In an economy marked by uncertainty and fluctuating financial and geopolitical conditions, companies with low-price stocks face considerable pressure to maintain their listing status. In 2023, hundreds of these small public companies risked being delisted due to non-compliance with the Nasdaq, Inc. and NYSE American’s listing requirements. These companies failed to maintain a minimum closing bid price per share of $1 for 30 consecutive business days. By December 8, 557 companies listed on these exchanges traded below $1 per share, a significant increase from the fewer than a dozen in early 2021, according to Dow Jones market data.
Out of these companies, 464 were listed on the Nasdaq stock market and faced possible delisting. The majority of these companies belong to the technology sector. Nasdaq and NYSE American argue that non-compliant companies are likely to engage in fraud and stock manipulation, causing losses for shareholders.
A company receives an initial bid price deficiency notification from Nasdaq when it doesn’t meet the specified compliance standards, leading to detrimental consequences. Nasdaq provides a period of 180 days for these companies to maintain a $1 closing bid price for a minimum of ten consecutive days within the specified period and regain compliance. Amid this period, directors often undertake aggressive measures such as reverse stock splits, stock buybacks, increased investor relations, and business combinations in a bid to improve the situation.
A reverse stock split process temporarily increases the company’s share price but reduces the total number of outstanding shares. However, it rarely serves as a lasting solution to the price deficiency, leading to further deficiencies based on the company’s market value. Similarly, the process of stock repurchasing to boost prices becomes complicated due to corporate laws preventing companies from repurchasing shares when their capital is or might become impaired.
Those Nasdaq companies aspiring to address stock price and shareholders’ equity deficiencies through capital raising often encounter a 20% shareholder approval limit. Instead of straight equity, these companies are generally offered high-interest convertible debt that morphs into equity at future market prices at a discount, leading to additional shares and causing serious dilution to existing shareholders.
Companies with a market capitalization less than $75 million are restricted to a one-third public float limit on the number of securities they can sell in the pursuit of attempting stock price elevation. Strategic opportunities are also pursued by these companies, but the onerous requirements of SEC review time and additional professional costs often make the stock-for-stock merger approach impractical.
Even though a company might be eligible for additional 180-day compliance time, Nasdaq can expedite the delisting process and shorten the compliance period for stocks that repeatedly fail to meet the minimum bid price or have undergone one or more reverse stock splits over the prior two years. The Securities and Exchange Commission encourages Nasdaq and other such bodies to find less severe enforcement options for noncompliant companies. Perhaps issuing public reprimands or adding an extra letter to a company’s ticker symbol might be a sufficient deterrent, reserving harsher sanctions for companies with multiple and flagrant listing standard violations.
The author of the Bloomberg Law article, Spencer G. Feldman, a partner at Olshan Frome Wolosky, emphasizes that small public companies with share prices below $1 often lack effective ways to address the likelihood of being delisted, advocating for Nasdaq to weigh less severe enforcement options.