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Does A New Nasdaq Listing-Proposal Make Any Sense?

News

On November 13, The Nasdaq stock market announced that it was proposing stricter listing standards. The move follows embarrassing scandals that involved penny stocks.

Background

This year, Nasdaq has dropped several stocks after controversies over the legitimacy of the companies and whether stock prices had been subject to manipulation. The most notorious case involved Comparator Systems, whereby stock rose to a market value of more than $1 billion before trading was halted. Officials later charged that the company's accounting was faulty.

Comparator Systems, the Newport Beach-based company, announced on May 3 that it is developing a system that can verify fingerprints. Its stock, which was trading at 6 cents before the announcement, shot up to $1 on May 6, and nearly $2 May 7, before closing at around 87 cents on enormous volume of 175 million, shares. Nasdaq suspended trading in the stock on May 9.

Analysis

New Requirement:
For currently listed: The rules, which require approval by the Nasdaq board, would bar any listed company with a share price of less than $1 from Nasdaq’s "small capitalization market," and would require that new listings have been operating for at least one year. Companies already traded would be dropped if they have net tangible assets of less than $2 million.

New listing: To get listed on the Nasdaq small capitalization market, a company would need to meet the following requirements: shares trading for at least $4, up from $3 now; would need to have at least $5 million in shares in public hands, up from $1 million now; and would also need at least $4 million in net tangible assets.

Consequences
The move could cause hundreds of companies to be dropped from its listings. These companies, however, could still be traded in the over-the-counter (OTC) market, but on what is known as the "bulletin board." Such quotes are not published in newspapers, and thus, the company would not be as attractive for investors.

 Nasdaq said that 394 companies, or 30 percent, would have to leave the small cap market. Those companies have a combined market capitalization of $3.9 billion, or 11 percent of the total for the market.

What can the companies do?
Some companies might seek listings on regional stock exchanges such as Pacific Stock Exchange (PSE), and Philadelphia Exchange.

To meet the $1 trading price, some companies might resort to a "reverse split," whereby a company combines more than one share together. Thus, if a company with, say, 1,000 shares outstanding and trading at $.75, a 2-for-1 split would result in the company having 500 shares outstanding with each share worth $1.5 (= original price of $.75 x 2 ).

By Alex Tajirian