(Dec 12): Nasdaq Inc is changing its rules to allow it to turn down stock listings when it spots red flags, even if applicants meet all of the exchange operator’s requirements.
The effort is a bid to prevent wild market swings and allegations of stock manipulation that have plagued small initial public offering (IPO), many by companies based in Asia.
Under the plan, outlined in a filing with the US Securities and Exchange Commission (SEC) on Friday, Nasdaq could consider where the company is located, whether US investors have legal remedies in those jurisdictions, and if any of the company’s advisers — including auditors, underwriters, and law firms — were involved in other deals where the securities had problematic or unusual trading.
It would also allow Nasdaq to weigh concerns about the integrity of the company’s board, management, significant shareholders or advisers. Current rules don’t allow Nasdaq to deny a listing based on trading patterns or considerations related to the company’s advisers.
“The proposed factors will help provide transparency to situations where Nasdaq believes an applicant’s securities may be more susceptible to manipulation, based on comparable characteristics or the involvement of similar advisors,” Nasdaq said in the filing.
The proposed rule will become effective immediately, according to the filing. The SEC didn’t immediately respond to a request for comment.
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Extreme share-price moves in publicly traded companies with relatively small market capitalisations and thin liquidity have made headlines this year. Regulators and market watchdogs have also raised concerns about bad actors manipulating the market and warned about pump-and-dump schemes.
Regencell Bioscience Holdings Ltd, a Hong Kong-based traditional Chinese medicine company with no sales, soared 46,000% this year through mid-June before retreating. It said in October the Department of Justice was probing trading in its shares. Pheton Holdings Ltd, another tiny Chinese healthcare stock, lost 90% of its market value in a matter of minutes in July.
In September, Nasdaq issued a separate proposal calling for tighter standards that small companies listing on Nasdaq must abide by, and additional requirements for new listings of companies with operations based in China. That proposal is awaiting SEC approval.
The SEC is also zeroing in on unusual trades. Since the end of September, the regulator has suspended trading in a dozen Nasdaq-listed microcaps based in Asia, citing potential share price manipulation. In all but one suspension, the regulator also warned about evidence of fraudsters on social media using scam tactics to inflate stock prices.
Other regulators are also raising questions. In October, the Financial Industry Regulatory Authority said it was probing broker-dealer firms involved in taking small foreign companies public.
A proposed rule change filed under the method Nasdaq used Friday normally doesn’t become operative prior to 30 days after the submission. The SEC can designate a shorter time if taking action is consistent with protecting investors and the public interest, according to the filing.
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