Faced with a surge in risky penny stock companies, Nasdaq has proposed the automatic suspension of companies whose per-share price stays below $1 for a year or whose stock falls below $1 after completing a reverse stock split.
"Based on [our] experience [we’re] proposing [these] two changes to the bid price requirements for listed companies to better protect investors," Nasdaq said in its filing with the SEC.
Penny stock companies are those whose stock trades at $5 or less. They face delisting if their stock drops below $1, but Nasdaq’s rules give them leeway to stay on the exchange for almost two years rather than be delisted, after which they can only be traded in the over-the-counter market.
Companies whose stock persistently trade at these low valuations can pose risk to investors who mistake their listing as a seal of approval from the exchange when in fact they tend to have deep-seated problems.
“The bottom line is that current SEC rules that allow high-risk penny stocks to be listed on major stock exchanges present serious investor protection concerns,” Thomas Merritt, deputy general counsel of Virtu Financial, said in a petition his company filed last month asking the Securities and Exchange Commission to press Nasdaq to get tough with these companies. Virtu provides financial and technical services to brokers and investors.
The number of companies whose stock is struggling at less than $1 per share has exploded in recent years, from just a handful a few years ago to more than 500 today, The Wall Street Journal reported Aug. 8, citing Dow Jones data. The lion’s share of these trade on Nasdaq, whose listing standards are considered more lenient than what the New York Stock Exchange requires.
Risky electric vehicle companies like Faraday Future Intelligent, Mullen Automotive, Polestar and Canoo, for example, are listed on Nasdaq and their stocks have been pounded as they wrestle with big losses, EV, a trade publication, reported. Faraday Future was trading at around 20 cents and Mullen Automotive was trading at around 58 cents on Monday.
Blockchain companies are another at-risk category as companies try to make viable business models out of the new technology. Bit Brother, a Chinese blockchain company, is one of these companies wrestling with a low stock price since 2020, the Journal said in its report.
How Nasdaq approaches these shaky companies under its proposed rules depends on whether or not they completed a reverse stock split to shore up their share price.
If they did, they would be suspended automatically if their stock falls again to under $1. Right now, if a company that split its stock falls again to below $1, it gets 180 days to turn things around before being suspended.
“Nasdaq has observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits,” the stock exchange said. “Nasdaq believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on Nasdaq for investor protection reasons.”
Listed companies initiated almost 500 reverse stock splits last year, and they’re on pace to do that again this year, the Journal said in its report citing S&P data.
If they didn’t conduct a stock split and they fall under $1 for a month, the proposed rules would give them 180 days to turn things around, which could be extended for another 180-day term, after which they would be suspended if their stock stays stuck at that level. Right now, they get the two 180-day terms plus an additional appeals process that can be stretched for what amounts to another 180-day term, or about 520 days total before they’re suspended.
“While we are encouraged by Nasdaq’s efforts here, there remains more room for improvement across all markets,” a Virtu spokesperson told the Journal.
The SEC must approve the proposed rules before they can take effect.
