Proposed Changes in Penny Stock Delisting Rules: Proactive Steps Needed to Avoid Disruptions

On August 8, 2024, the Nasdaq Stock Market LLC (“Nasdaq”) submitted a proposal to amend its rules regarding penny stocks (i.e., stocks trading below a $1.00 minimum bid price) to make it easier for Nasdaq to delist them. Penny stock issuers are under increasing scrutiny, and the rule proposal would greatly facilitate Nasdaq’s ability to quickly delist such companies.

Under the proposed rule changes, companies that fail to maintain a stock price above $1.00 for more than 360 days would face an immediate trading suspension, even if they appeal Nasdaq’s decision and are awaiting final determination. Furthermore, companies that have conducted a reverse stock split of any magnitude within the past year would be subject to immediate delisting upon falling below the $1.00 minimum bid price.

It is highly likely that the U.S. Securities and Exchange Commission (SEC) will approve Nasdaq’s proposal. Once published in the Federal Register (which has not occurred as of the time of this publication), the SEC will begin accepting public comments, after which it will decide to approve or reject the Nasdaq proposal within 45 to 90 days.

Companies delisted from Nasdaq are generally relegated to trading on OTC markets. The specific OTC market depends on whether the company continues to file periodic reports and financial statements with the SEC. OTC markets typically have lower liquidity, are more volatile, and offer less visibility, often being perceived as a gray area in the capital markets that carries significant risk. Companies relegated to OTC markets usually cannot engage in traditional capital-raising activities without first securing a successful uplisting back with Nasdaq or the New York Stock Exchange, which generally involves a new listing application coupled with an underwritten offering.

In addition, delisted companies sometimes may cease reporting with the SEC without going through a formal “deregistration” process, which may expose these companies to shareholder litigation and even SEC enforcement. In particular, the SEC from time to time brings actions to revoke registration from companies that fail to comply with their ongoing reporting obligations, which may affect some delisted companies. The SEC also may impose monetary fines against these companies.

Involuntary delisting can lead to significant market disruptions, increased volatility, reduced access to capital, operational challenges, and damage to investor relations and market reputation. As of the date of the proposed rule change, there are over 400 Nasdaq-listed penny stock companies, of which nearly 50 were based in China. The ongoing geopolitical tensions between China and the US may further compound the challenges faced by China-based penny stock companies listed on Nasdaq. Therefore, these companies—or any company at risk of falling into penny stock status—should proactively consider strategic alternatives, such as a privatization, to avoid being quickly forced into delisting.

MoFo has extensive experience advising clients on privatization and other complex transactions involving U.S.-listed companies with an Asia-Pacific nexus. We regularly assist companies in evaluating their options and developing strategies in response to regulatory changes. You may read more about our experience at: Coming Home – Overview of Going Private Transactions of U.S.-Listed Chinese Companies.