
[Federal Register Volume 77, Number 13 (Friday, January 20, 2012)]
[Notices]
[Pages 3021-3024]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1045]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66159; File No. SR-NASDAQ-2012-002]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt an Alternative to the 
$4 Initial Listing Bid Price Requirement for the Nasdaq Capital Market 
of Either $2 or $3, if Certain Other Listing Requirements Are Met

January 13, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 3, 2012, The NASDAQ Stock Market LLC (``Nasdaq'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by Nasdaq. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to adopt an alternative to the $4 initial listing 
bid price requirement for the Nasdaq Capital Market. The text of the 
proposed rule change is available on the Nasdaq's Web site at http://www.nasdaq.cchwallstreet.com, at Nasdaq's principal office, and at the 
Commission's Public Reference Room. Nasdaq will implement the proposed 
rule change upon approval.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq proposes to adopt an alternative to the minimum $4 price 
requirement for companies seeking to list on the Capital Market which 
meet the express exclusion from the definition of a ``penny stock'' 
contained in Exchange Act Rule 3a51-1(g).\3\
---------------------------------------------------------------------------

    \3\ 17 CFR 240.3a51-1(g).
---------------------------------------------------------------------------

    Nasdaq is seeking to make this change to enhance the competition 
among exchanges for companies with securities priced between $2 and $4. 
While Section 11A of the Act \4\ reflects a Congressional finding that 
it ``is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure * * 
* fair competition * * * among exchange markets,'' currently the only 
exchange listing alternative available to these companies is NYSE Amex, 
which has listing standards permitting the listing of companies at 
either $2 or $3.\5\ Nasdaq is unable to adopt an identical requirement 
for the Capital Market because of changes the Commission made to the 
Penny Stock

[[Page 3022]]

Rules in 2005,\6\ which would treat securities listed on the Capital 
Market as ``penny stocks'' if Nasdaq adopted the identical requirement.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78k-1.
    \5\ Section 102(b) of the NYSE Amex Company Guide.
    \6\ Securities Exchange Act Release No. 51983 (July 7, 2005) 70 
FR 40614 (July 13, 2005).
---------------------------------------------------------------------------

    A number of companies have indicated a preference to initially list 
on the Capital Market instead of NYSE Amex and have expressed 
frustration at their inability to do so without reverse splitting their 
stock.\7\ Nasdaq has previously requested that the Commission modify 
its rules to eliminate this arbitrary regulatory disparity. In fact, as 
early as 2004, Nasdaq noted that the then proposed changes to the penny 
stock rules--which created a ``grandfather'' for Amex stocks and which 
were ultimately adopted by the Commission--would memorialize an unfair 
competitive advantage for Amex that is not available to other 
exchanges.\8\ The Commission rejected Nasdaq's call for a uniform 
approach to all exchanges.\9\
---------------------------------------------------------------------------

    \7\ Some companies have indicated that they would not consider a 
reverse stock split unless there was an underlying business 
rationale to support it. Other companies are unable to reverse split 
their stock and maintain qualification with the public float 
requirement for listing.
    \8\ See Comment of Edward S. Knight, Nasdaq (March 18, 2004) 
regarding Proposed Amendments to the Penny Stock Rules, Securities 
Exchange Act Release No. 49037 (January 8, 2004), 69 FR 2531 
(January 16, 2004) (available at http://www.sec.gov/rules/proposed/s70204/s70704-5.pdf).
    \9\ Securities Exchange Act Release No. 51983, supra. In 
rejecting Nasdaq's comment, the Commission stated its belief that 
the rule would maintain the status quo. This conclusion was 
incorrect, however, as the status quo would have permitted Nasdaq to 
maintain its penny stock exclusion if it modified its listing 
standards to adopt the same requirements as NYSE Amex, whereas the 
new Commission rule did not.
---------------------------------------------------------------------------

    In a petition filed in May 2010, Nasdaq again requested that the 
Commission act to eliminate the competitive advantage provided NYSE 
Amex by the grandfather provision, including, if it felt appropriate, 
by abrogating the NYSE Amex rule and requiring NYSE Amex to adopt the 
same minimum $4 initial listing price currently applicable to 
Nasdaq.\10\ The Commission has not acted on this request and has not 
provided any rationale for its delay.
---------------------------------------------------------------------------

    \10\ See Request for Rulemaking to Allow the Nasdaq Capital 
Market to Adopt Initial Listing Price Requirements Identical to NYSE 
Amex, File No. 4-604 (May 25, 2010), available at http://www.sec.gov/rules/petitions/2010/petn4-604.pdf (the ``2010 
Petition'').
---------------------------------------------------------------------------

    The proposed rule change fits within another express exclusion to 
the Commission's penny stock definition and would allow a company that 
currently meets NYSE Amex's price requirement to instead list on the 
Capital Market at the same initial listing price requirement.\11\ 
However, companies listing on the Capital Market under the proposed $2 
or $3 price requirement would also have to satisfy the proposed net 
tangible assets or revenue test,\12\ which is not a requirement of the 
NYSE Amex rules, but which satisfies the requirements of Rule 3a51-
1(g).\13\ Specifically, as revised, a company would be eligible to list 
on the Capital Market if it satisfies all existing listing standards 
except for the $4 price requirement. Such a company must instead have a 
minimum $3 price if it qualifies under the $5 million equity or 
$750,000 net income alternatives \14\ or a minimum $2 price if it 
qualifies under the $50 million market value of listed securities 
alternative \15\. [sic] In addition, a company qualifying under the 
proposed standard must have either: (a) Net tangible assets in excess 
of $2 million, if the issuer has been in continuous operation for at 
least three years; or (b) net tangible assets in excess of $5 million, 
if the issuer has been in continuous operation for less than three 
years; or (c) average revenue of at least $6 million for the last three 
years. For this purpose, net tangible assets or revenue must be 
demonstrated on the Company's most recently filed audited financial 
statements, satisfying the requirements of the Commission, and which 
are dated less than 15 months prior to the date of listing.\16\
---------------------------------------------------------------------------

    \11\ All other requirements for listing on the Capital Market 
are the same or higher than those of NYSE Amex. Nasdaq included a 
table comparing its listing standards with NYSE Amex's as an 
attachment to the 2010 Petition. In addition, the Commission 
previously concluded that the initial listing standards for common 
stock on the Capital Market were substantially similar to those of 
NYSE Amex, allowing it to designate Capital Market securities as 
``covered securities'' under Section 18 of the 1933 Act, 15 U.S.C. 
77r(b). Securities Act Release No. 8791 (April 18, 2007), 72 FR 
20410 (April 24, 2007).
    \12\ The net tangible asset or revenue requirements would not 
apply to a company whose securities satisfy the existing $4 price 
requirement.
    \13\ 17 CFR 240.3a51-1(g).
    \14\ Rules 5505(b)(1) or (b)(3).
    \15\ Rule 5505(b)(2).
    \16\ Nasdaq notes that under Rule 5210(a)(1), any newly listing 
company, including a foreign private issuer, must be registered 
under Section 12(b) of the Act, which requires filing audited 
financial statements. Nasdaq believes that in all cases those 
financial statements must be more recent than 15 months old. See 
Rule 3-01 and 3-12, 17 CFR 210.3-01 and 210.3-12, with respect to 
domestic companies, and Item 8.A(4) of Form 20-F, with respect to 
foreign private issuers. However, the proposed rule adopts the 15 
month requirement to assure consistency with the timing requirements 
contained in Rule 3a51-1(g).
---------------------------------------------------------------------------

    Unlike the relief Nasdaq requested in 2004 and 2010, the proposed 
rule change will require companies to meet an additional net tangible 
assets or revenue test, which NYSE Amex does not require, thus assuring 
that securities listed under the proposed rule change would not be 
considered ``penny stocks'' under the Act at the time of their listing. 
In that regard, Rule 3a51-1 \17\ provides that ``penny stock'' means 
any equity security other than securities that meet certain exclusions. 
Rule 3a51-1(g) provides an exclusion for a security if its issuer has 
either ``[n]et tangible assets (i.e., total assets less intangible 
assets and liabilities) in excess of $2,000,000, if the issuer has been 
in continuous operation for at least three years, or $5,000,000, if the 
issuer has been in continuous operation for less than three years'' or 
``[a]verage revenue of at least $6,000,000 for the last three years.'' 
When the Commission made changes to Rule 3a51-1 concerning exchange-
listed securities, it specifically noted that it did not intend to 
foreclose reliance on the other exclusions available in Rule 3a51-1, 
including the exclusion available in Rule 3a51-1(g).\18\ Proposed Rule 
5505(a)(1)(B) would only permit a company to list with a $2 or $3 price 
if it satisfies the net tangible assets or revenue test of Rule 3a51-
1(g) and, as such, securities listing under the proposed rule would not 
be penny stocks at the time of their listing.\19\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.3a51-1.
    \18\ Release No. 49037, 69 FR at 2535 (text at footnote 41) 
(``In addition, we note that any security that satisfies one of the 
other exclusions in Rule 3a51-1 will not be a penny stock even if it 
fails to satisfy any of the proposed conditions for reported 
securities or for other exchange registered securities discussed 
above.'').
    \19\ Furthermore, the Commission has already concluded that 
companies that satisfy the NYSE Amex listing standards, including 
price, are not penny stocks. There is no reason to draw a different 
conclusion about these same companies if they were to list instead 
on the Nasdaq Capital Market under the proposed standard. See Indep. 
Petroleum Ass'n of Am. v. Babbitt, 92 F.3d 1248, 1258 (DC Cir. 1996) 
(``An agency must treat similar cases in a similar manner unless it 
can provide a legitimate reason for failing to do so.'').
---------------------------------------------------------------------------

    A company that qualifies for initial listing only under the 
proposed requirement could become a ``penny stock'' if it fails the net 
tangible assets and revenue tests after listing and does not satisfy 
any of the other exclusions from being a penny stock. In order to 
assist brokers' and dealers' compliance with the requirements of the 
Penny Stock Rules, Nasdaq will monitor companies listed under the 
proposed alternative and publish a list of any company that initially 
listed under that requirement, which does not then meet the 
requirements of Rule 3a51-1(g), described above, or any of the other 
exclusions from being a penny stock contained in Rule 3a51-1.\20\
---------------------------------------------------------------------------

    \20\ Nasdaq believes that the other exclusion most likely to be 
implicated would be Rule 3a51-1(d), 17 CFR 240.3a51-1(d), which 
provides an exclusion from the definition of a penny stock for a 
security with a minimum bid price of $5. Note, however, that if a 
company obtains a $4 minimum bid price at a time when it meets all 
other initial listing requirements, Nasdaq would no longer consider 
the company as having listed under the proposed alternative 
standard.

---------------------------------------------------------------------------

[[Page 3023]]

    Nasdaq notes that the adoption of the proposed rule change should 
not alter the Commission's prior designation of securities listed on 
the Capital Market as ``covered securities'' under Section 18 of the 
Securities Act of 1933.\21\ In 2007, the Commission concluded that 
Capital Market securities were covered securities, exempt from State 
law registration requirements, because the Capital Market has listing 
standards that are substantially similar to the listing standards of 
the Nasdaq Global Market, New York Stock Exchange, or NYSE Amex (the 
``Named Markets'').\22\ The Commission has held that an exchange's 
listing requirements will be considered substantially similar if the 
listing standards are ``at least as comprehensive as those of the Named 
Markets'' and that if ``listing standards are higher than the Named 
Markets, then the Commission still determined that the petitioner's 
listing standards are substantially similar to the Named Markets.'' 
\23\ As described above, following approval of the proposed rule 
change, the Capital Market listing requirements for common stock will 
continue to be the same as, or higher than, those of NYSE Amex, which 
permit the listing of companies at $2 and $3 without the proposed 
additional net tangible asset or revenue test. Indeed, all other 
requirements for listing on the Capital Market meet or exceed the 
requirements for listing on NYSE Amex. The proposed rule change, 
therefore, should not disturb the Commission's designation of Capital 
Market securities as covered securities.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 77r.
    \22\ Securities Act Release No. 8791, supra.
    \23\ Id., 72 FR at 20411.
---------------------------------------------------------------------------

2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\24\ in general and with 
Sections 6(b)(5) and (8) of the Act,\25\ in particular. Section 6(b)(5) 
requires, among other things, that a national securities exchange's 
rules must be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest. The proposed 
rule change would adopt a $2 and $3 initial listing price alternative 
for the NASDAQ Capital Market that is substantially similar to the 
requirements of NYSE Amex, which the Commission has already determined 
is consistent with these requirements.\26\ However, the proposed rule 
change would require companies to also satisfy an additional net 
tangible asset or revenue test, which is not a requirement of the NYSE 
Amex listing requirements and which is consistent with the requirements 
for a security to avoid being a ``penny stock'' set forth in Rule 3a51-
1(g).\27\ Nasdaq believes that the proposed price requirement is 
sufficient to protect investors and would exercise its discretionary 
authority to deny initial listing if Nasdaq was concerned about the 
ability of the company to maintain compliance with the continued 
listing price or believed there were public interest concerns leading 
to the company's low stock price.\28\ Moreover, given that these 
companies have an exchange-listing available to them, prohibiting 
listing on Nasdaq does not serve to protect investors and Nasdaq 
believes that investors would be at least as well protected by having 
these companies instead listed on the Capital Market, where they would 
be subject to oversight by Nasdaq's regulatory staff.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f.
    \25\ 15 U.S.C. 78f(b)(5) and (8).
    \26\ Securities Exchange Act Release No. 53050 (January 3, 
2006), 71 FR 1580 (January 10, 2006) (approving the NYSE Amex $2 
price requirement). The Commission notes that, prior to the adoption 
of the $2 price requirement, the applicable NYSE Amex standard did 
not require a minimum market price per share.
    \27\ 17 CFR 240.3a51-1(g).
    \28\ Nasdaq notes that NYSE Amex does not have a continued 
listing price requirement, although NYSE Amex will ``consider 
suspending dealings'' in a ``common stock selling for a substantial 
period of time at a low price per share.'' NYSE Amex Company Guide 
Section 1003(f)(v). As such, companies listing at $2 or $3 on NYSE 
Amex could quickly fall to a very low price and nonetheless remain 
listed indefinitely. On the other hand, Nasdaq requires a $1 price 
for continued listing. Nasdaq Listing Rule 5550(a)(2). See also 
Exchange Act Release No. 53050 (January 3, 2006), 71 FR 1580 at 1581 
(note 11) (January 10, 2006) (encouraging NYSE Amex to adopt a 
minimum price requirement for continued listing while approving SR-
AMEX-2005-114).
---------------------------------------------------------------------------

    Section 6(b)(8) of the Act requires that the rules of an exchange 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In addition, Section 11A of the 
Act \29\ requires that there be fair competition among exchange markets 
to further the public interest and protection of investors. The 
Department of Justice recently noted the importance of a competitive 
environment for exchange listings.\30\ Nasdaq believes that the 
existing situation, whereby NYSE Amex is permitted to list companies 
that no other market can, is an unfair burden on competition in 
violation of Sections 6(b)(8) and 11A. Since 2008, NYSE Amex listed 
approximately 50 companies for which no other market could compete. The 
proposed rule change would enhance the competition between exchanges, 
and benefit companies and their investors, by providing companies that 
today are forced to list on NYSE Amex an alternative exchange listing 
venue. As such, the proposed rule change is consistent with Sections 
6(b)(8) and 11A.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78k-1.
    \30\ See ``NASDAQ OMX Group Inc. and IntercontinentalExchange 
Inc. Abandon Their Proposed Acquisition of NYSE Euronext After 
Justice Department Threatens Lawsuit'' (May 16, 2011), available at 
http://www.justice.gov/atr/public/press_releases/2011/271214.htm.
---------------------------------------------------------------------------

    Finally, as noted above, the proposed rule change would adopt the 
identical initial listing price requirement contained in the NYSE Amex 
Company Guide. As such, Nasdaq believes that its listing requirements 
would remain substantially similar to those of NYSE Amex, as required 
for covered securities under Section 18 of the Securities Act.\31\ In 
addition, as noted, the proposed rule change would require that any 
company qualifying under this new price alternative also meet the 
requirements of Rule 3a51-1(g) \32\ and that these securities therefore 
would not be considered ``penny stocks'' under the Act at the time of 
their listing. To the extent that a company no longer qualified for the 
exclusion under Rule 3a51-1(g), or any of the other exclusions in Rule 
3a51-1, Nasdaq would notify the public by including the company in a 
list published on Nasdaq's Web site.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 77r.
    \32\ 17 CFR 240.3a51-1(g).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Instead, the 
proposed rule change would enhance the competition between exchanges, 
and benefit companies and their investors, by allowing companies that 
today are forced to list on NYSE Amex an alternative listing venue.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

[[Page 3024]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-002 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2012-002. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of Nasdaq. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-002 and should 
be submitted on or before February 10, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1045 Filed 1-19-12; 8:45 am]
BILLING CODE 8011-01-P


