[Federal Register Volume 77, Number 13 (Friday, January 20, 2012)]
[Notices]
[Pages 3021-3024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-1045]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66159; File No. SR-NASDAQ-2012-002]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt an Alternative to the
$4 Initial Listing Bid Price Requirement for the Nasdaq Capital Market
of Either $2 or $3, if Certain Other Listing Requirements Are Met
January 13, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 3, 2012, The NASDAQ Stock Market LLC (``Nasdaq'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
prepared by Nasdaq. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to adopt an alternative to the $4 initial listing
bid price requirement for the Nasdaq Capital Market. The text of the
proposed rule change is available on the Nasdaq's Web site at http://www.nasdaq.cchwallstreet.com, at Nasdaq's principal office, and at the
Commission's Public Reference Room. Nasdaq will implement the proposed
rule change upon approval.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq proposes to adopt an alternative to the minimum $4 price
requirement for companies seeking to list on the Capital Market which
meet the express exclusion from the definition of a ``penny stock''
contained in Exchange Act Rule 3a51-1(g).\3\
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\3\ 17 CFR 240.3a51-1(g).
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Nasdaq is seeking to make this change to enhance the competition
among exchanges for companies with securities priced between $2 and $4.
While Section 11A of the Act \4\ reflects a Congressional finding that
it ``is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure * *
* fair competition * * * among exchange markets,'' currently the only
exchange listing alternative available to these companies is NYSE Amex,
which has listing standards permitting the listing of companies at
either $2 or $3.\5\ Nasdaq is unable to adopt an identical requirement
for the Capital Market because of changes the Commission made to the
Penny Stock
[[Page 3022]]
Rules in 2005,\6\ which would treat securities listed on the Capital
Market as ``penny stocks'' if Nasdaq adopted the identical requirement.
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\4\ 15 U.S.C. 78k-1.
\5\ Section 102(b) of the NYSE Amex Company Guide.
\6\ Securities Exchange Act Release No. 51983 (July 7, 2005) 70
FR 40614 (July 13, 2005).
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A number of companies have indicated a preference to initially list
on the Capital Market instead of NYSE Amex and have expressed
frustration at their inability to do so without reverse splitting their
stock.\7\ Nasdaq has previously requested that the Commission modify
its rules to eliminate this arbitrary regulatory disparity. In fact, as
early as 2004, Nasdaq noted that the then proposed changes to the penny
stock rules--which created a ``grandfather'' for Amex stocks and which
were ultimately adopted by the Commission--would memorialize an unfair
competitive advantage for Amex that is not available to other
exchanges.\8\ The Commission rejected Nasdaq's call for a uniform
approach to all exchanges.\9\
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\7\ Some companies have indicated that they would not consider a
reverse stock split unless there was an underlying business
rationale to support it. Other companies are unable to reverse split
their stock and maintain qualification with the public float
requirement for listing.
\8\ See Comment of Edward S. Knight, Nasdaq (March 18, 2004)
regarding Proposed Amendments to the Penny Stock Rules, Securities
Exchange Act Release No. 49037 (January 8, 2004), 69 FR 2531
(January 16, 2004) (available at http://www.sec.gov/rules/proposed/s70204/s70704-5.pdf).
\9\ Securities Exchange Act Release No. 51983, supra. In
rejecting Nasdaq's comment, the Commission stated its belief that
the rule would maintain the status quo. This conclusion was
incorrect, however, as the status quo would have permitted Nasdaq to
maintain its penny stock exclusion if it modified its listing
standards to adopt the same requirements as NYSE Amex, whereas the
new Commission rule did not.
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In a petition filed in May 2010, Nasdaq again requested that the
Commission act to eliminate the competitive advantage provided NYSE
Amex by the grandfather provision, including, if it felt appropriate,
by abrogating the NYSE Amex rule and requiring NYSE Amex to adopt the
same minimum $4 initial listing price currently applicable to
Nasdaq.\10\ The Commission has not acted on this request and has not
provided any rationale for its delay.
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\10\ See Request for Rulemaking to Allow the Nasdaq Capital
Market to Adopt Initial Listing Price Requirements Identical to NYSE
Amex, File No. 4-604 (May 25, 2010), available at http://www.sec.gov/rules/petitions/2010/petn4-604.pdf (the ``2010
Petition'').
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The proposed rule change fits within another express exclusion to
the Commission's penny stock definition and would allow a company that
currently meets NYSE Amex's price requirement to instead list on the
Capital Market at the same initial listing price requirement.\11\
However, companies listing on the Capital Market under the proposed $2
or $3 price requirement would also have to satisfy the proposed net
tangible assets or revenue test,\12\ which is not a requirement of the
NYSE Amex rules, but which satisfies the requirements of Rule 3a51-
1(g).\13\ Specifically, as revised, a company would be eligible to list
on the Capital Market if it satisfies all existing listing standards
except for the $4 price requirement. Such a company must instead have a
minimum $3 price if it qualifies under the $5 million equity or
$750,000 net income alternatives \14\ or a minimum $2 price if it
qualifies under the $50 million market value of listed securities
alternative \15\. [sic] In addition, a company qualifying under the
proposed standard must have either: (a) Net tangible assets in excess
of $2 million, if the issuer has been in continuous operation for at
least three years; or (b) net tangible assets in excess of $5 million,
if the issuer has been in continuous operation for less than three
years; or (c) average revenue of at least $6 million for the last three
years. For this purpose, net tangible assets or revenue must be
demonstrated on the Company's most recently filed audited financial
statements, satisfying the requirements of the Commission, and which
are dated less than 15 months prior to the date of listing.\16\
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\11\ All other requirements for listing on the Capital Market
are the same or higher than those of NYSE Amex. Nasdaq included a
table comparing its listing standards with NYSE Amex's as an
attachment to the 2010 Petition. In addition, the Commission
previously concluded that the initial listing standards for common
stock on the Capital Market were substantially similar to those of
NYSE Amex, allowing it to designate Capital Market securities as
``covered securities'' under Section 18 of the 1933 Act, 15 U.S.C.
77r(b). Securities Act Release No. 8791 (April 18, 2007), 72 FR
20410 (April 24, 2007).
\12\ The net tangible asset or revenue requirements would not
apply to a company whose securities satisfy the existing $4 price
requirement.
\13\ 17 CFR 240.3a51-1(g).
\14\ Rules 5505(b)(1) or (b)(3).
\15\ Rule 5505(b)(2).
\16\ Nasdaq notes that under Rule 5210(a)(1), any newly listing
company, including a foreign private issuer, must be registered
under Section 12(b) of the Act, which requires filing audited
financial statements. Nasdaq believes that in all cases those
financial statements must be more recent than 15 months old. See
Rule 3-01 and 3-12, 17 CFR 210.3-01 and 210.3-12, with respect to
domestic companies, and Item 8.A(4) of Form 20-F, with respect to
foreign private issuers. However, the proposed rule adopts the 15
month requirement to assure consistency with the timing requirements
contained in Rule 3a51-1(g).
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Unlike the relief Nasdaq requested in 2004 and 2010, the proposed
rule change will require companies to meet an additional net tangible
assets or revenue test, which NYSE Amex does not require, thus assuring
that securities listed under the proposed rule change would not be
considered ``penny stocks'' under the Act at the time of their listing.
In that regard, Rule 3a51-1 \17\ provides that ``penny stock'' means
any equity security other than securities that meet certain exclusions.
Rule 3a51-1(g) provides an exclusion for a security if its issuer has
either ``[n]et tangible assets (i.e., total assets less intangible
assets and liabilities) in excess of $2,000,000, if the issuer has been
in continuous operation for at least three years, or $5,000,000, if the
issuer has been in continuous operation for less than three years'' or
``[a]verage revenue of at least $6,000,000 for the last three years.''
When the Commission made changes to Rule 3a51-1 concerning exchange-
listed securities, it specifically noted that it did not intend to
foreclose reliance on the other exclusions available in Rule 3a51-1,
including the exclusion available in Rule 3a51-1(g).\18\ Proposed Rule
5505(a)(1)(B) would only permit a company to list with a $2 or $3 price
if it satisfies the net tangible assets or revenue test of Rule 3a51-
1(g) and, as such, securities listing under the proposed rule would not
be penny stocks at the time of their listing.\19\
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\17\ 17 CFR 240.3a51-1.
\18\ Release No. 49037, 69 FR at 2535 (text at footnote 41)
(``In addition, we note that any security that satisfies one of the
other exclusions in Rule 3a51-1 will not be a penny stock even if it
fails to satisfy any of the proposed conditions for reported
securities or for other exchange registered securities discussed
above.'').
\19\ Furthermore, the Commission has already concluded that
companies that satisfy the NYSE Amex listing standards, including
price, are not penny stocks. There is no reason to draw a different
conclusion about these same companies if they were to list instead
on the Nasdaq Capital Market under the proposed standard. See Indep.
Petroleum Ass'n of Am. v. Babbitt, 92 F.3d 1248, 1258 (DC Cir. 1996)
(``An agency must treat similar cases in a similar manner unless it
can provide a legitimate reason for failing to do so.'').
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A company that qualifies for initial listing only under the
proposed requirement could become a ``penny stock'' if it fails the net
tangible assets and revenue tests after listing and does not satisfy
any of the other exclusions from being a penny stock. In order to
assist brokers' and dealers' compliance with the requirements of the
Penny Stock Rules, Nasdaq will monitor companies listed under the
proposed alternative and publish a list of any company that initially
listed under that requirement, which does not then meet the
requirements of Rule 3a51-1(g), described above, or any of the other
exclusions from being a penny stock contained in Rule 3a51-1.\20\
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\20\ Nasdaq believes that the other exclusion most likely to be
implicated would be Rule 3a51-1(d), 17 CFR 240.3a51-1(d), which
provides an exclusion from the definition of a penny stock for a
security with a minimum bid price of $5. Note, however, that if a
company obtains a $4 minimum bid price at a time when it meets all
other initial listing requirements, Nasdaq would no longer consider
the company as having listed under the proposed alternative
standard.
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[[Page 3023]]
Nasdaq notes that the adoption of the proposed rule change should
not alter the Commission's prior designation of securities listed on
the Capital Market as ``covered securities'' under Section 18 of the
Securities Act of 1933.\21\ In 2007, the Commission concluded that
Capital Market securities were covered securities, exempt from State
law registration requirements, because the Capital Market has listing
standards that are substantially similar to the listing standards of
the Nasdaq Global Market, New York Stock Exchange, or NYSE Amex (the
``Named Markets'').\22\ The Commission has held that an exchange's
listing requirements will be considered substantially similar if the
listing standards are ``at least as comprehensive as those of the Named
Markets'' and that if ``listing standards are higher than the Named
Markets, then the Commission still determined that the petitioner's
listing standards are substantially similar to the Named Markets.''
\23\ As described above, following approval of the proposed rule
change, the Capital Market listing requirements for common stock will
continue to be the same as, or higher than, those of NYSE Amex, which
permit the listing of companies at $2 and $3 without the proposed
additional net tangible asset or revenue test. Indeed, all other
requirements for listing on the Capital Market meet or exceed the
requirements for listing on NYSE Amex. The proposed rule change,
therefore, should not disturb the Commission's designation of Capital
Market securities as covered securities.
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\21\ 15 U.S.C. 77r.
\22\ Securities Act Release No. 8791, supra.
\23\ Id., 72 FR at 20411.
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\24\ in general and with
Sections 6(b)(5) and (8) of the Act,\25\ in particular. Section 6(b)(5)
requires, among other things, that a national securities exchange's
rules must be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest. The proposed
rule change would adopt a $2 and $3 initial listing price alternative
for the NASDAQ Capital Market that is substantially similar to the
requirements of NYSE Amex, which the Commission has already determined
is consistent with these requirements.\26\ However, the proposed rule
change would require companies to also satisfy an additional net
tangible asset or revenue test, which is not a requirement of the NYSE
Amex listing requirements and which is consistent with the requirements
for a security to avoid being a ``penny stock'' set forth in Rule 3a51-
1(g).\27\ Nasdaq believes that the proposed price requirement is
sufficient to protect investors and would exercise its discretionary
authority to deny initial listing if Nasdaq was concerned about the
ability of the company to maintain compliance with the continued
listing price or believed there were public interest concerns leading
to the company's low stock price.\28\ Moreover, given that these
companies have an exchange-listing available to them, prohibiting
listing on Nasdaq does not serve to protect investors and Nasdaq
believes that investors would be at least as well protected by having
these companies instead listed on the Capital Market, where they would
be subject to oversight by Nasdaq's regulatory staff.
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\24\ 15 U.S.C. 78f.
\25\ 15 U.S.C. 78f(b)(5) and (8).
\26\ Securities Exchange Act Release No. 53050 (January 3,
2006), 71 FR 1580 (January 10, 2006) (approving the NYSE Amex $2
price requirement). The Commission notes that, prior to the adoption
of the $2 price requirement, the applicable NYSE Amex standard did
not require a minimum market price per share.
\27\ 17 CFR 240.3a51-1(g).
\28\ Nasdaq notes that NYSE Amex does not have a continued
listing price requirement, although NYSE Amex will ``consider
suspending dealings'' in a ``common stock selling for a substantial
period of time at a low price per share.'' NYSE Amex Company Guide
Section 1003(f)(v). As such, companies listing at $2 or $3 on NYSE
Amex could quickly fall to a very low price and nonetheless remain
listed indefinitely. On the other hand, Nasdaq requires a $1 price
for continued listing. Nasdaq Listing Rule 5550(a)(2). See also
Exchange Act Release No. 53050 (January 3, 2006), 71 FR 1580 at 1581
(note 11) (January 10, 2006) (encouraging NYSE Amex to adopt a
minimum price requirement for continued listing while approving SR-
AMEX-2005-114).
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Section 6(b)(8) of the Act requires that the rules of an exchange
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. In addition, Section 11A of the
Act \29\ requires that there be fair competition among exchange markets
to further the public interest and protection of investors. The
Department of Justice recently noted the importance of a competitive
environment for exchange listings.\30\ Nasdaq believes that the
existing situation, whereby NYSE Amex is permitted to list companies
that no other market can, is an unfair burden on competition in
violation of Sections 6(b)(8) and 11A. Since 2008, NYSE Amex listed
approximately 50 companies for which no other market could compete. The
proposed rule change would enhance the competition between exchanges,
and benefit companies and their investors, by providing companies that
today are forced to list on NYSE Amex an alternative exchange listing
venue. As such, the proposed rule change is consistent with Sections
6(b)(8) and 11A.
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\29\ 15 U.S.C. 78k-1.
\30\ See ``NASDAQ OMX Group Inc. and IntercontinentalExchange
Inc. Abandon Their Proposed Acquisition of NYSE Euronext After
Justice Department Threatens Lawsuit'' (May 16, 2011), available at
http://www.justice.gov/atr/public/press_releases/2011/271214.htm.
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Finally, as noted above, the proposed rule change would adopt the
identical initial listing price requirement contained in the NYSE Amex
Company Guide. As such, Nasdaq believes that its listing requirements
would remain substantially similar to those of NYSE Amex, as required
for covered securities under Section 18 of the Securities Act.\31\ In
addition, as noted, the proposed rule change would require that any
company qualifying under this new price alternative also meet the
requirements of Rule 3a51-1(g) \32\ and that these securities therefore
would not be considered ``penny stocks'' under the Act at the time of
their listing. To the extent that a company no longer qualified for the
exclusion under Rule 3a51-1(g), or any of the other exclusions in Rule
3a51-1, Nasdaq would notify the public by including the company in a
list published on Nasdaq's Web site.
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\31\ 15 U.S.C. 77r.
\32\ 17 CFR 240.3a51-1(g).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Instead, the
proposed rule change would enhance the competition between exchanges,
and benefit companies and their investors, by allowing companies that
today are forced to list on NYSE Amex an alternative listing venue.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
[[Page 3024]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2012-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-002. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of Nasdaq. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2012-002 and should
be submitted on or before February 10, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1045 Filed 1-19-12; 8:45 am]
BILLING CODE 8011-01-P