Notice2021-21988
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Granting Approval of a Proposed Rule Change To Adopt Additional Initial Listing Criteria for Companies Primarily Operating in Jurisdictions That Do Not Provide the PCAOB With the Ability To Inspect Public Accounting Firms
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 8, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 193 (Friday, October 8, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 193 (Friday, October 8, 2021)]
[Notices]
[Pages 56338-56344]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-21988]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93256; File No. SR-NASDAQ-2021-007]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Granting Approval of a Proposed Rule Change To Adopt Additional Initial
Listing Criteria for Companies Primarily Operating in Jurisdictions
That Do Not Provide the PCAOB With the Ability To Inspect Public
Accounting Firms
October 4, 2021.
I. Introduction
On February 1, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt additional initial listing criteria for
companies primarily operating in jurisdictions that do not provide the
Public Company Accounting Oversight Board (``PCAOB'') with the ability
to inspect public accounting firms. The proposed rule change was
published for comment in the Federal Register on February 16, 2021.\3\
On March 26, 2021, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On May 17, 2021, the Commission instituted proceedings to
determine whether to approve or disapprove the
[[Page 56339]]
proposed rule change.\6\ This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 91089 (February 9,
2021), 86 FR 9549 (``Notice''). Comments on the proposed rule change
can be found at: <a href="https://www.sec.gov/comments/sr-nasdaq-2021-007/srnasdaq2021007.htm">https://www.sec.gov/comments/sr-nasdaq-2021-007/srnasdaq2021007.htm</a>.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 91413, 86 FR 17263
(April 1, 2021). The Commission designated May 17, 2021 as the date
by which the Commission shall approve or disapprove, or institute
proceedings to determine whether to approve or disapprove, the
proposed rule change.
\6\ See Securities Exchange Act Release No. 91904, 86 FR 27659
(May 21, 2021).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange states that the Exchange's rules, in addition to
federal securities laws, require that a company's financial statements
included in its initial registration statement or annual report be
audited by an independent public accountant that is registered with the
PCAOB.\7\ According to the Exchange, the Exchange and investors rely on
the work of auditors to provide reasonable assurances that the
financial statements provided by a company are free of material
misstatements, and on the PCAOB's critical role in overseeing the
quality of the auditor's work.\8\ The Exchange states its belief that
accurate financial statement disclosure is critical for investors to
make informed investment decisions.\9\
---------------------------------------------------------------------------
\7\ See Notice, supra note 3, at 9549. See also Nasdaq Rules
5210(b) and 5250(c)(3) (requiring for initial and continued listing
on Nasdaq that companies must be audited by an independent public
accountant that is registered as a public accounting firm with the
PCAOB); 15 U.S.C. 7212(a) (Registration with the PCAOB); 17 CFR
210.2-01 (Qualifications of Accountants).
\8\ See Notice, supra note 3, at 9550.
\9\ See id.
---------------------------------------------------------------------------
The Exchange states that the former Chairman and former Chief
Accountant of the Commission and the former Chairman of the PCAOB have
raised concerns that national barriers on access to information can
impede effective regulatory oversight of U.S.-listed companies with
operations in certain countries, including the PCAOB's inability to
inspect the audit work and practices of auditors in those
countries.\10\ The Exchange states that similar concerns have been
expressed by members of Congress, the State Department, and the
President's Working Group on Financial Markets.\11\ The Exchange states
that it shares these concerns and believes the lack of transparency
from certain markets raises concerns about the accuracy of disclosures,
accountability, and access to information, particularly when a company
is based in a jurisdiction that does not provide the PCAOB with access
to conduct inspections of public accounting firms that audit Nasdaq-
listed companies (``Restrictive Market'').\12\
---------------------------------------------------------------------------
\10\ See id. (citing to various statements by former Commission
Chairman Jay Clayton, former Commission Chief Accountant Wes
Bricker, and former PCAOB Chairman William D. Duhnke III, available
at <a href="https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other">https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other</a>; <a href="https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting">https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting</a>; and <a href="https://www.sec.gov/news/public-statement/clayton-emerging-markets-roundtable-2020-07-09">https://www.sec.gov/news/public-statement/clayton-emerging-markets-roundtable-2020-07-09</a>). See id. at 9550,
n.8.
\11\ See id. at 9550 (citing to ``Congress Passes Legislation to
De-List Chinese Companies Unless U.S. Has Access to Audit
Workpapers'' (December 2, 2020), available at <a href="https://sherman.house.gov/media-center/press-releases/congress-passes-legislation-to-de-list-chinese-companies-unless-us-has">https://sherman.house.gov/media-center/press-releases/congress-passes-legislation-to-de-list-chinese-companies-unless-us-has</a>; Former
Commission Chairman Jay Clayton, ``Statement after the Enactment of
the Holding Foreign Companies Accountable Act'' (December 18, 2020),
available at <a href="https://www.sec.gov/news/public-statement/clayton-hfcaa-2020-12#_ftn5">https://www.sec.gov/news/public-statement/clayton-hfcaa-2020-12#_ftn5</a>; Press Statement of Michael R. Pompeo, Former
Secretary of State, New Nasdaq Restrictions Affecting Listing of
Chinese Companies (June 4, 2020), available at <a href="https://2017-2021-translations.state.gov/2020/06/04/new-nasdaq-restrictions-affecting-listing-of-chinese-companies/index.html">https://2017-2021-translations.state.gov/2020/06/04/new-nasdaq-restrictions-affecting-listing-of-chinese-companies/index.html</a>; President's Working Group
on Financial Markets: Report on Protecting United States Investors
from Significant Risks from Chinese Companies (July 24, 2020),
available at <a href="https://home.treasury.gov/system/files/136/PWG-Report-on-Protecting-United-States-Investors-from-Significant-Risks-from-Chinese-Companies.pdf">https://home.treasury.gov/system/files/136/PWG-Report-on-Protecting-United-States-Investors-from-Significant-Risks-from-Chinese-Companies.pdf</a>). See id. at 9550, nn.9-11.
\12\ See id. at 9550.
---------------------------------------------------------------------------
The Exchange further states that such concerns can be compounded
when a company from a Restrictive Market lists on the Exchange through
an initial public offering (``IPO'') or a business combination with a
small offering size or a low public float percentage because such
companies may not attract market attention and develop sufficient
public float, investor base, and trading interest to provide the depth
and liquidity necessary to promote fair and orderly trading.\13\
According to the Exchange, such securities may trade infrequently, in a
more volatile manner and with a wider bid-ask spread, all of which may
result in trading at a price that may not reflect their true market
value.\14\ Furthermore, the Exchange states that less liquid securities
may be more susceptible to price manipulation and that, in particular,
the risk of price manipulation due to insider trading is more acute
with respect to a company that principally administers its business in
a Restrictive Market (``Restrictive Market Company''), particularly if
a company's financial statements contain undetected material
misstatements due to error or fraud and the PCAOB is unable to inspect
the company's auditor to determine if it complied with PCAOB and
Commission rules and professional standards in connection with its
performance of audits.\15\ The Exchange states that risk to investors
in such cases may be compounded because regulatory investigations into
price manipulation, insider trading, and compliance concerns may be
impeded and investor protections and remedies may be limited in such
cases due to obstacles encountered by U.S. authorities in bringing or
enforcing actions against the companies and insiders.\16\
---------------------------------------------------------------------------
\13\ See id.
\14\ See id. The Exchange also states that foreign issuers are
more likely to issue a portion of an offering to investors in their
home country, which raises concerns that such investors will not
contribute to the liquidity of the security in the U.S. secondary
market. See id.
\15\ See id.
\16\ See id.
---------------------------------------------------------------------------
Nasdaq states that it believes the U.S. capital markets can provide
Restrictive Market Companies with access to additional capital to fund
ground-breaking research and technological advancements and that such
companies provide U.S. investors with opportunities to diversify their
portfolio by providing exposure to Restrictive Markets.\17\ However,
Nasdaq further states that it believes that Restrictive Market
Companies present unique potential risks to U.S. investors due to
restrictions on the PCAOB's ability to inspect the audit work and
practices of auditors in those countries, which create concerns about
the accuracy of disclosures, accountability, and access to
information.\18\ Nasdaq states that it believes its proposal will
reduce trading volatility and price manipulation and help to ensure
that Restrictive Market Companies have sufficient investor base and
public float to support fair and orderly trading on the Exchange.\19\
---------------------------------------------------------------------------
\17\ See id. at 9553-54. See also Letter from Jeffrey S. Davis,
Senior Vice President, General Counsel, Nasdaq, Inc. (April 30,
2021) (``Nasdaq Response Letter''), at 2.
\18\ See Notice, supra note 3, at 9554.
\19\ See id. See also Nasdaq Response Letter, supra note 17, at
3.
---------------------------------------------------------------------------
Specifically, the Exchange proposes to adopt a definition of
``Restrictive Market'' \20\ and to apply additional initial listing
requirements to a Restrictive Market Company listing on the Exchange in
connection with an IPO or a business combination.\21\ The
[[Page 56340]]
Exchange also proposes to prohibit a Restrictive Market Company from
listing on the Nasdaq Capital Market in connection with a Direct
Listing,\22\ but to allow a Restrictive Market Company to list on the
Nasdaq Global Select Market or Nasdaq Global Market in connection with
a Direct Listing, provided that such company meets all applicable
initial listing requirements for such market.
---------------------------------------------------------------------------
\20\ See infra note 24 and accompanying text.
\21\ The Exchange states that, currently, it may rely upon its
discretionary authority under Nasdaq Rule 5101 to deny initial
listing or apply additional or more stringent criteria when it is
concerned that a small offering size for an IPO may not reflect the
company's initial valuation or may not ensure sufficient liquidity
to support trading in the secondary market. Pursuant to Nasdaq Rule
5101, Nasdaq has broad discretionary authority over the initial and
continued listing of securities in Nasdaq in order to maintain the
quality of and public confidence in its market, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and to protect investors and the
public interest. Nasdaq may use such discretion to deny initial
listing, apply additional or more stringent criteria for the initial
or continued listing of particular securities, or suspend or delist
particular securities based on any event, condition, or circumstance
that exists or occurs that makes initial or continued listing of the
securities on Nasdaq inadvisable or unwarranted in the opinion of
Nasdaq, even though the securities meet all enumerated criteria for
initial or continued listing on Nasdaq. See Nasdaq Rule 5101.
\22\ Nasdaq defines ``Direct Listing'' as the listing of
``companies that have sold common equity securities in private
placements, which have not been listed on a national securities
exchange or traded in the over-the-counter market pursuant to FINRA
Form 211 immediately prior to the initial pricing.'' See Nasdaq Rule
IM-5315-1.
---------------------------------------------------------------------------
A. Definition of Restrictive Market
The Exchange proposes to adopt a new definition of Restrictive
Market in Nasdaq Rule 5005(a)(37).\23\ As proposed, a Restrictive
Market will be defined as a jurisdiction that does not provide the
PCAOB with access to conduct inspections of public accounting firms
that audit Nasdaq-listed companies.\24\ Under the proposed rule, Nasdaq
will consider a company's business to be principally administered in a
Restrictive Market if: (i) The company's books and records are located
in that jurisdiction; (ii) at least 50% of the company's assets are
located in such jurisdiction; or (iii) at least 50% of the company's
revenues are derived from such jurisdiction.\25\
---------------------------------------------------------------------------
\23\ The Exchange proposes to renumber current paragraphs
(a)(37) through (a)(46) of Nasdaq Rule 5005 in connection with the
addition of the definition of Restrictive Market. See Notice, supra
note 3, at 9551.
\24\ See proposed Nasdaq Rule 5005(a)(37). The Exchange states
that the PCAOB maintains a map of where it can and cannot conduct
oversight activities on its website and publishes a list identifying
the public companies for which a PCAOB-registered public accounting
firm signed and issued an audit report and is located in a
jurisdiction where obstacles to PCAOB inspections exist. See Notice,
supra note 3, at 9551.
\25\ See proposed Nasdaq Rule 5005(a)(37). The term ``Company''
means the issuer of a security listed or applying to list on Nasdaq.
See Nasdaq Rule 5005(a)(6). The Exchange provides the following
examples. Company X's books and records are located in Country Y,
which is not a Restrictive Market, while 90% of its revenues are
driven from operations in Country Z, which is a Restrictive Market.
Nasdaq would consider Company X's business to be principally
administered in Country Z, so Company X would be considered a
Restrictive Market Company. Alternatively, Company A's books and
records are located in Country B, which is a Restrictive Market, but
90% of its revenues are derived from Country C, which is not a
Restrictive Market. Nasdaq would consider Company A's business to be
principally administered in Country B, so Company A would be
considered a Restrictive Market Company. See Notice, supra note 3,
at 9551.
---------------------------------------------------------------------------
B. Minimum Offering Size or Public Float Percentage Requirement for an
IPO
The Exchange proposes to adopt new Nasdaq Rule 5210(k)(i) to
require a Restrictive Market Company listing its Primary Equity
Security \26\ on Nasdaq in connection with its IPO to offer a minimum
amount of securities in a Firm Commitment Offering \27\ in the U.S. to
Public Holders \28\ that (i) will result in gross proceeds to the
Company of at least $25 million or (ii) will represent at least 25% of
the Company's post-offering Market Value of Listed Securities,\29\
whichever is lower. A Restrictive Market Company listing on the
Exchange in connection with an IPO that is subject to the proposed rule
would also need to comply with all other applicable listing
requirements.\30\ The Exchange states that it believes this proposed
listing requirement for Restrictive Market Companies conducting an IPO
will provide greater support for the company's price, as determined
through the offering, and will help assure there will be sufficient
liquidity, U.S. investor interest, and distribution to support price
discovery once the security is listed.\31\ In addition, the Exchange
states that the proposal will help ensure that Restrictive Market
Companies seeking to list on the Exchange have sufficient investor base
and public float to support fair and orderly trading on the
Exchange.\32\
---------------------------------------------------------------------------
\26\ Nasdaq Rule 5005(a)(33) defines ``Primary Equity Security''
as ``a Company's first class of Common Stock, Ordinary Shares,
Shares or Certificates of Beneficial Interest of Trust, Limited
Partnership Interests or American Depositary Receipts (ADR) or
Shares (ADS).''
\27\ Nasdaq Rule 5005(a)(17) defines ``Firm Commitment
Offering'' as ``an offering of securities by participants in a
selling syndicate under an agreement that imposes a financial
commitment on participants in such syndicate to purchase such
securities.''
\28\ Nasdaq Rule 5005(a)(36) defines ``Public Holders'' as
``holders of a security that includes both beneficial holders and
holders of record, but does not include any holder who is, either
directly or indirectly, an Executive Officer, director, or the
beneficial holder of more than 10% of the total shares
outstanding.''
\29\ ``Market Value'' means the consolidated closing bid price
multiplied by the measure to be valued. See Nasdaq Rule 5000(a)(23).
``Listed Securities'' means securities listed on Nasdaq or another
national securities exchange. See Nasdaq Rule 5000(a)(22).
\30\ The Exchange provides the following examples to illustrate
the proposed rule. First, Company X, which principally administers
its business in a Restrictive Market, is applying to list on Nasdaq
Global Market and has an expected post-offering Market Value of
Listed Securities of $75,000,000. Since 25% of $75,000,000 is
$18,750,000, which is lower than $25,000,000, pursuant to the
requirements of the proposed rule, Company X would be eligible to
list based on a Firm Commitment Offering in the U.S. to Public
Holders of at least $18,750,000. Company X would also need to comply
with the other applicable listing requirements of the Nasdaq Global
Market, including a Market Value of Unrestricted Publicly Held
Shares of at least $8 million. See Notice, supra note 3, at 9551;
Nasdaq Rule 5405(b)(1)(C). See also Nasdaq Rules 5005(a)(45)
(definition of ``Unrestricted Publicly Held Shares''), 5005(a)(46)
(definition of ``Unrestricted Securities''), and 5005(a)(37)
(definition of ``Restricted Securities''). As another example,
Company Y, which also principally administers its business in a
Restrictive Market, is applying to list on the Nasdaq Global Select
Market and its post-offering Market Value of Listed Securities is
expected to be $200,000,000. Since 25% of $200,000,000 is
$50,000,000, which is higher than $25,000,000, pursuant to the
requirements of the proposed rule, Company Y would be eligible to
list based on a Firm Commitment Offering in the U.S. to Public
Holders that will result in gross proceeds of at least $25,000,000.
Company Y would also need to comply with the other applicable
listing requirements of the Nasdaq Global Select Market, including a
Market Value of Unrestricted Publicly Held Shares of at least $45
million. See Notice, supra note 3, at 9551-52; Nasdaq Rule
5315(f)(2)(C).
\31\ See Notice, supra note 3, at 9552.
\32\ See id.
---------------------------------------------------------------------------
The Exchange further states that it has observed that Restrictive
Market Companies listing on Nasdaq in connection with an IPO with an
offering size below $25 million or public float ratio below 25% have a
high rate of compliance concerns.\33\ The Exchange states that it
believes the proposed listing requirement for Restrictive Market
Companies conducting an IPO will mitigate such compliance concerns.\34\
---------------------------------------------------------------------------
\33\ See id. Specifically, the Exchange states that 39 out of
113 Restrictive Market Companies that listed on Nasdaq through an
IPO from January 1, 2015 to September 30, 2020 would not have
qualified under the requirement in proposed Nasdaq Rule 5210(k)(i)
because they had offering amounts of $25 million or less. According
to Nasdaq, two of these companies were considered to be Restrictive
Market Companies because they had at least 50% of the company's
assets located in a Restrictive Market, and 37 met the definition
because they had at least 50% of the company's revenues derived from
a Restrictive Market. Of those companies that would not have
qualified under the requirement in proposed Nasdaq Rule 5210(k)(i),
twenty, or 51%, were cited for a compliance issue, which Nasdaq
states is a significantly higher rate than other Restrictive Market
Companies (16%). The Exchange also states that, during the same
period, 25 out of 84 (or 30%) of Restrictive Market Companies that
had a ratio of offering size to Market Value of Listed Securities of
25% or less failed to comply with one or more listing standards
after listing, which, according to the Exchange, is a significantly
higher non-compliance rate than for other foreign companies (11%)
and other Restrictive Market Companies (21%) that had such listings.
The Exchange also found that, during the same period, 35 Restrictive
Market Companies would not have met either the $25 million offering
size requirement or the 25% of the company's post-offering Market
Value of Listed Securities requirement, and 18 of those companies
were cited for a compliance concern. See id.
\34\ See id.
---------------------------------------------------------------------------
[[Page 56341]]
C. Minimum Market Value of Unrestricted Publicly Held Shares
Requirement for a Business Combination
The Exchange proposes to adopt new Nasdaq Rule 5210(k)(ii) to
require a Company that is conducting a business combination, as
described in Nasdaq Rule 5110(a) \35\ or IM-5101-2,\36\ with a
Restrictive Market Company to have a minimum Market Value of
Unrestricted Publicly Held Shares \37\ following the business
combination equal to the lesser of (i) $25 million or (ii) 25% of post-
business combination entity's Market Value of Listed Securities. A
Restrictive Market Company subject to the proposed rule would also need
to comply with all other applicable listing requirements.\38\
---------------------------------------------------------------------------
\35\ Nasdaq Rule 5110(a) (Business Combinations with non-Nasdaq
Entities Resulting in a Change of Control) sets forth requirements
applicable to a Company that engages in a business combination with
a non-Nasdaq entity, resulting in a change of control of the Company
and potentially allowing the non-Nasdaq entity to obtain a Nasdaq
Listing.
\36\ Nasdaq Rule IM-5101-2 (Listing of Companies Whose Business
Plan is to Complete One or More Acquisitions) sets forth
requirements applicable to a Company whose business plan is to
complete an IPO and engage in a merger or acquisition with one or
more unidentified companies within a specific period of time.
\37\ Nasdaq Rule 5005(a)(45) defines ``Unrestricted Publicly
Held Shares'' as Publicly Held Shares that are Unrestricted
Securities. ``Publicly Held Shares'' means shares not held directly
or indirectly by an officer, director or any person who is the
beneficial owner of more than 10 percent of the total shares
outstanding. See Nasdaq Rule 5005(a)(35). ``Unrestricted
Securities'' means securities that are not subject to resale
restrictions for any reason, including, but not limited to,
securities: (i) Acquired directly or indirectly from the issuer or
an affiliate of the issuer in unregistered offerings such as private
placements or Regulation D offerings; (ii) acquired through an
employee stock benefit plan or as compensation for professional
services; (iii) acquired in reliance on Regulation S, which cannot
be resold within the United States; (iv) subject to a lockup
agreement or a similar contractual restriction; or (v) considered
``restricted securities'' under Rule 144. See Nasdaq Rules
5005(a)(46) and (37).
\38\ The Exchange provides the following examples to illustrate
the proposed rule. First, Company A is currently listed on the
Nasdaq Capital Market and plans to acquire a company that
principally administers its business in a Restrictive Market, in
accordance with IM-5101-2. Following the business combination,
Company A intends to transfer to the Nasdaq Global Select Market.
Company A expects the post-business combination entity to have a
Market Value of Listed Securities of $250,000,000. Since 25% of
$250,000,000 is $62,500,000, which is higher than $25,000,000,
pursuant to the requirements of the proposed rule, to qualify for
listing the post-business combination entity must have a minimum
Market Value of Unrestricted Publicly Held Shares of at least
$25,000,000. The company would also need to comply with the other
applicable listing requirements of the Nasdaq Global Select Market,
including a Market Value of Unrestricted Publicly Held Shares of at
least $45,000,000. See Notice, supra note 3, at 9552; Nasdaq Rule
5315(f)(2)(C). As another example, Company B is currently listed on
Nasdaq Capital Market and plans to combine with a non-Nasdaq entity
that principally administers its business in a Restrictive Market,
resulting in a change of control as defined in Nasdaq Rule 5110(a),
whereby the non-Nasdaq entity will become the Nasdaq-listed company.
Following the change of control, Company B expects the listed
company to have a Market Value of Listed Securities of $50,000,000.
Since 25% of $50,000,000 is $12,500,000, which is lower than
$25,000,000, pursuant to the requirements of the proposed rule, the
listed company must have a minimum Market Value of Unrestricted
Publicly Held Shares following the change of control of at least
$12,500,000. The post-business combination company would also need
to comply with all other applicable listing requirements of the
Nasdaq Capital Market, including a Market Value of Unrestricted
Publicly Held Shares of at least $5 million. See Notice, supra note
3, at 9552; Nasdaq Rule 5505(b)(3)(C).
---------------------------------------------------------------------------
The Exchange states that it believes that a business combination as
described in Nasdaq Rule 5110(a) or IM-5101-2 involving a Restrictive
Market Company presents similar risks to U.S. investors as an IPO of a
Restrictive Market Company, and therefore, Nasdaq believes it is
appropriate to apply similar thresholds to post-business combination
entities to ensure that a company listing through a business
combination would have satisfied equivalent standards that apply to an
IPO.\39\ The Exchange further states that it believes that the proposed
listing requirement for post-business combination entities would help
to provide an additional assurance that there are sufficient freely
tradable shares and investor interest to support fair and orderly
trading on the Exchange when the target company principally administers
its business in a Restrictive Market.\40\
---------------------------------------------------------------------------
\39\ See Notice, supra note 3, at 9553. The Exchange states that
it found that out of seven business combinations involving
Restrictive Market Companies from 2015 through September 30, 2020,
five would not have qualified under proposed Nasdaq Rule 5210(k)(ii)
to have a minimum Market Value of Unrestricted Publicly Held Shares
following the business combination of $25 million or 25% of the
post-business combination entity's Market Value of Listed
Securities, whichever is lower. The Exchange states that all five of
these companies have been cited for a deficiency after the
completion of their business combination. On the other hand, Nasdaq
states that only one out of the two business combinations involving
Restrictive Market Companies that would have qualified under
proposed Nasdaq Rule 5210(k)(ii) during such period was cited for a
compliance concern. See id.
\40\ See id.
---------------------------------------------------------------------------
D. Direct Listings of Restrictive Market Companies
The Exchange proposes to adopt new Nasdaq Rule 5210(k)(iii) to
provide that a Restrictive Market Company that is listing its Primary
Equity Security on Nasdaq in connection with a Direct Listing, as
defined in Nasdaq Rule IM-5315-1,\41\ would be permitted to list on:
(i) The Nasdaq Global Select Market, provided that the Company meets
all applicable listing requirements for the Nasdaq Global Select Market
and the additional requirements of Nasdaq Rule IM-5315-1, or (ii) the
Nasdaq Global Market, provided that the Company meets all applicable
listing requirements for the Nasdaq Global Market and the additional
requirements of Nasdaq Rule IM-5405-1.\42\ On the other hand, proposed
Nasdaq Rule 5210(k)(iii) would provide that a Restrictive Market
Company would not be permitted to list on the Nasdaq Capital Market in
connection with a Direct Listing, notwithstanding the fact that the
Company may meet the applicable initial listing requirements for the
Nasdaq Capital Market and the additional requirements in Nasdaq Rule
IM-5505-1.\43\
---------------------------------------------------------------------------
\41\ See supra note 22.
\42\ See Notice, supra note 3, at 9553.
\43\ See id.
---------------------------------------------------------------------------
The Exchange's rules currently set forth initial listing
requirements for companies listing on the Nasdaq Global Select Market,
Nasdaq Global Market, and Nasdaq Capital Market,\44\ and additional
listing requirements for Companies conducting a Direct Listing on such
markets.\45\ The Exchange states that it believes it is appropriate to
permit Restrictive Market Companies to list through a Direct Listing on
the Nasdaq Global Select Market or Nasdaq Global Market because such
companies would be subject to the additional listing requirements set
forth in Nasdaq Rule IM-5315-1 or IM-5405-1, respectively.\46\ On the
other hand, the Exchange states that it does not believe that the
additional requirements for Direct Listing on the Nasdaq Capital
Market, set forth in Nasdaq Rule IM-5501-1, are sufficient to overcome
concerns regarding sufficient liquidity and investor interest to
support fair and orderly trading on the Exchange with respect to
Restrictive Market Companies.\47\
---------------------------------------------------------------------------
\44\ See Nasdaq Rules 5315, 5405, and 5505.
\45\ See Nasdaq Rules IM-5315-1, IM-5405-1, and IM-5505-1.
\46\ See Notice, supra note 3, at 9553.
\47\ See id. As an example, the Exchange states that the Nasdaq
Global Select Market and Nasdaq Global Market require a company to
have at least 1,250,000 and 1.1 million Unrestricted Publicly Held
Shares, respectively, and a Market Value of Unrestricted Publicly
Held Shares of at least $45 million and $8 million, respectively.
See Nasdaq Rules 5315(e)(2), 5315(f)(2)(C), 5405(a)(2), and
5405(b)(1)(C). In contrast, the Nasdaq Capital Market only requires
a company to have at least 1 million Unrestricted Publicly Held
Shares and a Market Value of Unrestricted Publicly Held Shares of at
least $5 million. See Nasdaq Rules 5505(a)(2) and 5505(b)(3)(C);
Notice, supra note 3, at 9553, n.34.
---------------------------------------------------------------------------
[[Page 56342]]
III. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\48\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\49\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest, and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange has proposed to adopt enhanced initial listing
standards for Restrictive Market Companies conducting an IPO or engaged
in a business combination in order to help assure the existence of
adequate investor base and public float to support fair and orderly
trading for securities issued by Restrictive Market Companies that are
listing on the Exchange for the first time.\50\ In addition, the
Exchange has proposed to prohibit Direct Listings on Nasdaq Capital
Market of securities issued by Restrictive Market Companies due to
concerns regarding liquidity and fair and orderly trading.\51\ As
stated by the Exchange, listed companies that are based in
jurisdictions that do not provide the PCAOB with access to conduct
inspections of public accounting firms that audit Nasdaq-listed
companies raise concerns regarding the accuracy of disclosures,
accountability, and access to information with respect to such
companies and present unique potential risks to U.S. investors due to
restrictions on the PCAOB's ability to inspect the audit work and
practices of auditors in those countries.\52\ The Exchange also states
that less liquid securities may be more susceptible to price
manipulation and that, in particular, the risk of price manipulation
due to insider trading is more acute with respect to Restrictive Market
Companies, particularly if a company's financial statements contain
undetected material misstatements due to error or fraud and the PCAOB
is unable to inspect the company's auditor to determine if it complied
with PCAOB and Commission rules and professional standards in
connection with its performance of audits.\53\
---------------------------------------------------------------------------
\50\ See supra notes 32 and 40 and accompanying text.
\51\ See supra note 47 and accompanying text.
\52\ See supra notes 10-12 and accompanying text.
\53\ See supra note 15 and accompanying text.
---------------------------------------------------------------------------
Further, the Exchange states that Nasdaq and investors rely on the
work of auditors to provide reasonable assurances that the financial
statements provided by a company are free of material
misstatements.\54\ The Exchange states that the PCAOB's inability to
inspect the audit work and practices of auditors in certain countries
weakens the assurance that the auditor obtained sufficient appropriate
audit evidence to express its opinion on a company's financial
statements, and decreases confidence that the auditor complied with
PCAOB and Commission rules and professional standards in connection
with the auditor's performance of audits.\55\ Absent reasonable
assurances from an auditor that a company's financial statements and
related disclosures are free from material misstatements, the Exchange
states that there is a risk that a company that would otherwise not
have qualified to list on Nasdaq may satisfy Nasdaq's listing standards
by presenting financial statements that contain undetected material
misstatements.\56\ The Exchange therefore believes that the proposed
rule change would provide greater assurances to investors that a
company truly meets Nasdaq's financial listing requirements by imposing
heightened listing criteria on a Restrictive Market Company, thereby
preventing fraudulent and manipulative acts, protecting investors, and
promoting the public interest.\57\
---------------------------------------------------------------------------
\54\ See supra note 8 and accompanying text.
\55\ See Notice, supra note 3, at 9554.
\56\ See id.
\57\ See id. See also Nasdaq Response Letter, supra note 17, at
3.
---------------------------------------------------------------------------
The Commission has consistently recognized that the development and
enforcement of meaningful listing standards for an exchange is of
critical importance to financial markets and the investing public.\58\
Among other things, the Commission has stated that listing standards
provide the means for an exchange to screen issuers that seek to become
listed, and to provide listed status only to those that are bona fide
companies that have or will have sufficient public float, investor
base, and trading interest likely to generate depth and liquidity
sufficient to promote fair and orderly markets.\59\ Meaningful listing
standards are also important given investor expectations regarding the
nature of securities that have achieved an exchange listing, and the
role of an exchange in overseeing its market and assuring compliance
with its listing standards.\60\
---------------------------------------------------------------------------
\58\ See infra notes 59-60.
\59\ See, e.g., Securities Exchange Act Release Nos. 81856
(October 11, 2017), 82 FR 48296, 48298 (October 17, 2017) (SR-NYSE-
2017-31); 81079 (July 5, 2017), 82 FR 32022, 32023 (July 11, 2017)
(SR-NYSE-2017-11); 65708 (November 8, 2011), 76 FR 70799, 70802
(November 15, 2011) (``SR-NASDAQ-2011-073 Approval Order''); 63607
(December 23, 2010), 75 FR 82420, 82422 (December 30, 2010) (``SR-
NASDAQ-2010-137 Approval Order''); and 57785 (May 6, 2008), 73 FR
27597, 27599 (May 13, 2008) (``SR-NYSE-2008-17 Approval Order'').
The Commission has stated that adequate listing standards, by
promoting fair and orderly markets, are consistent with Section
6(b)(5) of the Act, in that they are, among other things, designed
to prevent fraudulent and manipulative acts and practices, promote
just and equitable principles of trade, and protect investors and
the public interest. See, e.g., Securities Exchange Act Release Nos.
82627 (February 2, 2018), 83 FR 5650, 5653, n.53 (February 8, 2018)
(SR-NYSE-2017-30); 87648 (December 3, 2019), 84 FR 67308, 67314,
n.42 (December 9, 2019) (SR-NASDAQ-2019-059); and 88716 (April 21,
2020), 85 FR 23393, 23395, n.22 (April 27, 2020) (SR-NASDAQ-2020-
001).
\60\ See, e.g., SR-NASDAQ-2011-073 Approval Order, supra note
59, 76 FR at 70802; SR-NASDAQ-2010-137 Approval Order, supra note
59, 75 FR at 82422; and SR-NYSE-2008-17 Approval Order, supra note
59, 73 FR at 27599.
---------------------------------------------------------------------------
The Commission has also previously stated that when the PCAOB is
unable to inspect auditors there is a lack of transparency with respect
to the audit quality provided by such firms and that the inability of
the PCAOB to inspect auditors of certain registrants could generate
uncertainty regarding their financial reporting quality.\61\ The
Commission has stated that, as a result, there is uncertainty regarding
the reliability of the financial information of issuers audited by
firms that are not inspected by the PCAOB, which can potentially lead
to suboptimal investment decisions by investors.\62\ Given these
heightened risks identified by the Commission with respect to issuers
audited by firms that the PCAOB is unable to inspect, the Commission
concludes that the Exchange's proposal to impose heightened listing
requirements on companies that principally administer their business in
a jurisdiction that does not provide the PCAOB with access to conduct
inspections of public accounting firms that audit Nasdaq-listed
companies (i.e., Restrictive Market Companies) is consistent with the
Act and not
[[Page 56343]]
designed to permit unfair discrimination. Furthermore, the Commission
believes that the objective criteria proposed by the Exchange for
determining whether a company's business is principally administered in
a Restrictive Market \63\ should help to ensure that the Exchange
applies the heightened listing standards to companies in a manner that
is not designed to permit unfair discrimination consistent with Section
6(b)(5) of the Act.
---------------------------------------------------------------------------
\61\ See Holding Foreign Companies Accountable Act Disclosure,
Securities Exchange Act Release No. 91364 (March 18, 2021), 86 FR
17528 (April 5, 2021), at 17534, 17537.
\62\ See id. at 17534-35.
\63\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------
With respect to the proposed heightened initial listing standards,
the Commission believes that the proposed requirements should allow the
Exchange to more accurately determine whether a Restrictive Market
Company conducting an IPO or a post-business combination entity
involving a Restrictive Market Company does not have adequate
distribution and liquidity and is thus not suitable for listing and
trading on the Exchange. The Exchange has provided data showing that it
has observed that Restrictive Market Companies listing on Nasdaq in
connection with an IPO and post-business combination entities involving
Restrictive Market Companies that did not meet the proposed listing
requirements have more non-compliance issues than similar companies
that would have met the proposed listing requirements.\64\ The
Commission has previously stated that a Firm Commitment Offering is
designed to promote appropriate price discovery and assists in creating
a liquid market.\65\ In addition, the Commission believes that having a
minimum Market Value of Unrestricted Publicly Held Shares requirement
should allow an exchange to more accurately determine whether a
security does not have adequate distribution and liquidity, and should
therefore help to ensure that an exchange does not list securities that
do not have a sufficient market, with adequate depth and liquidity, and
without sufficient investor interest to support an exchange
listing.\66\ Thus, the Commission concludes that the proposals to
require (i) a Restrictive Market Company conducting an IPO to offer a
minimum amount of securities in the U.S. to Public Holders in a Firm
Commitment Offering and (ii) a company conducting a business
combination, as described in Nasdaq Rule 5110(a) or IM-5101-2, with a
Restrictive Market Company, to have a minimum Market Value of
Unrestricted Publicly Held Shares following the business combination,
and the proposed thresholds for such requirements, are consistent with
the requirements of Section 6(b)(5) of the Act that the rules of the
exchange be designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, and protect
investors and the public interest, and not be designed to permit unfair
discrimination.
---------------------------------------------------------------------------
\64\ See supra notes 33 and 39 and accompanying text.
\65\ See also Securities Exchange Act Release No. 86314 (July 5,
2019), 84 FR 33102 (July 11 2019) (SR-NASDAQ-2019-009) (Order
Approving Revisions to Nasdaq's Initial Listing Standards Related to
Liquidity), at 33112.
\66\ See id. at 33111.
---------------------------------------------------------------------------
One commenter states that the proposal is insufficient to address
the risk that a company may satisfy Nasdaq's listing standards by
presenting financial statements that contain undetected material
misstatements and that the proposed rules should include provisions
that would prohibit Restrictive Market Companies, including companies
listed prior to the effectiveness of the proposal, from engaging an
auditor or an accounting firm that is located in a jurisdiction that
limits the PCAOB's ability to inspect the auditor to assist with the
company audit.\67\ In addition, this commenter expresses concerns
raised by academics regarding the vulnerability of U.S. investors to
``low-ball `take private' transactions'' in Restricted Market
Companies, where ``[t]he goal is to delist U.S. shares at a depressed
buyout price and then relist in [a Restricted Market] at a much loftier
valuation.'' \68\ This commenter states that Nasdaq should promptly
limit the U.S. investor exposure to potentially unfair take-private
transactions by adopting provisions to prevent the initial listing of
Restrictive Market Companies.\69\ In response, the Exchange states
that, while the commenter may prefer a different proposal, the
commenter's suggested proposal is not the Exchange's proposal that is
currently before the Commission.\70\ The Exchange states that, instead,
to address the concerns Nasdaq has observed arising from the unique
potential risks to U.S. investors due to restrictions on the PCAOB's
ability to inspect the audit work and practices of auditors in
Restrictive Markets, Nasdaq has proposed heightened liquidity
requirements designed to ensure that Restrictive Market Companies have
sufficient investor base and public float to support fair and orderly
trading on the Exchange, which Nasdaq believes, as structured, are
consistent with Section 6(b)(5) of the Act.\71\
---------------------------------------------------------------------------
\67\ See Letter from Jeffrey P. Mahoney, General Counsel,
Council of Institutional Investors (February 18, 2021) (``CII Letter
I''), at 4-5; Letter from Jeffrey P. Mahoney, General Counsel,
Council of Institutional Investors (May 27, 2021) (``CII Letter
II''), at 1-4.
\68\ See CII Letter II, supra note 67, at 3 (citing Jesse Fried
& Matthew J. Schoenfeld, Delisting Chinese Firms: A Cure Likely
Worse than the Disease, Harv. L. Sch. F. On Corp. Governance (June
9, 2020), <a href="https://corpgov.law.harvard.edu/2020/06/09/delisting-chinese-firms-a-cure-likely-worse-than-the-disease/">https://corpgov.law.harvard.edu/2020/06/09/delisting-chinese-firms-a-cure-likely-worse-than-the-disease/</a>).
\69\ See id. at 3-4.
\70\ See Nasdaq Response Letter, supra note 17, at 3.
\71\ See id.
---------------------------------------------------------------------------
The proposed provisions suggested by the commenter are not part of
Nasdaq's proposal, and the Commission must approve the proposal if it
finds that the proposal is consistent with the Act and rules
thereunder. The Commission believes the Exchange's proposal is
reasonably designed to help address compliance concerns regarding
securities of Restrictive Market Companies and to help ensure fair and
orderly trading when such companies list on Nasdaq.
The Commission concludes that it is consistent with the Act to
prohibit Restrictive Market Companies from listing on the Nasdaq
Capital Market in connection with a Direct Listing. In support of its
proposal, the Exchange states that it does not believe the listing
requirements for Direct Listings on the Nasdaq Capital Market set forth
in Nasdaq's rules are sufficient to overcome the risks that Restrictive
Market Companies present with respect to liquidity.\72\ Given the
heightened concerns enumerated by the Commission regarding companies
that cannot be inspected by the PCAOB,\73\ the Commission believes that
the proposal to prohibit Restrictive Market Companies from listing on
the Nasdaq Capital Market in connection with a Direct Listing is
consistent with the requirements of Section 6(b)(5) of the Act that the
rules of the exchange be designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest, and not be
designed to permit unfair discrimination.
---------------------------------------------------------------------------
\72\ See supra note 47 and accompanying text. See also Nasdaq
Rules 5505 and IM-5505-1.
\73\ See supra notes 61-62 and accompanying text.
---------------------------------------------------------------------------
In sum, the Commission concludes that the proposed new initial
listing requirements for Restrictive Market Companies, including the
prohibition on Direct Listings on Nasdaq Capital Market, will help
maintain fair and orderly markets and are designed to protect investors
and the public interest, and are not designed to permit unfair
[[Page 56344]]
discrimination given the risks that Restricted Market Companies
present, and should help the Exchange in determining whether a
Restricted Market Company will not have a sufficient market, with
adequate depth and liquidity, and sufficient investor interest to
support listing on the Exchange. A Restrictive Market Company subject
to the proposed initial listing requirements for an IPO or business
combination would also need to comply with all other applicable listing
requirements for the market tier on which it is listing.\74\
---------------------------------------------------------------------------
\74\ See Nasdaq Rule 5000 Series.
---------------------------------------------------------------------------
Based on the foregoing, the Commission finds that the proposed rule
change is consistent with the Act.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\75\ that the proposed rule change (SR-NASDAQ-2021-007) be, and
hereby is, approved.
---------------------------------------------------------------------------
\75\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
---------------------------------------------------------------------------
\76\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21988 Filed 10-7-21; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on October 8, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.