Notice2023-24522
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Approving a Proposed Rule Change Related to Notification and Disclosure of Reverse Stock Splits
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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
November 7, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 214 (Tuesday, November 7, 2023)</title>
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[Federal Register Volume 88, Number 214 (Tuesday, November 7, 2023)]
[Notices]
[Pages 76867-76870]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-24522]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98843; File No. SR-NASDAQ-2023-025]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Approving a Proposed Rule Change Related to Notification and Disclosure
of Reverse Stock Splits
November 1, 2023.
I. Introduction
On June 21, 2023, 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 related to notification and disclosure of reverse
stock splits. The proposed rule change was published for comment in the
Federal Register on August 3, 2023.\3\ On September 14,
[[Page 76868]]
2023, the Commission extended the time period within which to approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change to November 1, 2023.\4\ This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98014 (July 28,
2023), 88 FR 51376 (``Notice''). Comment received by the Commission
on the proposed rule change is available on the Commission's website
at: <a href="https://www.sec.gov/comments/sr-nasdaq-2023-025/srnasdaq2023025.htm">https://www.sec.gov/comments/sr-nasdaq-2023-025/srnasdaq2023025.htm</a>. The Commission received two comment letters in
support of the proposed rule change. See Letter from Thomas M.
Merritt, Deputy General Counsel, Virtu Financial, Inc., dated August
23, 2023 (``Virtu Letter''); Letter from Imran Javaid, Director and
Association General Counsel, Robinhood Markets, Inc., dated October
24, 2023 (``Robinhood Letter'').
\4\ See Securities Exchange Act Release No. 98386, 88 FR 64936
(Sept. 20, 2023).
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II. Description of the Proposed Rule Change
Nasdaq is proposing to amend its rules regarding the notification
and disclosure of reverse stock splits in light of recent increased
volume in reverse stock split activity.\5\ Currently, a reverse stock
split is considered a ``Substitution Listing Event'' under Nasdaq Rule
5005(a)(44).\6\ Nasdaq Rule 5250(e)(4) requires a company to notify
Nasdaq about any ``Substitution Listing Event (other than a re-
incorporation or a change to a company's place of organization) no
later than 15 calendar days prior to the implementation of such event
by filing the appropriate form as designated by Nasdaq.'' While public
disclosure of a reverse stock split is not specifically addressed under
Nasdaq's current rules, Nasdaq Rule 5250(b)(1) requires a company to
make ``prompt disclosure'' of ``any material information that would
reasonably be expected to affect the value of its securities or
influence investors' decisions,'' which Nasdaq interprets to include
details on reverse stock splits.\7\ While ``prompt'' disclosure is not
expressly defined in the Exchange's rules, Nasdaq states that it has
published an FAQ stating that ``[t]his disclosure should be
disseminated prior to, or in conjunction with, the announcements that
Corporate Data Operations will make on the day prior to the market
effective date at approximately 1:00 p.m.'' \8\
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\5\ Nasdaq states that in 2022, Nasdaq processed 196 reverse
stock splits, compared to 31 in 2021 and 94 in 2020. See Notice,
supra note 3, at 51376. As of June 23, 2023, Nasdaq states that it
has processed 164 reverse stock splits, and projects significantly
more throughout 2023. See id. In most cases, Nasdaq observes,
companies are conducting reverse stock splits to achieve compliance
with Nasdaq's $1 bid price requirement to remain on the Capital
Market tier. See id. Nasdaq Rule 5550(a)(2) states that a company
that has its Primary Equity Security listed on the Capital Market
must have a minimum bid price of at least $1 per share. See also
Nasdaq Rule 5450(a)(1) (Global and Global Select Markets).
\6\ Nasdaq Rule 5505(a)(44) states, in part, that a
``Substitution Listing Event'' means: ``a reverse stock split, re-
incorporation or a change in the Company's place of organization,
the formation of a holding company that replaces a listed Company,
reclassification or exchange of a Company's listed shares for
another security, the listing of a new class of securities in
substitution for a previously-listed class of securities, a business
combination described in IM-5101-2, a change in the obligor of a
listed debt security, or any technical change whereby the
Shareholders of the original Company receive a share-for-share
interest in the new Company without any change in their equity
position or rights.''
\7\ See Notice, supra note 3, at 51376.
\8\ See Nasdaq FAQs-Listings #317, available at <a href="https://listingcenter.nasdaq.com/Material_search.aspx?materials=317&mcd=LQ&criteria=2&cid=120%2C1%2C145%2C108%2C157%2C14%2C22%2C126%2C142%2C29%2C107%2C34%2C37%2C38%2C45%2C16%2C110%2C52%2C71%2C156%2C69%0A%0A">https://listingcenter.nasdaq.com/Material_search.aspx?materials=317&mcd=LQ&criteria=2&cid=120%2C1%2C145%2C108%2C157%2C14%2C22%2C126%2C142%2C29%2C107%2C34%2C37%2C38%2C45%2C16%2C110%2C52%2C71%2C156%2C69%0A%0A</a>. Nasdaq states that these
announcements are published as Equity Corporate Action Alerts on
<a href="https://www.nasdaqtrader.com/">https://www.nasdaqtrader.com/</a> (the ``Nasdaq Trader website'') on the
day prior to the reverse stock split. See Notice, supra note 3, at
51377, n.7. See also infra note 12.
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Accordingly, Nasdaq proposes to amend its rules to require a
company conducting a reverse stock split to notify Nasdaq about certain
details of the reverse stock split no later than 12 p.m. ET five
business days prior to the anticipated market effective date, and to
expressly require in its rules a company to make public disclosure
about the reverse stock split at least two business days (no later than
12:00 p.m. ET) prior to the anticipated market effective date.\9\
Specifically, Nasdaq proposes to add new Rules 5250(b)(4), 5250(e)(7),
and IM-5250-3, as discussed in more detail below, as well as update the
information that a company must disclose about a reverse stock split to
the Exchange on the Company Event Notification Form.\10\ Nasdaq also
proposes to amend Rule 5250(b)(1) concerning disclosure of material
information to specify that a company should refer to Rules 5250(b)(4)
and 5250(e)(7) for the disclosure and notification requirements related
to reverse stock splits.\11\
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\9\ For example, Nasdaq states that if a company desires to
effect a reverse stock split with a market effective date of Monday,
July 24, the company would have to provide Nasdaq with a draft of
the disclosure required by proposed Nasdaq Rule 5250(b)(4) and a
complete Company Event Notification Form by 12:00 p.m. ET on Monday,
July 17, and provide the public disclosure by 12:00 p.m. ET by
Thursday, July 20 (assuming there are no holidays during these
dates). See id. at 51376, n.5.
\10\ Nasdaq also proposes to delete the existing reference to a
reverse stock split in Nasdaq Rule 5005(a)(44) that currently
defines a ``Substitution Listing Event'' to include a reverse stock
split. See supra note 6 and accompanying text.
\11\ Nasdaq also proposes clarifying edits in Nasdaq Rule
5250(b)(1) to specify that the time deadlines refer to Eastern Time.
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Proposed Nasdaq Rule 5250(b)(4) will specify that a company must
provide public notice about a reverse stock split using a Regulation FD
compliant method no later than 12:00 p.m. ET at least two business days
prior to the proposed market effective date.\12\ In addition, the
company shall, prior to the release of this information, provide notice
of such disclosure to Nasdaq's MarketWatch Department, at least ten
minutes prior to public announcement if the public release of the
material information is made between 7:00 a.m. to 8:00 p.m. ET.\13\ If
the public release of this information is made outside the hours of
7:00 a.m. to 8:00 p.m. ET, Nasdaq companies must notify MarketWatch of
the material information prior to 6:50 a.m. ET.\14\ The prior notice of
this disclosure must be made to the MarketWatch Department through the
electronic disclosure submission system available at <a href="https://www.nasdaq.net">https://www.nasdaq.net</a>, except in emergency situations, when notification may
instead be provided by telephone or facsimile.\15\
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\12\ Currently, the Nasdaq Trader website announcement and the
company's press release are published the day prior to a reverse
split, and includes material information such as the CUSIP number
and split ratio. Nasdaq states that if a market participant
inadvertently misses the announcement, they may continue to accept
orders at the pre-split price, rather than the post-split adjusted
price, which could lead to volatility in the stock price and trading
inaccurate share amounts. See id. at 51378. Accordingly, proposed
Nasdaq Rule 5250(b)(4) would provide market participants with at
least one additional business day to review the company's public
disclosure about the reverse stock split and update their systems.
See id.
\13\ See proposed Nasdaq Rule 5250(b)(4). The timing for
notifying Nasdaq about disclosure of material news before the public
announcement of a reverse stock split in the proposed rule mirrors
the timing for notifying Nasdaq's MarketWatch Department about the
disclosure of other material news in current Nasdaq Rule 5250(b)(1).
\14\ See id.
\15\ See id. See also IM-5250-1, which states that examples of
an emergency situation include: lack of computer or internet access;
technical problems on either the company or Nasdaq system or an
incompatibility between those systems; and a material development
such that no draft disclosure document exists, but immediate
notification to MarketWatch is important based on the material
event.
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Proposed Nasdaq Rule 5250(e)(7) will specify that, for a reverse
stock split, the company must notify Nasdaq by submitting a complete
Company Event Notification Form \16\ no later than 12:00
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p.m. ET five business days prior to the proposed market effective date.
The submission must include all information required by the form and a
draft of the disclosure required by proposed Nasdaq Rule
5250(b)(4).\17\ Nasdaq will not process a reverse stock split unless
the requirements set forth in proposed Rules 5250(b)(4) and 5250(e)(7)
have been timely satisfied.\18\ Additionally, if a company takes legal
action to effect a reverse stock split notwithstanding its failure to
timely satisfy these requirements, or provides incomplete or inaccurate
information about the timing or ratio of the reverse stock split in its
public disclosure,\19\ Nasdaq will halt the stock in accordance with
the procedure set forth in Nasdaq Equity 4, Rule 4120, that provides
Nasdaq with the authority to halt trading to permit the dissemination
of material news.\20\
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\16\ Nasdaq filed the text of the proposed Company Event
Notification Form (``Form'') as Exhibit 3 to Nasdaq's rule filing.
See Notice, supra note 3, at 51377, n.9. The proposed Company Event
Notification Form to be used for reverse mergers is being modified,
in conjunction with the rule changes being approved in this order,
to require a company to provide additional information to Nasdaq on
the reverse merger than is currently required in the Company Event
Notification Form. See Exhibit 3 to Nasdaq's rule filing. The Form
will indicate the requirements for the company's notification to the
Exchange and public under the newly adopted rules herein as well as
require the company to provide information including: (1) split
ratio; (2) new CUSIP number; (3) dates of board approval,
shareholder approval, and DTC eligibility; and (4) the effective
date of the reverse stock split.
\17\ See proposed Nasdaq Rule 5250(e)(7).
\18\ See id.
\19\ For example, Nasdaq states that it will not process a
proposed reverse stock split if the Company Event Notification Form
does not include the new CUSIP number or a split ratio if the press
release contains a split ratio or market effective date that is
inconsistent with the draft submission previously provided to
Nasdaq. See Notice, supra note 3, at 51377, n.12.
\20\ See proposed Nasdaq Rule 4120(a)(1) and 5250(e)(7). Nasdaq
has submitted a separate rule filing to adopt a new regulatory halt
procedure specific to the pre-market trading and opening of a
Nasdaq-listed security undergoing a reverse stock split. See
Securities Exchange Act Release No. 98489 (September 22, 2023), 88
FR 66913 (September 28, 2023) (Notice of Filing of Proposed Rule
Change to Amend Rule 4120 and Rule 4753).
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Proposed Nasdaq IM-5250-3 repeats the requirements of both proposed
Nasdaq Rules 5250(b)(4) and (e)(7). According to Nasdaq this will
provide issuers and market participants with additional transparency by
having all information related to the reverse split process in one
location in the Nasdaq rulebook.\21\
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\21\ See id. at 51377.
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Nasdaq believes the proposed amendments will provide additional
transparency and clarity to companies and market participants by
specifying the notification and disclosure requirements related to
reverse stock splits.\22\ Nasdaq states that the requirement for
companies to submit a completed Company Event Notification Form no
later than 12:00 p.m. ET five business days prior to the market
effective date will help ensure that Nasdaq has timely and complete
information to process the reverse stock split prior to the effective
date.\23\ Nasdaq also states that by shortening the deadline for the
notification from 15 calendar days to five business days, Nasdaq
believes that companies will be able to provide complete information in
a single submission of the form, which they often cannot do today.\24\
As such, Nasdaq states the shorter time frame will simplify a company's
ability to submit a completed Company Event Notification Form because
all relevant information can be provided in one submission closer to
the market effective date and thereby improve Nasdaq's processing of
the forms and reduce the possibility of errors to the forms.\25\
Additionally, Nasdaq states the requirement under proposed Nasdaq Rule
5250(e)(7) for companies to submit a draft of the Regulation FD
disclosure required by proposed Rule 5250(b)(4) will help ensure that
the information disseminated to the market by the company aligns with
Nasdaq's announcement, including the split ratio and market effective
date.\26\ Nasdaq also states that it would publish an announcement
through the Nasdaq Trader website one and two business days prior to
the market effective date.\27\ Furthermore, Nasdaq states that the
requirement under proposed Nasdaq Rule 5250(b)(4) for a company to make
public disclosure about a reverse stock split no later than 12:00 p.m.
ET two business days prior to the market effective date will help
ensure that sufficient notice is provided to market participants,
thereby allowing them to process the event in their systems.\28\
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\22\ See id.
\23\ See id.
\24\ See id. For example, Nasdaq states that currently some
companies may submit a form without CUSIP information, and then will
email the CUSIP information to Nasdaq a few days later. See id.
Additionally, some companies may not have received confirmation of
DTC eligibility, and receive it closer to the market effective date
of the reverse stock split. See id. Nasdaq also indicated that where
a company is conducting a reverse stock split to demonstrate
compliance with the minimum $1 bid price requirement, as many
companies are doing to remain on Nasdaq's Capital Market tier, as
described above in note 5, supra, the company may need to modify the
ratio of the reverse stock split after providing initial notice due
to changes in market conditions and the company's stock price. See
id.
\25\ See id. Nasdaq represents that the five business day
timeframe still provides sufficient time for Nasdaq to process the
notification. See id. at 51377, n.13.
\26\ See id. at 51377.
\27\ See id. at 51378. Nasdaq states that a company may publish
a press release earlier than two business days prior to the market
effective date of the reverse stock split. See id. at 51377, n. 15.
However, Nasdaq states that it will only publish an announcement
through the Nasdaq Trader website one and two business days prior to
the reverse stock split. See id. As an example, Nasdaq states that
if a company publishes a press release on Monday announcing a
reverse stock split with a market effective date on Friday, Nasdaq
will only publish an announcement through the Nasdaq Trader website
on Wednesday and Thursday. See id.
\28\ See id. See also supra note 12.
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III. Discussion and Commission Findings
After careful review, 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.\29\ In particular, the Commission finds that the proposed
rule change is consistent with section 6(b)(5) of the Act,\30\ which
requires, among other things, that a national securities exchange have
rules designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
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\29\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\30\ 15 U.S.C. 78f(b)(5).
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As noted above, current Nasdaq Rule 5250(b)(1) requires a company
to make ``prompt disclosure'' of ``any material information that would
reasonably be expected to affect the value of its securities or
influence investors' decisions,'' which Nasdaq interprets to include
details on reverse stock splits.\31\ In light of recent increased
volume in reverse stock split activity, Nasdaq proposes to expressly
set forth new notification and disclosure requirements for reverse
stock splits in Nasdaq Rules 5250(b)(4), 5250(e)(7), and IM-5250-3.\32\
The Exchange's proposal is reasonably designed to address this recent
market activity, including for companies that are listed on the Nasdaq
Capital Market tier, by providing additional transparency of reverse
stock splits to investors through public disclosure of material
information about such splits,\33\ thus allowing them to better manage
investment decisions.
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\31\ See supra notes 7 and 8.
\32\ See supra notes 10 and 11 and accompanying text.
\33\ See supra note 16.
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Further, the Exchange has represented that the requirement for
companies to
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submit a completed Company Event Notification Form no later than 12:00
p.m. ET five business days prior to the market effective date will help
ensure that Nasdaq has timely, complete, and accurate information to
process the reverse stock split prior to the effective date.\34\ While
Nasdaq currently is required to receive notification and certain
information about a reverse stock split no later than 15 calendar days
before it is scheduled to occur, Nasdaq has represented in its proposal
that this longer time frame creates issues because some of the terms of
the reverse stock split may not be set or available at that time or may
change before the reverse stock split is to occur. As Nasdaq has
stated, shortening the timeframe for notifying the Exchange about a
reverse stock split to five business days should help to reduce the
possibility of errors and allow companies to provide more complete and
accurate information about a reverse stock split in a single submission
to Nasdaq. This can also inure to the benefit of investors by
ultimately providing the marketplace with improved and timely
information about a reverse stock split.
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\34\ See supra note 23.
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The Commission also believes that the other changes in proposed
Nasdaq Rule 5250(e)(7) and to the Company Notification Form appear to
be reasonable additions to address Nasdaq's and market participants'
concerns about having adequate, accurate, and complete information in a
timely manner about reverse stock splits. As described above, these
changes include, among others, requiring companies to submit a draft of
its public disclosure of the reverse stock split no later than 12 p.m.
ET five business days prior to the market effective date so that the
Exchange can ensure the disclosure aligns with the announcement Nasdaq
will be making, including on the split ratio and effective date of the
reverse split. In addition, as described above, new Nasdaq Rule
5250(e)(7) will specifically indicate that in certain circumstances
such as when a company takes action to effect a reverse stock split but
has failed to satisfy the rule's requirements or a company provides
incomplete or inaccurate information about the timing or ratio of the
reverse stock split in its public disclosure, Nasdaq will halt the
trading in the stock in accordance with its provisions on material news
halts in Equity Rule 4, Rule 4120(a)(1).
The proposal will also provide the investing public and other
market participants with at least one additional business day of public
notice to help reduce the risk that investors and brokers inadvertently
miss the public announcement of the reverse stock split or fail to
process the event in their systems, helping to maintain fair and
orderly markets, and protecting investors and the public interest.\35\
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\35\ See supra note 12 (noting concerns about market volatility
in stock prices if a market participant misses the current one
business day announcement and continues to accept orders at pre-
split prices and trading inaccurate share amounts). The Exchange
also state that it believes the changes to both the notification and
disclosure requirements should help to address these concerns about
trading volatility and potential price mistakes. See Notice, supra
note 3, at 51378. See also proposed Nasdaq Rule 5250(b)(4).
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The Commission also finds that the other changes in proposed Nasdaq
Rule 5250(b)(1) and the addition of Nasdaq Rule 5250(b)(4) and IM-5250-
3 will enhance the transparency of the reverse stock split disclosure
process to issuers and investors. Finally, the Commission notes that
the two comment letters received on the proposal were supportive.\36\
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\36\ See Virtu Letter, supra note 3 (stating that, among other
things, (i) shortening the notice requirement to Nasdaq from 15
calendar days to five business days before the planned reverse stock
split would ``provide issuers with additional time to obtain more
complete data and thorough information before reporting the planned
corporate action to Nasdaq,'' and ``result in Nasdaq having more
complete information in advance of the planned reverse split date to
ensure that all of the technical requirements have been satisfied'';
and (ii) increasing the public notice requirement to two business
days ``will enable market participants to plan more effectively for
a reverse stock split, which will contribute to the maintenance of
fair, orderly, and efficient markets''); Robinhood Letter, supra
note 3 (expressing general support for the proposal and, in
particular, the requirement to increase the public notice
requirement to two business days).
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For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with section 6(b)(5) of the Act \37\
and the rules and regulations thereunder applicable to a national
securities exchange.
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\37\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\38\ that the proposed rule change (SR-NASDAQ-2023-025), be, and
hereby is, approved.
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\38\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-24522 Filed 11-6-23; 8:45 am]
BILLING CODE 8011-01-P
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