Nasdaq Proposed Rule Changes To Its Discretionary Listing And Continued Listing Standards

On June 2, 2020, the Nasdaq Stock Market LLC filed a proposed rule change with the SEC to amend Rule IM-5101-1. The rule provides Nasdaq authority to deny or continue listing to a company but rules out certain factors. The proposed rule change will establish NASDAQ’s position related to quality audits’ importance by enhancing discretionary authority and additional stringent measures to an applicant based on:

  • The company’s auditor
  • If the company’s primary business jurisdiction is in a “restrictive market.”

“Restrictive Market” refers to a country having secrecy laws, blocking statutes, national security laws, or other laws or regulations that restrict access to information by the U.S. company regulators. This definition applies to Belgium, France, China, and Hong Kong (to the extent their audit clients have operations in mainland China). Geographic locations of the following five criteria may be considered by the NASDAQ to determine if a company’s administration is under the jurisdiction of a Restrictive Market:

  • Principal business segments, operations, or assets.
  • Board and shareholders’ meetings.
  • Headquarters or principal executive offices.
  • Senior management and employees; and
  • Books and records.

Nasdaq’s filing came as an effort to make listings adhere to higher standards for the companies based in China following the SEC’s public statement on April 21, 2020. A joint statement issued by the SEC Chairman Jay Clayton, PCAOB chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman, and SEC Division of Investment Management Director Dalia Blass clearly warned about the risks of investing in emerging markets, especially China, including companies from those markets that are accessing the U.S. capital markets.

Under federal securities laws and Nasdaq filing requirements, the company’s financial reports must be audited by an independent auditor, who is under the supervision of both the SEC and PCAOB. In case of non-compliance, the audited public company must revise and refile its financial statements or reassess the effectiveness of its internal control over financial reporting, which also improves future audit quality.

The proposed rule change would add a new paragraph (b) to IM-5101-1 detailing factors that Nasdaq will consider:

  • PCAOB inspection on the auditor
  • Quality control and deficiencies of the auditor after PCAOB inspection
  • If the auditor has adequately qualified personnel in the office with expertise in U.S. GAAP, GAAS, or IFRS
  • Whether the auditor is conducting adequate training for auditing personnel
  • For non-U.S. auditors, whether the auditor is part of a global network and updated on standard technologies, tools, methodologies, training, and quality assurance monitoring
  • Whether the auditor can demonstrate to Nasdaq sufficient resources, geographic reach, or experience related to the issuing company’s audit.

An auditor may not have to meet every criterion mentioned above. In circumstances where Nasdaq is concerned about the offering’s quality, it will exercise discretionary power to impose additional stringent standards that may include:

  • Higher equity, assets, earnings, or liquidity measures
  • An offering must be completed on a firm commitment basis (as opposed to best efforts)
  • Lockups for officers, directors, or other insiders
  • Higher float percentage or market value of unrestricted publicly held shares; or
  • Higher average OTC trading volume before an uplisting.

To determine if an individual (officer, director, Substantial Shareholder (as defined in Rule 5635(e)(3)), or consultant to the company) with a history of regulatory misconduct is associated with the issuing Company, Nasdaq will consider a variety of factors, as listed here. To know about NASDAQ’s listing requirements, click here

Colonial Stock Transfer can help provide SEC registered transfer agent services for your IPO as well as help you with your NASDAQ application. To speak with a professional today or learn more, please contact us.

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