Nasdaq's Efforts to Remove Penny Stocks in a Move Towards Stricter Regulations

Tightening Regulations to Curb Penny Stocks and Enhance Market Integrity

The Nasdaq stock exchange is taking significant steps to rid itself of companies whose shares trade for less than $1, a move driven by concerns over the increasing number of risky penny stocks on its platform. Nasdaq recently proposed rule changes aimed at expediting the delisting process for such companies. These changes come in response to criticism that the exchange has become a haven for high-risk, low-value stocks that are often associated with market manipulation schemes.

One of the key examples prompting this change is Bit Brother, a small Chinese blockchain company. Despite facing severe financial difficulties, Bit Brother managed to stay listed on Nasdaq by performing three reverse stock splits since 2020. These splits temporarily boosted its share price above $1, which is the minimum required to remain listed on the exchange. However, the company's stock price plummeted by over 99% after accounting for these splits. Bit Brother's volatile trading, fueled by social media and retail investor interest, eventually led to its delisting in March. This situation highlighted the need for Nasdaq to address the growing issue of penny stocks on its platform.

Virtu Financial, an electronic-trading firm, has been vocal in its criticism of Nasdaq’s handling of these small, high-risk companies. In a petition to the Securities and Exchange Commission (SEC) in July, Virtu called for stricter rules to limit reverse stock splits and to accelerate the delisting of companies whose shares fall below $1. Currently, Nasdaq allows companies that fall below this threshold multiple opportunities to regain compliance, which can result in a company remaining listed for over a year despite its low share price.

Under existing Nasdaq rules, if a company’s stock closes below $1 for 30 consecutive trading days, it is deemed noncompliant. The company is then given a 180-day grace period to raise its share price above $1. If the company fails to do so, it can request an additional 180-day extension. Even after this second grace period, the company can appeal the delisting decision to a Nasdaq hearings panel, which further delays the delisting process.

On the day Nasdaq proposed its new rules, there were 509 stocks trading below $1 on U.S. exchanges, with 421 of them listed on Nasdaq. This is a significant increase compared to early 2021, when fewer than a dozen stocks were trading below $1.

The new rules proposed by Nasdaq aim to address these issues. The first rule change would prevent companies from delaying their delisting by appealing to the Nasdaq hearings panel. Instead, their shares would be immediately moved to the over-the-counter (OTC) market while they await the outcome of their appeal. This change effectively limits the time a company can remain listed

on Nasdaq if its share price stays below $1 to roughly one year.

The second proposed rule targets companies that have recently conducted reverse stock splits. If a company’s share price falls below $1 within a year after a reverse split, Nasdaq would immediately issue a delisting notice. While the company could still appeal and stay listed for an additional 180 days, the process would be faster and more decisive than before.

These proposed changes indicate Nasdaq’s commitment to tightening its regulations and maintaining the integrity of its listings. While the rules may not go as far as some critics like Virtu Financial have demanded, they represent a significant step towards addressing the problem of penny stocks on the exchange.