Nasdaq Tightens Grip on Penny Stocks: New Rules Could Fast-Track Delisting of Low-Priced Companies

Nasdaq has announced plans to tighten its regulations regarding low-priced stocks, aiming to expedite the delisting process for companies that do not comply with its standards. According to a document published on its website last Thursday (August 8), Nasdaq is proposing rule changes that would streamline the process for removing "penny stocks" from its exchange.

Under the current rules, Nasdaq requires that stocks listed on its exchange maintain a closing price above $1. When a stock closes below $1 for 30 consecutive trading days, it is classified as a penny stock and is considered non-compliant with listing standards. Nasdaq then issues a compliance notice, giving the company up to 180 days to regain compliance by reaching a closing price of at least $1 for ten consecutive days. If the company fails to do so, it may apply for a second 180-day extension, provided some conditions are met.

If the proposed changes are approved, the process will become stricter. First, any stock that remains below $1 for 360 consecutive days will be automatically suspended from trading on Nasdaq, even if the company is in the process of appealing. This effectively imposes a non-negotiable timeframe for compliance.

Second, if a company resorts to a reverse stock split to lift its stock price above $1 but then falls below that threshold again within a year, Nasdaq will immediately issue a delisting notice. The company can still appeal the decision and maintain its listing for an additional 180 days during the appeal process.

Nasdaq has reasoned these changes by pointing out that companies frequently undertaking reverse stock splits may be experiencing fundamental financial or operational issues, rendering them unsuitable for the Nasdaq marketplace and posing a risk to investors.

These proposed amendments are awaiting approval from the U.S. Securities and Exchange Commission (SEC) before they can be enacted.

In essence, these rule changes indicate that Nasdaq is aiming to elevate the quality standards of its listed stocks, accelerating the removal of companies that fail to sustain a healthy stock price. This move could significantly impact companies like Chinese firms listed on the exchange. Many of these firms often pursue U.S. listings to avoid certain IPO-related risks and pressures found in other markets. However, under the new rules, these low-priced stocks face a higher chance of quick delisting if they cannot demonstrate strong and consistent trading activity.

In response, venture capital and private equity firms that back these companies may reconsider their strategies, potentially favoring listings on more lenient exchanges such as those in Hong Kong.

Currently, 27 Chinese companies have conducted initial public offerings (IPOs) in the U.S. this year, with 22 listed on Nasdaq. However, most have raised modest sums, frequently less than $10 million, resulting in lower trading volumes and higher risks of falling below the $1 threshold.

Should these companies' stock prices decline and remain low, they could face rapid delisting under the new regulations. Notably, sectors like traditional manufacturing, financial technology, and certain internet companies are more vulnerable due to their smaller market capitalizations and heavy regulatory scrutiny.

As this regulatory change unfolds, Nasdaq is likely to intensify its message: only companies with sustainable stock prices and active trading volumes are welcome, solidifying its reputation as a marketplace for robust and reliable investments.