New Nasdaq and NYSE rules on use of reverse stock splits

Nasdaq and the New York Stock Exchange (NYSE) maintain certain ongoing requirements that listed companies must satisfy in order to maintain their listings, including a US$1.00 minimum share price requirement. Listed companies with securities trading at or around or below this price point often conduct reverse stock splits to maintain compliance with this minimum share price requirement. Reverse stock splits typically increase the share price of a company’s stock, at least initially, by consolidating the company’s outstanding shares at a pre-determined ratio, with stockholders maintaining their respective ownership percentages in the company, subject to elimination of any resulting fractional share entitlements.

In an effort to curtail the excessive use of reverse stock splits to regain compliance with the minimum stock price requirements, particularly by distressed companies that had often resorted to repeatedly effecting a number of successive reverse stock splits over a short period of time to avoid being delisted, both the NYSE and Nasdaq recently promulgated updated rules that limited the ability of companies to utilize such practices to remedy a minimum share price deficiency.

NYSE minimum closing price rules

Under the NYSE’s continued listing requirements, listed companies must maintain an average closing price of US$1.00 per share over a consecutive thirty (30) day trading period. Companies falling into non-compliance with this requirement are afforded a six month cure period to cure this deficiency. In order to regain compliance, the delinquent company must have a closing share price of at least US$1.00 on the last trading day of any calendar month during such six month cure period and an average closing share price of at least US$1.00 over the prior thirty (30) trading days.

NYSE now restricts the use of reverse stock splits

To limit the excessive use of reverse stock splits, the NYSE amended NYSE Section 802.01C of the NYSE Listed Company Manual to restrict the use of reverse stock splits to regain compliance with the minimum share price requirement.

Amended Section 802.01C now provides that a listed company is no longer eligible for a six month cure period to regain compliance with the minimum share price requirement, and the NYSE will immediately begin suspension and delisting procedures if:

• a company has effectuated a reverse stock split within the past year, or
• a company has effectuated one or more reverse stock splits over the past two years with a cumulative ratio of 200 shares or more to one.

Further, listed companies may not effectuate a reverse stock split to regain compliance with the minimum share price requirement if doing so would result in non-compliance with any of the other NYSE continued listing requirements of Section 802.01A.

Nasdaq minimum bid price rules

Similarly, the Nasdaq’s listing rules require listed companies to maintain a minimum bid price of at least US$1.00 per share. If a listed company’s share bid price falls below US$1.00 per share for thirty (30) consecutive business days, Nasdaq will deem the company noncompliant with the Nasdaq continued listing requirements and issue a deficiency notice. 

Companies that receive a deficiency notice for failing to meet Nasdaq’s minimum bid price requirement generally have 180 days to cure the price deficiency. After that first 180-day period, a listed company may be granted an additional 180-day period by notifying Nasdaq of its intent to cure the price deficiency.

If the company failed to regain compliance after the second 180-day period, it could appeal a delisting decision by requesting a review by a Nasdaq hearings panel. Under Nasdaq’s prior listing rules, an appeal would automatically stay a suspension or delisting action up to an additional 180 days, effectively enabling listed companies to be noncompliant with the minimum bid price requirement for up to 540 days.

To cure a deficiency in the minimum bid price requirement, a company’s security must trade at or above US$1.00 for 10 consecutive trading days, unless Nasdaq exercises its discretion to impose a longer period up to 20 days.

Nasdaq now restricts the use of reverse stock splits

In order to curb the excessive use of reverse stock splits to regain compliance with the minimum bid price requirement, Nasdaq amended its Listing Rule 5810(c)(3)(A)(iv) to limit the ability of a listed company to utilize a reverse stock split to regain compliance with the minimum bid price requirement.

• Under the amended Listing Rule, a listed company is not eligible for any cure period to address a deficiency in the minimum bid price requirement if it effected a reverse stock split in the prior year.
• The inability to utilize a cure period under the amended Listed Rule applies even if the listed company was in compliance with the minimum bid price requirement at the time of a reverse stock split effected within the prior year.

Accordingly, Nasdaq listed companies that fall out of compliance with the minimum bid price requirement within one year of having conducted a reverse stock split will be issued a delisting decision rather than being granted any cure period.

• Nasdaq’s amended Listing Rule supplements a prior 2022 Listing Rule change pursuant to which companies that fallout of compliance with the minimum bid price requirement are issued a delisting decision without being granted any cure period if they have effectuated one or more reverse stock splits within a two-year period with a cumulative ratio of 250 shares or more to one. 

Companies that receive a delisting decision, without any cure period, for falling out of compliance with the minimum bid price requirement in these circumstances because they conducted prior reverse stock splits, may still appeal that decision, which will stay the suspension of trading of its securities pending the outcome of the appeal.

• Nasdaq also issued a series of additional rule changes to shorten the period of time listed companies can remain out of compliance with the minimum bid price requirement before trading in their securities is suspended and they are delisted.
• Under new Listing Rule 5815(a)(1)(B)(ii)d, when a company has been given a second 180-day compliance period and does not regain compliance with the price criteria for 10 consecutive business days prior to the end of the second period, a request for a hearing no longer stays the suspension and delisting of its security pending the panel’s decision. Now, after the second 180-day period expires, trading of the company’s security is automatically suspended, and the security will move to the over-the-counter market while the appeal is pending.

Nasdaq amended minimum bid price requirement compliance periods

Previously, if a listed company effectuated a reverse stock split to regain compliance with the minimum bid price requirement and in so doing fell out of compliance with one of the other continued listing requirements, it would be afforded a new cure period for the new deficiency, essentially giving the company additional time to regain compliance.

Under amened Listing Rule 5810(c)(3)(A), if a listed company takes an action such as a reverse stock split to regain compliance with the minimum bid price requirement and that action results in the company falling out of compliance with another listing requirement, the company will be deemed to not have cured and to remain non-compliant with the original minimum bid price requirement until both:

• the new deficiency is cured; and
• the company meets the minimum bid price requirement for at least ten consecutive days.

Nasdaq new notification deadline

Furthermore, Listing Rules 5250(e)(7) and IM-5250-3 were amended to advance the deadline by which a listed company effecting a reverse stock split must submit a Company Event Notification Form to no later than 12:00 PM Eastern Time at least 10 calendar days prior to the proposed market effective date of a reverse stock split.

This amended Listing Rule became effective January 30, 2025. Previously, a Company Event Notification Form was required 5 business days in advance of the proposed market effective date.

The information required on the Company Event Notification Form for a reverse stock split includes:

• the dates of board approval and stockholder approval of the reverse stock split,
• the ratio for the split,
• the new CUSIP number for the post-split stock,
• evidence that the new CUSIP number has been made eligible by The Depository Trust Company (DTC),
• a draft of the public disclosure of the split, which must be issued by 12:00 PM Eastern Time at least 2 business days prior to the reverse stock split’s effective date.

Companies should be aware, however, that DTC will not make a CUSIP eligible unless the company has issued a press release. If a company does not comply with the 10 calendar day notification deadline, Nasdaq will not process a reverse stock split and will halt trading of the company’s stock.

Ultra low price rule

Finally, it should be noted that Listing Rule 5810(c)(3)(A)(iii) which was included in a 2020 Listing Rule change, provides that Nasdaq will issue a delisting determination for a company whose security has a closing price of US$0.10 or less for 10 consecutive business days. In such event, a listed company is ineligible for any cure period, although suspension of trading will be stayed while an appeal is pending.

Considerations

Listed companies with shares trading close to or below US$1.00 per share and contemplating a reverse stock split to regain compliance should be aware of the increased scrutiny by the NYSE and Nasdaq. Companies should take careful note of the new rules when considering actions to avoid being delisted from those exchanges as a result of the trading price of their shares.

• Companies considering a reverse stock split to cure a minimum share price deficiency should seek to effectuate that reverse stock split at a ratio that will avoid the possibility of falling out of compliance with the minimum share price requirements in the short-to-medium time frame following the reverse stock split.
• At the same time, such companies should take steps to ensure that any such reverse stock split does not inadvertently cause non-compliance with another listing requirement.
• Companies with share prices slightly above US$1.00 that are considering a follow-on offering with significant dilution should review their compliance strategies to make sure that they optimize their chances for maintaining compliance with the NYSE and Nasdaq minimum share price requirements.

Nasdaq listed companies considering a reverse stock split to cure a minimum bid price deficiency should begin the process sufficiently in advance of the expiration of any available cure periods due to the potential lag time, additional requirements and increased notice periods.

• Specifically, Nasdaq requires evidence that a new CUSIP number is confirmed eligible by DTC at least ten-calendar-days before the market effective date of a reverse stock split. DTC requires that reverse stock splits be publicly announced prior to making a new CUSIP DTC eligible even though Nasdaq only requires that the reverse stock split be announced two days prior to the effective date of the reverse stock split. DTC will not grant eligibility until after shareholder approval (if required by state law or a company’s organizational documents).
• Nasdaq listed companies should pay close attention to this timeline to ensure any reverse stock split is effective before the end of any final cure period, particularly since companies facing delisting due to noncompliance with minimum share price requirements often implement reverse stock splits only as a last resort near the end of the cure period.