they were listed. Would the new business model have qualified for an IPO if it had been the company's focus at the time of listing? If not, the company should be prepared to address this issue with the NYSE.
Governance and Management Adjustments: Companies should assess whether any changes to their management structure, board of directors, or financial framework are necessary to align with NYSE requirements. Making proactive adjustments could mitigate the risk of delisting.
Timing is Critical: Companies must notify the NYSE as soon as a change in their business focus is decided. Delays in notification could cause the company to fall out of compliance with NYSE requirements, leaving little room for remediation.

What About Other Exchanges?

Although the new NYSE rule applies only to companies listed on the NYSE, this change could signal a broader trend among stock exchanges. As the NYSE seeks to maintain the quality and integrity of its listed companies, other major exchanges, such as Nasdaq, may implement similar rules in the near future. Companies considering a listing on any U.S. exchange should stay informed of potential regulatory changes and consult with legal and financial advisors when making business decisions that could impact their compliance with exchange rules.

Conclusion

The SEC's approval of the NYSE's new rule permitting the delisting of companies that significantly change their primary business focus marks an important development in corporate governance and securities law. While the new rule introduces potential risks for companies undergoing a significant transformation, it also provides a clearer framework for how the NYSE will assess the suitability of listed companies in the event of a major business shift.

Companies that are contemplating changes in their primary business focus must take this rule seriously and plan accordingly to avoid the risk of suspension or delisting. Proactive governance measures, early engagement with the NYSE, and adherence to transparency standards will be critical for companies seeking to navigate this new regulatory landscape.

Gayatri GuptaSeptember 11, 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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