Nasdaq May Extend Delisting Grace Period
The Nasdaq Stock Market has proposed tripling the time a stock can trade below $1 on its small-cap market before being delisted, a move that could prevent hundreds of companies from being dropped from the second-largest U.S. equity market.
Nasdaq, however, also will reinstate rules early next year requiring all listed companies to maintain a share price of at least $1. The market announced Sept. 27 a three-month moratorium on price and market value listing requirements that was to expire Jan. 2. When it suspended the rule, about 700 Nasdaq companies, mostly technology and Internet firms, were trading at or below $1, according to Bloomberg data. Today, 394 trade at that level.
But Nasdaq said Wednesday that it doesn’t want to force companies trading at that level to have to switch so quickly to thinly traded markets, such as Nasdaq’s OTC Bulletin Board, a loosely regulated electronic quote service, or other, non-Nasdaq markets.
“This is a recognition that sometimes stock prices go down but the company is still a viable investment,” said Junius Peake, professor of finance at the University of Northern Colorado’s business school. “Why should a shareholder be told suddenly, ‘Your stock is going to be kicked off this well-regulated, transparent market onto the [Bulletin Board]’?”
Brokerage analysts usually drop their coverage of delisted companies, and shareholders often have trouble getting timely information on price quotes on delisted stocks.
Under Nasdaq’s current rule, suspended in September, companies whose minimum “bid” price--the amount offered by prospective buyers--remains below $1 a share for 30 consecutive trading days face possible delisting. Once a company has fallen below the minimum bid price for 30 consecutive days, it has 90 calendar days to come back into compliance. Those who fail to do so and are delisted can appeal to Nasdaq, which is supposed to schedule a hearing within 45 days.
On Wednesday, Nasdaq proposed allowing companies whose stocks are trading below $1 a grace period of at least six months on its small-cap market to try to boost the price. Companies would get an additional six months if they meet one of the following requirements: net income of $750,000, stockholder’s equity of $5 million, or total market value of $50 million. So, in many cases, the grace period would be extended to a year from four months.
The Securities and Exchange Commission must approve the proposed rule change.
Nasdaq’s moratorium covered stocks that already were under review for delisting prior to Sept. 27 amid a bear market in technology stocks that caused the Nasdaq composite index to plunge 60% in the previous 12 months. Since Sept. 27, however, the Nasdaq composite has climbed 38%.
Some experts object to the extension of the grace period.
“Nobody likes stocks trading below $1,” said Roy Smith, a finance professor specializing in investment banks at New York University’s business school.
Nasdaq has sought to distance itself from penny stocks, a term for shares valued under $1, which experts say are the most likely to be subject to manipulation.
