NASDAQ Listing Requirements

One year ago, many Internet companies were talking about secondary offerings, next-stage financing and stock-for-stock acquisitions. Now, with many Internet stocks down 95% or more from their all-time highs, a number of companies are worrying about their shares being delisted from NASDAQ Small Cap.

A few years ago, the types of companies that were delisted cut across a large number of industries. Today, however, many of the companies on the verge of being delisted are the same Internet and technology companies that propelled the NASDAQ Composite up 86% in 1999. In today's market, it is extremely important to understand NASDAQ's listing requirements.

The box below shows both the initial listing and continued listing requirements for the NASDAQ Small Cap.

Initial Listing
Continued Listing

Net Tangible Assets

Market Capitalization

$4 million
$50 million

$2 million
$35 million
Net Income (in latest fiscal year or 2 of last 3 years)
Public Float (shares)
1 million
Market Value of Public Float
$5 million
$1 million
Minimum Bid Price
Market Makers
Shareholders (round lot holders)

Operating History

1 year

Market Capitalization
$50 million
Corporate Governance

If a company does not meet the above criteria, NASDAQ will issue a deficiency notice. Upon receipt of this notice, it is incumbent upon the company to respond to NASDAQ with a reasonable plan that addresses the specific deficiency problem. There are two requirements that have been responsible for most of the listing deficiencies:

  • Net Tangible Assets
  • Share Price

Net Tangible Assets
NASDAQ screens 10-Q and 10-K filings for net tangible asset deficiencies. If a company's filings show a deficiency, you can count on NASDAQ sending a letter within 30 days of the filing. Typically the process goes as follows: 1) NASDAQ sends a letter alerting the company of the deficiency and requesting a response within two weeks, 2) Company responds and outlines a game plan on how it is going to correct the deficiency, 3) NASDAQ sends subsequent letter to the Company which states that unless the deficiency is cleared up by X date, the Company will be delisted. During this process the Company has the opportunity to meet with NASDAQ and seek an exception or an extension. One option for the company is to raise capital in order to satisfy this deficiency. It is typically a three to five month process from the time a company is notified until it is actually delisted.

Share Price
If a company's stock trades below $1.00 for 30 consecutive trading days, NASDAQ will issue a deficiency notice. If the stock continues to trade below $1 for 90 days, the Company risks delisting. During this 90 day period, if the closing bid price is $1 or above for 10 consecutive days, the 90-day clock is restarted.

There are options for companies whose share price is below the minimum bid of $1. For example, the company can affect a reverse stock split. This can be seen as a desperate move because even though the share price would technically meet the requirement, it wouldn't change any fundamental problems the company may have. Therefore the SEC may or may not accept this proposal. Another option, assuming the fundamental business is sound, is to increase the public awareness the company's undervalued share price through an IR/PR campaign. Research coverage can be an extremely significant component in this effort.

According to Scott Peterson, Director of NASDAQ Media Relations, NASDAQ is fair to both the public companies as well as the shareholders. "We go the extra mile for the company and try to work on them to keep their listing standards; we recognize that they value being listed on NASDAQ - but we believe it is also an investor protection issue - if they can't meet the requirements, we will delist them."

If NASDAQ's standards have not been met at the end of the 90-day period, the company has the option of requesting a hearing - oral or written - before a panel of two securities experts (a securities lawyer or accountant) of their choice. If the panel denies the extension, in most cases the Company can appeal and is granted a final review. At this point the Company is either delisted of granted the extension.

The entire delisting process can take as long as six months. Once a company is delisted, it will typically trade on the OTCBB or on the Pink Sheets - clearly the OTCBB is preferable. Trading on the OTCBB requires current SEC filings and a market maker that is willing to make a market. (There are instances when a company qualifies for the OTCBB but still trades on the Pink Sheets because no market makers step up.) There is still a market for the stock so, what exactly is so bad about being delisted? Loosing NASDAQ listing will significantly affect liquidity. Most investors avoid OTC stocks, and with good reason. Additionally, raising capital becomes a significant challenge. In essence you have all the costs and regulations associated with being public and none of the benefits.



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