[Federal Register Volume 84, Number 133 (Thursday, July 11, 2019)]
[Notices]
[Pages 33102-33113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14723]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86314; File No. SR-NASDAQ-2019-009]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendment No. 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 3, To 
Revise the Exchange's Initial Listing Standards Related to Liquidity

July 5, 2019.

I. Introduction

    On March 21, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to revise the Exchange's initial listing standards 
related to liquidity. The proposed rule change was published for 
comment in the Federal Register on April 9, 2019.\3\ On May 24, 2019, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change.\5\ 
On June 12, 2019, the Exchange filed Amendment No. 1 to the proposed 
rule change. On June 13, 2019, the Exchange withdrew Amendment No. 1 
and filed Amendment No. 2 to the proposed rule change. On July 1, the 
Exchange withdrew Amendment No. 2 and filed Amendment No. 3 to the 
proposed rule change, which replaced and superseded the proposed rule 
change as originally filed.\6\ The Commission received one comment on 
the proposed rule change.\7\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as modified by 
Amendment No. 3, from interested persons and is approving the proposed 
rule change, as modified by Amendment No. 3, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 85503 (April 3, 
2019), 84 FR 14172 (April 9, 2019) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85933, 84 FR 25329 
(May 31, 2019). The Commission designated July 8, 2019, as the date 
by which the Commission shall approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
    \6\ Amendment No. 3 is available at: https://www.sec.gov/comments/sr-nasdaq-2019-009/srnasdaq2019009-5751370-186792.pdf.
    \7\ See Letter from Carol Anne Huff, Kirkland & Ellis LLP, to 
Eduardo A. Aleman, Deputy Secretary, Commission, dated June 5, 2019 
(``Kirkland Letter''). The commenter stated that it believes the 
Exchange's proposed exclusion of ``restricted securities'' from the 
calculation of round lot holders and public float will provide for a 
more accurate measure of liquidity, but advocated for a reasonable 
grace period for former special purpose acquisition vehicles 
(``SPACs''), after their business combination, to demonstrate 
compliance with round lot holder and public float requirements, 
irrespective of the structure of the business combination.
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II. Exchange's Description of the Proposal, as Modified by Amendment 
No. 3

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

1. Purpose
    Nasdaq is filing this amendment to SR-NASDAQ-2019-009,\8\ which was

[[Page 33103]]

published for comment by the Commission on April 9, 2019, in order to 
(i) clarify Nasdaq's initial intent to impose a new requirement that at 
least 50% of a company's round lot holders must each hold unrestricted 
securities with a market value of at least $2,500; (ii) clarify that 
the new listing rule requiring a minimum average daily trading volume 
for securities trading over-the-counter (``OTC'') of at least 2,000 
shares over the 30 day period prior to listing (with trading occurring 
on more than half of those 30 days) includes trading volume of the 
underlying security on the primary market with respect to an ADR; (iii) 
clarify that, in connection with a company applying to list on the 
Exchange through a direct listing that has not had sustained recent 
trading in a private placement market prior to listing, Nasdaq will 
determine that the company has met the market value of unrestricted 
publicly held shares requirement if the company satisfies the 
applicable requirement and provides an independent third-party 
valuation evidencing a market value of publicly held shares of at least 
$250,000,000; and (iv) make minor technical changes. This amendment 
supersedes and replaces the Initial Proposal in its entirety.
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    \8\ Securities Exchange Act Release No. 85503 (April 3, 2019), 
84 FR 14172 (April 9, 2019) (the ``Initial Proposal'').
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    Nasdaq proposes several amendments in this rule change to increase 
Nasdaq's requirements for initial listing and help assure adequate 
liquidity for listed securities. In addition to the changes described 
above, Nasdaq proposes to revise its initial listing criteria to 
exclude restricted securities from the Exchange's calculations of a 
company's publicly held shares, market value of publicly held shares 
and round lot holders (``Initial Liquidity Calculations''). To do so, 
Nasdaq proposes to add three new definitions to define ``restricted 
securities'', ``unrestricted publicly held shares'' and ``unrestricted 
securities'' and proposes to amend the definition of ``round lot 
holder''. Nasdaq is not proposing to change the requirements for 
continued listing purposes at this time, but believes that these 
heightened initial listing requirements will result in enhanced 
liquidity for the companies that satisfy them on an ongoing basis.\9\ 
Each amendment is described in more detail below.
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    \9\ Nasdaq staff may apply additional and more stringent 
criteria to a listed company that satisfies all of the continued 
listing requirements but where there are indications that there is 
insufficient liquidity in the security to support fair and orderly 
trading. In such circumstances, Nasdaq would typically first allow 
the company to provide and implement a plan to increase its 
liquidity in the near term.
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I. Restricted Securities
    Nasdaq is proposing to modify its initial listing standards to 
exclude securities subject to resale restrictions from its Initial 
Liquidity Calculations. Currently, securities subject to resale 
restrictions are included in the Exchange's Initial Liquidity 
Calculations, however, such securities are not freely transferrable or 
available for outside investors to purchase and therefore do not truly 
contribute to a security's liquidity upon listing. Because the current 
Initial Liquidity Calculations include restricted securities, a 
security with a substantial number of restricted securities could 
satisfy the Exchange's initial listing requirements related to 
liquidity and list on the Exchange, even though there could be few 
freely tradable shares, resulting in a security listing on the Exchange 
that is illiquid. Nasdaq is concerned because illiquid securities may 
trade infrequently, in a more volatile manner and with a wider bid-ask 
spread, all of which may result in trading at a price that may not 
reflect their true market value. Less liquid securities also may be 
more susceptible to price manipulation, as a relatively small amount of 
trading activity can have an inordinate effect on market prices.
    To address this concern, Nasdaq is proposing to adopt a new 
definition of ``restricted securities'' at Nasdaq Rule 5005(a)(37), 
which includes any securities subject to resale restrictions for any 
reason, including restricted securities (1) acquired directly or 
indirectly from the issuer or an affiliate of the issuer in 
unregistered offerings such as private placements or Regulation D 
offerings; \10\ (2) acquired through an employee stock benefit plan or 
as compensation for professional services; \11\ (3) acquired in 
reliance on Regulation S, which cannot be resold within the United 
States; \12\ (4) subject to a lockup agreement or a similar contractual 
restriction; \13\ or (5) considered ``restricted securities'' under 
Rule 144.\14\ Nasdaq is also proposing to adopt a new definition of 
``unrestricted securities'' at Nasdaq Rule 5005(a)(46), which includes 
securities that are not restricted securities. In connection with these 
amendments, Nasdaq is proposing to renumber the remaining provisions of 
Rule 5005 to maintain an organized rule structure.
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    \10\ See, e.g., 17 CFR 230.144(a)(3)(i) and (ii).
    \11\ See, e.g., 17 CFR 230.701(g), which states that securities 
issued pursuant to certain compensatory benefit plans and contracts 
relating to compensation are considered restricted securities.
    \12\ See 17 CFR 230.144(a)(3)(v), which states that securities 
of domestic issuers acquired in a transaction in reliance on 
Regulation S are considered restricted securities.
    \13\ Securities issued in such transactions would typically 
include a ``restrictive'' legend stating that the securities cannot 
be freely resold unless they are registered with the SEC or in a 
transaction exempt from the registration requirements, such as the 
exemption available under Rule 144.
    \14\ See generally Securities and Exchange Commission Investor 
Publications, Rule 144: Selling Restricted and Control Securities 
(January 16, 2013), available at: https://www.sec.gov/reportspubs/investorpublications/investorpubsrule144htm.html. Nasdaq would 
consider a security as subject to a resale restriction until any 
restrictive legends are removed, even if a safe harbor is available 
that permits the sale of the security at an earlier date.
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    The Exchange believes that these proposed amendments to the listing 
rules will enhance its listing criteria and better protect investors by 
helping to ensure that securities listed on Nasdaq are liquid and have 
sufficient investor interest to support an exchange listing. Nasdaq 
notes that in developing their index methodologies the FTSE Russell and 
S&P indices take a similar approach. As disclosed by FTSE Russell, 
``All FTSE Russell equity index constituents are free float adjusted in 
accordance with the index rules, to reflect the actual availability of 
stock in the market for public investment.'' \15\ FTSE Russell excludes 
shares held within employee share plans, shares subject to a ``lock-
in'' clause, and shares subject to contractual restrictions.\16\ S&P 
Dow Jones adjusts its indices to ``reflect only those shares available 
to investors rather than all of a company's outstanding shares.'' \17\
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    \15\ See FTSE Russell, ``Free-Float'', available at: https://www.ftse.com/products/indices/free-float.
    \16\ See FTSE Russell, ``Free Float Restrictions v2.0'', May 
2018, available at: https://www.ftse.com/products/downloads/Free_Float_Restrictions.pdf.
    \17\ See S&P Dow Jones Indices, ``Float Adjustment 
Methodology'', April 2018, available at: https://us.spindices.com/documents/index-policies/methodology-sp-float-adjustment.pdf.
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A. Publicly Held Shares
    Nasdaq is proposing to modify its initial listing requirements 
related to publicly held shares so that they are based only on 
unrestricted shares. A company is required to have a minimum number of 
publicly held shares in order to list its primary equity securities 
(including American Depositary Receipts or ``ADRs'') \18\ on all tiers 
of the Exchange. A company is also required

[[Page 33104]]

to have a minimum number of publicly held shares in order to list its 
preferred stock or secondary classes of common stock on Nasdaq's Global 
and Capital Market tiers; \19\ subscription receipts on Nasdaq's 
Capital Market tier; or paired share units on Nasdaq's Global Select or 
Global Market tiers. Currently, Nasdaq Rule 5005(a)(35) defines 
``publicly held shares'' as ``shares not held directly or indirectly by 
an officer, director or any person who is the beneficial owner of more 
than 10 percent of the total shares outstanding. Determinations of 
beneficial ownership in calculating publicly held shares shall be made 
in accordance with Rule 13d-3 under the Act.'' As discussed above, the 
current definition of publicly held shares does not exclude securities 
subject to resale restrictions, which may result in a security with 
limited liquidity satisfying the Exchange's initial listing 
requirements related to publicly held shares and qualifying to list on 
the Exchange.
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    \18\ Rule 5005(a)(33) defines ``Primary Equity Security'' as ``a 
Company's first class of Common Stock, Ordinary Shares, Shares or 
Certificates of Beneficial Interest of Trust, Limited Partnership 
Interests or American Depositary Receipts (ADR) or Shares (ADS).''
    \19\ There are no separate listing requirements on the Nasdaq 
Global Select Market for classes of securities other than primary 
equity securities. Instead, pursuant to Rule 5320, if the primary 
equity security is listed on the Nasdaq Global Select Market, 
generally any other security of that same company that qualifies for 
listing on the Nasdaq Global Market is also included in the Nasdaq 
Global Select Market.
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    Nasdaq proposes adding a new definition of ``unrestricted publicly 
held shares'' at Nasdaq Rule 5005(a)(45), which would be defined as 
publicly held shares excluding the newly defined ``restricted 
securities.'' Nasdaq proposes to revise references to ``publicly held 
shares'' to ``unrestricted publicly held shares'' in the following 
rules:

----------------------------------------------------------------------------------------------------------------
                                                                                     Current required  number of
             Rule No.               Nasdaq market tier         Security type            publicly  held shares
----------------------------------------------------------------------------------------------------------------
5315(e)(2).......................  Global Select.......  Primary Equity Security    At least 1,250,000.
                                                          (including Paired Share
                                                          Units and direct
                                                          listings).
5405(a)(2).......................  Global..............  Primary Equity Security    At least 1,100,000.
                                                          (including Paired Share
                                                          Units).
5415(a)(1).......................  Global..............  Preferred Stock or         At least 200,000.
                                                          Secondary Class of
                                                          Common Stock.
5505(a)(2).......................  Capital.............  Primary Equity Security..  At least 1,000,000.
5510(a)(3).......................  Capital.............  Preferred Stock or         At least 200,000.
                                                          Secondary Class of
                                                          Common Stock.
5520(g)(3).......................  Capital.............  Subscription Receipts....  At least 1,100,000.
----------------------------------------------------------------------------------------------------------------

    As a result, only securities that are freely transferrable will be 
included in the calculation of publicly held shares to determine 
whether a company satisfies the Exchange's initial listing criteria 
under these rules. Nasdaq believes that excluding restricted securities 
will better reflect the liquidity of, and investor interest in, a 
security and therefore will better protect investors.
    In addition to the above, Nasdaq proposes revising references to 
``publicly held shares'' to ``unrestricted publicly held shares'' in 
Rule 5310(d), which states that ``in computing the number of publicly 
held shares for Global Select purposes, Nasdaq will not consider shares 
held by an officer, director or 10% or greater Shareholder \20\ of the 
Company,'' and Rule 5226(b) which requires a paired share unit to 
satisfy the security-level requirements of Rule 5315 or 5405, including 
the number of publicly held shares. Nasdaq also proposes to revise Rule 
5205(g) to reflect the change to ``unrestricted publicly held shares.'' 
\21\ Nasdaq also proposes revising Rule 5215(b) to state that in 
considering whether an ADR satisfies the initial listing requirements, 
Nasdaq will consider the unrestricted publicly held shares of the 
underlying security, and that in determining whether shares of the 
underlying security are restricted for this purpose, Nasdaq will only 
consider restrictions that prohibit the resale or trading of the 
underlying security on the foreign issuer's home country market, as 
discussed below.
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    \20\ Rule 5005(a)(40) defines ``Shareholder'' as ``a record or 
beneficial owner of a security listed or applying to list. For 
purposes of the Rule 5000 Series, the term ``Shareholder'' includes, 
for example, a limited partner, the owner of a depository receipt, 
or unit.''
    \21\ Rule 5205(g) currently states that ``The computation of 
Publicly Held Shares and Market Value of Publicly Held Shares shall 
be as of the date of application of the Company.''
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B. Market Value of Publicly Held Shares
    Nasdaq is proposing to modify its initial listing requirements 
related to market value of publicly held shares so that they are based 
only on unrestricted shares. A company is required to have a minimum 
market value of publicly held shares in order to list its primary 
equity securities (including ADRs) on all tiers of the Exchange. A 
company is also required to have a minimum market value of publicly 
held shares in order to list its preferred stock or secondary classes 
of common stock on Nasdaq's Global and Capital Market tiers; 
subscription receipts on Nasdaq's Capital Market tier; or paired share 
units on Nasdaq's Global Select or Global Market tiers. The calculation 
of ``market value of publicly held shares'' does not exclude stock 
subject to resale restrictions. As discussed above, restricted 
securities may not contribute to liquidity and therefore the current 
calculation of market value of publicly held shares may result in a 
security with limited true liquidity satisfying the listing 
requirements related to the market value of publicly held shares and 
qualifying to list.
    Nasdaq proposes revising its initial listing requirements so that 
they are based on the market value of unrestricted publicly held 
shares, and therefore exclude restricted securities, in the following 
rules:

----------------------------------------------------------------------------------------------------------------
                                                                                        Current required market
             Rule No.                Nasdaq  market tier          Security type                  value
----------------------------------------------------------------------------------------------------------------
5315(c)(1)-(3)....................  Global Select........  Primary Equity Security of  (i) A total market value
                                                            a Closed End Management     of the fund family of at
                                                            Investment Company Listed   least $220 million; (ii)
                                                            with a Fund Family.         an average market value
                                                                                        of all funds in the fund
                                                                                        family of at least $50
                                                                                        million; and (iii) a
                                                                                        market of each fund in
                                                                                        the fund family of at
                                                                                        least $35 million.

[[Page 33105]]

 
5315(f)(2)(A)-(D).................  Global Select........  Primary Equity Securities   (i) At least $110
                                                            (including direct           million; (ii) at least
                                                            listings and Paired Share   $100 million, if the
                                                            Units).                     company has
                                                                                        stockholders' equity of
                                                                                        at least $110 million;
                                                                                        (iii) at least $45
                                                                                        million in the case of
                                                                                        an initial public
                                                                                        offering or spin-off; or
                                                                                        (iv) at least $70
                                                                                        million in the case of a
                                                                                        closed end management
                                                                                        investment company
                                                                                        registered under the
                                                                                        Investment Company Act
                                                                                        of 1940.
5405(b)(1)(C).....................  Global...............  Primary Equity Securities   At least $8 million
                                                            (including Paired Share     (Income Standard).
                                                            Units).
5405(b)(2)(C).....................  Global...............  Primary Equity Securities   At least $18 million
                                                            (including Paired Share     (Equity Standard).
                                                            Units).
5405(b)(3)(B).....................  Global...............  Primary Equity Securities   At least $20 million
                                                            (including Paired Share     (Market Value Standard).
                                                            Units).
5405(b)(4)(B).....................  Global...............  Primary Equity Securities   At least $20 million
                                                            (including Paired Share     (Total Assets/Total
                                                            Units).                     Revenue Standard).
5415(a)(2)........................  Global...............  Preferred Stock or          At least $4 million.
                                                            Secondary Classes of
                                                            Common Stock.
5505(b)(1)(B).....................  Capital..............  Primary Equity Securities.  At least $15 million
                                                                                        (Equity Standard).
5505(b)(2)(C).....................  Capital..............  Primary Equity Securities.  At least $15 million
                                                                                        (Market Value Standard).
5505(b)(3)(C).....................  Capital..............  Primary Equity Securities.  At least $5 million (Net
                                                                                        Income Standard).
5510(a)(4)........................  Capital..............  Preferred Stock or          At least $3.5 million.
                                                            Secondary Classes of
                                                            Common Stock.
5520(g)(2)........................  Capital..............  Subscription Receipts.....  At least $100 million.
----------------------------------------------------------------------------------------------------------------

    As discussed above, Nasdaq believes that excluding restricted 
securities from the calculation of market value of publicly held shares 
will better reflect the liquidity of, and investor interest in, a 
security and therefore will better protect investors. Specifically, 
market value of publicly held shares is an indication of the size and 
investor interest in a company. When restricted securities are included 
in that calculation, a company could technically meet Nasdaq's 
requirement without actually having sufficient investor interest, 
resulting in a security that is illiquid. Less liquid securities may be 
more susceptible to price manipulation, as a relatively small amount of 
trading activity can have an inordinate effect on market prices and a 
company's market value of publicly held shares.
    In addition to the above, Nasdaq proposes revising references to 
``market value of publicly held shares'' to ``market value of 
unrestricted publicly held shares'' in Rule 5226(b), which requires a 
paired share unit listing on Nasdaq's Global Select or Global Market 
tiers to satisfy the security-level requirements of Rule 5315 or 5405, 
including the market value of publicly held shares.\22\ Nasdaq also 
proposes to revise Rule 5205(g) to reflect that the computation for 
market value of unrestricted publicly held shares shall be as of the 
date of the application of the company for all market tiers.\23\
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    \22\ Nasdaq is also proposing to capitalize defined terms in 
Rule 5226(b) that were previously not capitalized for consistency 
and in order to maintain an organized rule book structure.
    \23\ Rule 5205(g) currently states that ``The computation of 
Publicly Held Shares and Market Value of Publicly Held Shares shall 
be as of the date of application of the Company.''
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    Nasdaq also proposes revising references to ``market value of 
publicly held shares'' to ``market value of unrestricted publicly held 
shares'' in the preamble and subsections (a) and (b) of IM-5315-1, 
which currently set forth the Exchange's method of determining bid 
price, market capitalization and market value of publicly held shares 
for a company applying to list on the Exchange through a direct 
listing.\24\ Currently, IM-5315-1(a) states that ``[i]f the Company's 
security has had sustained recent trading in a Private Placement 
Market,\25\ Nasdaq will attribute a price, market capitalization, and 
Market Value of Publicly Held Shares to the Company equal to the lesser 
of (i) the value calculable based on an independent third-party 
valuation (a ``Valuation'') and (ii) the value calculable based on the 
most recent trading price in a Private Placement Market.'' As a result 
of the proposed change, Nasdaq will attribute a market value of 
unrestricted publicly held shares to the company equal to the lesser of 
(i) the value calculable based on a Valuation and (ii) the value 
calculable based on the most recent trading price in a Private 
Placement Market.
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    \24\ A ``direct listing'' is the listing of a company that has 
sold common equity securities in private placements, which have not 
been listed on a national securities exchange or traded in the over-
the-counter market pursuant to FINRA Form 211 immediately prior to 
the initial pricing on Nasdaq.
    \25\ Rule 5005(a)(34) defines ``Private Placement Market'' as 
``a trading system for unregistered securities operated by a 
national securities exchange or a registered broker-dealer.''
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    Currently, IM-5315-1(b) states that ``[f]or a security that has not 
had sustained recent trading in a Private Placement Market prior to 
listing, Nasdaq will determine that such Company has met the Market 
Value of Publicly Held Shares requirement if the Company provides a 
Valuation evidencing a Market Value of Publicly Held Shares of at least 
$250,000,000. Nasdaq will also determine the bid price and market 
capitalization based on such Valuation.'' Nasdaq is proposing to revise 
this rule to clarify that Nasdaq will determine that such company has 
met the market value of unrestricted publicly held shares requirement 
if the company satisfies the applicable market value of unrestricted 
publicly held shares requirement and provides a Valuation evidencing a 
market value of publicly held shares of at least $250,000,000. As a 
result, a company applying to list on the Exchange through a direct 
listing will be subject to all proposed changes in Rule 5315 to exclude 
restricted securities from the Exchange's Initial Liquidity 
Calculations, but restricted securities will not be excluded for 
purposes of determining whether the Valuation evidences a market value 
of publicly held shares of at least $250,000,000. Nasdaq believes that 
it is appropriate to include restricted securities in this calculation 
because this requirement is

[[Page 33106]]

meant to measure the size of the entity, and not necessarily measure 
its liquidity, and restricted securities should be included in the 
measure of the entity size. Furthermore, as discussed above, a direct 
listing would also need to comply with the initial listing standards 
set forth in Rule 5315 including the revised Initial Liquidity 
Calculations.
    Lastly, Nasdaq proposes revising Rule 5215(b) to state that in 
considering whether an ADR satisfies the initial listing requirements, 
Nasdaq will consider the market value of unrestricted publicly held 
shares of the underlying security, and that in determining whether 
shares of the underlying security are restricted for this purpose, 
Nasdaq will only consider restrictions that prohibit the resale or 
trading of the underlying security on the foreign issuer's home country 
market, as discussed below.
C. Round Lot Holders
    Nasdaq is proposing to revise the listing criteria related to the 
minimum number of round lot holders for companies seeking to initially 
list primary equity securities (including ADRs), preferred stock, 
secondary classes of common stock and warrants on the Exchange so that 
they are based on holders of unrestricted securities. Currently, Nasdaq 
defines a ``round lot holder'' as ``a holder of a Normal Unit of 
Trading'' and notes that ``beneficial holders will be considered in 
addition to holders of record.'' \26\ Nasdaq defines a ``round lot or 
normal unit of trading'' as ``100 shares of a security unless, with 
respect to a particular security, Nasdaq determines that a normal unit 
of trading shall constitute other than 100 shares.'' \27\ A company is 
required to have a minimum number of round lot holders in order to list 
securities on the Exchange. While this is another measure of liquidity 
designed to help assure that there will be sufficient investor interest 
and trading to support price discovery once a security is listed, as 
noted above, under the existing rule, all the shares held by a holder 
could be restricted securities that do not contribute to liquidity.
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    \26\ Currently, this is Nasdaq Rule 5005(a)(39) but will be 
converted to Nasdaq Rule 5005(a)(40).
    \27\ Currently, this is Nasdaq Rule 5005(a)(38) but will be 
converted to Nasdaq Rule 5005(a)(39).
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    To address this concern, Nasdaq is proposing to revise the 
definition of ``round lot holder'' to mean a holder of a normal unit of 
trading of unrestricted securities. This change will impact the 
following rules:

----------------------------------------------------------------------------------------------------------------
                                                                                        Current required number
             Rule No.                 Nasdaq market tier          Security type           of round lot holders
----------------------------------------------------------------------------------------------------------------
5315(f)(1)(C).....................  Global Select........  Primary Equity Security     At least 450 round lot
                                                            (including Paired Share     holders or a minimum
                                                            Units and direct            number of total holders.
                                                            listings).
5405(a)(3)........................  Global...............  Primary Equity Security     At least 400.
                                                            (including Paired Share
                                                            Units).
5410(d)...........................  Global...............  Warrants..................  At least 400 unless such
                                                                                        warrants are listed in
                                                                                        connection with an
                                                                                        initial firm commitment
                                                                                        underwritten public
                                                                                        offering.
5415(a)(4)........................  Global...............  Preferred Stock or          At least 100.
                                                            Secondary Class of Common
                                                            Stock.
5505(a)(3)........................  Capital..............  Primary Equity Securities.  At least 300.
5510(a)(2)........................  Capital..............  Preferred Stock or          At least 100.
                                                            Secondary Class of Common
                                                            Stock.
5515(a)(4)........................  Capital..............  Warrants..................  At least 400 unless such
                                                                                        warrants are listed in
                                                                                        connection with an
                                                                                        initial firm commitment
                                                                                        underwritten public
                                                                                        offering.
5520(g)(4)........................  Capital..............  Subscription Receipts.....  At least 400.
----------------------------------------------------------------------------------------------------------------

    As a result of these changes, a holder of only restricted 
securities would not be considered in the round lot holder count. 
Nasdaq believes that these amendments will help ensure adequate 
distribution and investor interest in a listed security, which will 
result in a more liquid trading market and which will better protect 
investors. Illiquid securities may trade infrequently, in a more 
volatile manner and with a wider bid-ask spread, all of which may 
result in trading at a price that may not reflect their true market 
value. Less liquid securities also may be more susceptible to price 
manipulation, as a relatively small amount of trading activity can have 
an inordinate effect on market prices.
    In addition to the above, Nasdaq proposes revising references to 
``holder'' to ``round lot holders'' in Rule 5226(b), which requires a 
paired share unit applying to list on the Nasdaq Global Select or 
Global Market tiers to meet the security-level requirements of Rule 
5315 or 5405, which includes the number of round lot holders. Nasdaq 
also proposes revising Rule 5215(b) to state that in considering 
whether an ADR satisfies this proposed change that determination of 
round lot holders be based on holders of unrestricted securities, 
Nasdaq will consider whether round lot holders of the underlying 
security hold unrestricted shares of that underlying security, and that 
in determining whether shares of the underlying security are restricted 
for this purpose, Nasdaq will only consider restrictions that prohibit 
the resale or trading of the underlying security on the foreign 
issuer's home country market, as discussed below. Nasdaq will also 
apply the new minimum value requirement for round lot holders to the 
underlying security, as proposed below, in addition to the minimum 
number of round lot holders required by the applicable tier that the 
company is seeking to list on.
D. American Depositary Receipts
    Lastly, Nasdaq proposes to revise Rule 5215(b) to specify how these 
new requirements apply to ADRs. Specifically, as under the current rule 
for calculating publicly held shares, market value of publicly held 
shares, and round lot holders, Nasdaq will continue to consider the 
underlying security in calculating the unrestricted publicly held 
shares and market value of unrestricted publicly held shares and in 
calculating the new definition of a round lot holder. In determining 
whether shares of the underlying security are ``restricted'' for these 
purposes, only restrictions that prohibit the resale or trading of the 
underlying security on the foreign issuer's home country market would 
result in those securities being considered restricted for purposes of 
the proposed rules. Thus, if the restrictions provided as examples in 
the new definition of ``restricted

[[Page 33107]]

securities'' would restrict the underlying security from being freely 
sold or tradable on its home country market, Nasdaq would also consider 
such restrictions when calculating ``unrestricted publicly held 
shares.'' Nasdaq believes that this is appropriate because the purpose 
of the Initial Liquidity Calculations, and the proposed changes 
described herein, is to establish investor interest in the foreign 
issuer and ensure adequate liquidity and distribution of the foreign 
issuer's underlying security on its home country market, which is held 
by the depositary bank and represented by the ADR. For this reason, 
existing Rule 5215(b) currently looks to the underlying security when 
calculating publicly held shares, market value of publicly held shares, 
round lot and public holders and it is similarly appropriate to 
consider whether or not the underlying security is freely tradable in 
its home country market when determining unrestricted publicly held 
shares, market value of unrestricted publicly held shares, and round 
lot holders. Excluding securities that are only restricted from resale 
or trading in the United States would be not be an appropriate measure 
of investor interest in or liquidity of the underlying security because 
the underlying security will not be listed or trading in the U.S.\28\ 
Moreover, applying the new definition of restricted securities to 
securities trading on a foreign market, if the securities trading on 
the home country market are not already restricted by the examples set 
forth in the new definition of restricted securities, would unduly 
impose the requirements of a U.S. national securities exchange on those 
securities, which will not be listed in the U.S.
---------------------------------------------------------------------------

    \28\ For example, the underlying security may not be eligible to 
trade in the U.S., but that would not cause all shares of that 
security to be considered restricted if they are freely tradable on 
the foreign issuer's home country market.
---------------------------------------------------------------------------

    In addition, Nasdaq proposes to revise the reference to Form S-12 
in Rule 5215(b) to Form F-6 in order to refer to the current form 
required by the Commission to register ADRs under the Securities Act of 
1933.\29\
---------------------------------------------------------------------------

    \29\ Securities Exchange Act Release No. 34-19612 (March 18, 
1983), 48 FR 12346 (March 24, 1983).
---------------------------------------------------------------------------

II. Minimum Value Requirement for Holders
    Nasdaq is also proposing to revise the listing rules related to 
round lot holders listed in Part I.C, above, except for those 
applicable to listing warrants, to impose a new requirement related to 
the minimum investment amount held by shareholders. Under the current 
definition of a round lot, a shareholder may be considered a round lot 
holder by holding exactly 100 shares, which would be worth only $400 in 
the case of a stock that is trading at the minimum bid price of $4 per 
share.\30\ Nasdaq believes that this minimal investment is not an 
appropriate representation of investor interest to support a listing on 
a national securities exchange. To address this concern, Nasdaq 
proposes to require that for initial listing at least 50% of a 
company's required round lot holders must each hold unrestricted 
securities with a market value of at least $2,500. Nasdaq does not 
propose to impose this requirement on initial listings of warrants, 
however, because warrants do not have a minimum price requirement and 
may have little value at the time of issuance.\31\ Nonetheless, 
warrants are often issued as part of a unit and the common stock 
component of the unit would be required to satisfy the minimum value 
requirement. Further, in all cases, the security underlying a warrant 
must be listed on Nasdaq or be a covered security, as defined in 
Section 18(b) of the Securities Act of 1933.\32\ Nasdaq has not 
observed problems with the trading of warrants.
---------------------------------------------------------------------------

    \30\ On the Nasdaq Capital Market, certain companies are also 
eligible to list at $2 or $3 and the minimum value held by such a 
holder would be only $200 or $300, respectively. See Listing Rule 
5505(a)(1)(B).
    \31\ Warrants issued as part of a unit must satisfy the initial 
listing requirements for warrants applying to list on the applicable 
market tier in accordance with Rule 5225.
    \32\ 15 U.S.C. 77r(b).
---------------------------------------------------------------------------

    Nasdaq believes that adopting this amendment will help ensure that 
a majority of the required minimum number of shareholders hold a 
meaningful value of unrestricted securities and that a company has 
sufficient investor interest to support an exchange listing.
III. Average Daily Trading Volume
    Nasdaq is proposing to adopt an additional initial listing criteria 
for primary equity securities (including ADRs), preferred stock, 
secondary classes of common stock and paired share units, previously 
trading OTC in the United States. The new rules will require such 
securities to have a minimum average daily trading volume over the 30 
trading days prior to listing of at least 2,000 shares a day (including 
trading volume of the underlying security on the primary market with 
respect to an ADR), with trading occurring on more than half of those 
30 days (i.e., at least 16 days). Nasdaq believes that this will help 
ensure a liquid trading market, promote price discovery and establish 
an appropriate market price for the listed securities.
    Nasdaq is proposing to implement this new requirement by making 
additional amendments to Rule 5315(e) to add a new Rule 5315(e)(4); 
Rule 5405(a) to add a new Rule 5405(a)(4); Rule 5415(a) to add a new 
Rule 5415(a)(6); Rule 5505(a) to add a new Rule 5505(a)(5); and Rule 
5510(a) to add a new Rule 5510(a)(6).\33\ In connection with the 
foregoing amendments, Nasdaq is proposing to revise the cross-
references in Rules 5415(a) and 5510(a) to add new Rules 5415(a)(6) and 
5510(a)(6), respectively, and renumber the remaining provisions of Rule 
5505(a) to maintain an organized rule structure. In addition, Nasdaq is 
proposing to revise Rule 5226(b) to clarify that the average daily 
trading volume requirement would apply to companies seeking to list 
paired share units on the Exchange.
---------------------------------------------------------------------------

    \33\ Rule 5005(a)(33) defines ``Primary Equity Security'' as ``a 
Company's first class of Common Stock, Ordinary Shares, Shares or 
Certificates of Beneficial Interest of Trust, Limited Partnership 
Interests or American Depositary Receipts (ADR) or Shares (ADS).'' 
The Exchange considers ADRs to be primary equity securities and 
therefore the Exchange's initial listing requirements for preferred 
stock and secondary classes of common stock (including Rules 
5415(a)(6) and 5510(a)(6)) do not apply to ADRs.
---------------------------------------------------------------------------

    As noted above, the average daily trading volume requirement will 
also apply to ADRs. Currently, Nasdaq considers the underlying security 
of an ADR when determining annual income from continuing operations, 
publicly held shares, market value of publicly held shares, 
stockholders' equity, round lot or public holders, operating history, 
market value of listed securities, total assets and total revenue. 
Nasdaq is proposing amend Rule 5215(b) to state that the average daily 
trading volume of the underlying security of an ADR will be considered 
in the Exchange's computations for this new requirement. Nasdaq would 
consider trading in the security underlying an ADR on the foreign 
issuer's primary market together with the average daily trading volume 
of the ADR in the U.S. OTC market in determining whether a foreign 
issuer seeking to list ADRs satisfies the requirement. Nasdaq believes 
that this will help demonstrate adequate investor interest in the 
foreign issuer and the underlying security, which will help promote 
price discovery and establish an appropriate market price for the 
ADR.\34\
---------------------------------------------------------------------------

    \34\ ADR shares trade separately from the underlying securities, 
and often have slightly different values. However, ADR share values 
usually track closely with the value of the underlying security.

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

[[Page 33108]]

    Nasdaq is proposing to adopt an exemption from the proposed average 
daily trading volume requirement for securities (including ADRs) listed 
in connection with a firm commitment underwritten public offering of at 
least $4 million. Nasdaq believes that the sale of securities in an 
underwritten public offering provides an additional basis for believing 
that a liquid trading market will likely develop for such securities 
after listing, since the offering process is designed to promote 
appropriate price discovery. Moreover, the underwriters in a firm 
commitment underwritten public offering will also generally make a 
market in the securities for a period of time after the offering, 
assisting in the creation of a liquid trading market. For these 
reasons, in part, Nasdaq's rules already provide similar exemptions in 
other situations involving a firm commitment underwritten offering.\35\ 
Nasdaq believes that the process of a firm commitment underwritten 
offering similarly supports an exception from the proposed average 
daily trading volume requirement. Nasdaq also notes that the same 
volume requirement is being proposed for each of Nasdaq's Global 
Select, Global and Capital Market tiers, and that it is therefore 
appropriate to base the exemption on the same minimum $4 million 
offering in each case, notwithstanding the different listing criteria 
generally applicable to companies seeking to list on each tier. 
Finally, Nasdaq believes that the proposed minimum $4 million firm 
commitment underwritten public offering is large enough to represent a 
fundamental change in how the company will trade following the 
offering, such that the prior trading volume will not be representative 
of the volume following the offering. In that regard, Nasdaq notes that 
the minimum $4 million offering would be sufficient to satisfy Nasdaq's 
one million share public float requirement at the minimum $4 price for 
listing on Capital Market. This exemption will be included in new Rules 
5315(e)(4), 5405(a)(4), 5415(a)(6), 5505(a)(5), and 5510(a)(6).
---------------------------------------------------------------------------

    \35\ For example, Rules 5410(d) and 5515(a)(4) provide an 
exemption from the minimum round lot holder requirement for warrants 
listed in connection with an initial firm commitment underwritten 
public offering. Rule 5110(c)(3) provides an exemption from the 
requirements applicable to a company that was formed by a reverse 
merger if the company completes a firm commitment underwritten 
public offering where the gross proceeds to the company will be at 
least $40 million.
---------------------------------------------------------------------------

    Nasdaq proposes that this change be effective 30 days after 
approval by the SEC. Nasdaq notes that it had originally solicited 
comment on a similar proposal in October 2018,\36\ which provided 
companies with notice that Nasdaq was considering adopting the proposed 
changes to the Exchange's Initial Liquidity Calculations. The proposed 
30-day delay from approval until operation of the proposed rule will 
allow companies a short opportunity to complete an offering or 
transaction before the new rules become effective if they have 
substantially completed the Nasdaq review process or are near 
completion of an offering or transaction, and have relied on the 
existing rules.
---------------------------------------------------------------------------

    \36\ See https://listingcenter.nasdaq.com/assets/Liquidity_Measures_Comment_Solicitation.pdf.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\37\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\38\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, as set forth below. Further, the Exchange believes that this 
proposal is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b).
    \38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has previously opined on the importance of 
meaningful listing standards for the protection of investors and the 
public interest.\39\ In particular, the Commission stated:
---------------------------------------------------------------------------

    \39\ Securities Exchange Act Release No. 65708 (November 8, 
2011), 76 FR 70799 (November 15, 2011) (approving SR-Nasdaq-2011-073 
adopting additional listing requirements for companies applying to 
list after consummation of a ``reverse merger'' with a shell 
company.)
---------------------------------------------------------------------------

    Among other things, listing standards provide the means for an 
exchange to screen issuers that seek to become listed, and to provide 
listed status only to those that are bona fide companies with 
sufficient public float, investor base, and trading interest likely to 
generate depth and liquidity sufficient to promote fair and orderly 
markets. Meaningful listing standards also are important given investor 
expectations regarding the nature of securities that have achieved an 
exchange listing, and the role of an exchange in overseeing its market 
and assuring compliance with its listing standards.\40\
---------------------------------------------------------------------------

    \40\ Id. at 70802.
---------------------------------------------------------------------------

    As described below, Nasdaq believes that the proposed rule changes 
in this filing are consistent with the investor protection requirement 
of Section 6(b)(5) of the Act because they each will enable Nasdaq to 
help ensure that issuers seeking to list on the Exchange have 
sufficient public float, investor base, and trading interest likely to 
generate depth and liquidity. Illiquid securities may trade 
infrequently, in a more volatile manner and with a wider bid-ask 
spread, all of which may result in trading at a price that may not 
reflect their true market value. Less liquid securities also may be 
more susceptible to price manipulation, as a relatively small amount of 
trading activity can have an inordinate effect on market prices.
I. Restricted Securities
    The proposed amendments will adopt new definitions of ``restricted 
securities'' and ``unrestricted securities'' in order to exclude 
securities that are subject to resale restrictions from the Exchange's 
Initial Liquidity Calculations. The Exchange believes that these 
amendments will bolster the Exchange's quantitative shareholder 
requirements, and as a result, better reflect and safeguard the 
liquidity of a security. The Commission has previously noted the 
importance of adequate liquidity in a security and the consequences for 
investors when a security is thinly traded. In In the Matter of the 
Application of Rocky Mountain Power Company, the Commission observed:

    We note that the requirement concerning the number of shareholders 
is not only an important listing criterion but is also a standard used 
in conjunction with other standards to ensure that a stock has the 
investor following and liquid market necessary for trading. In response 
to the Panel's questions, the Company's president acknowledged that the 
market for Rocky Mountain's shares would be initially ``very, very 
small,'' and that fewer than 20,000 of the Company's over 700,000 
shares outstanding were freely tradeable. While Rocky Mountain, as a 
technical matter, complied with the shareholder requirement, it failed 
to demonstrate an adequate market for its shares, which is at the heart 
of this and other [Nasdaq] inclusion requirements.\41\
---------------------------------------------------------------------------

    \41\ See Rocky Mountain Power Co., Securities Exchange Act 
Release No. 40648, 1998 SEC LEXIS 2422; 53 SEC. 979 (November 9, 
1998).

    Nasdaq believes that adopting the new definitions of restricted 
securities and unrestricted securities will promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national market system, and protect 
investors and the public interest

[[Page 33109]]

because securities subject to resale restrictions are not freely 
transferrable and therefore excluding restricted securities from the 
Exchange's Initial Liquidity Calculations will help ensure that Nasdaq 
lists only companies with liquid securities and sufficient investor 
interest to support an exchange listing meeting the Exchange's listing 
criteria, which will better protect investors.
A. Publicly Held Shares
    The proposed amendments will adopt a new definition of 
``unrestricted publicly held shares'' which excludes restricted 
securities and revise Nasdaq's initial listing standards to conform the 
minimum number of publicly held shares to the new definition. Nasdaq 
believes that these changes will promote just and equitable principles 
of trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest because it will help ensure that a security to be 
listed has adequate liquidity and is thus suitable for listing and 
trading on an exchange, which will reduce trading volatility and price 
manipulation, thereby protecting investors and the public interest.
B. Market Value of Publicly Held Shares
    The proposed amendments will revise the definition of ``market 
value'' to exclude restricted securities from the calculation of 
``market value of unrestricted publicly held shares'' and revise 
Nasdaq's initial listing standards to conform the minimum market value 
to the new definition. Nasdaq believes that these changes will promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and protect investors and the public interest because it will 
help ensure that a security to be listed has adequate liquidity and 
investor interest and is thus suitable for listing and trading on an 
exchange, which will reduce trading volatility and price manipulation, 
thereby protecting investors and the public interest.
C. Round Lot Holders
    The proposed amendments will exclude restricted securities from the 
calculation of the number of round lot holders required to meet the 
Exchange's initial listing criteria by revising the definition of 
``round lot holder'' to exclude restricted securities. Nasdaq believes 
that this amendment will promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest by helping ensure adequate distribution, shareholder 
interest and a liquid trading market of a security.
D. American Depositary Receipts
    The proposed amendments will modify Nasdaq's rules to state that 
when considering the security underlying an ADR, Nasdaq will only 
consider restrictions that prohibit the resale or trading of the 
underlying security on the foreign issuer's home country market. 
However, any restrictions, including those provided as examples in the 
new definition of ``restricted securities,'' which would restrict the 
underlying security from being freely sold or tradable on its home 
country market would be considered by Nasdaq when calculating 
``unrestricted publicly held shares.'' Nasdaq believes that this is 
appropriate because the purpose of the Initial Liquidity Calculations, 
and the proposed changes described herein, is to establish investor 
interest in the foreign issuer and ensure adequate liquidity and 
distribution of the foreign issuer's underlying security on its home 
country market, which is held by the depositary bank and represented by 
the ADR. For this reason, existing Rule 5215(b) currently looks to the 
underlying security when calculating publicly held shares, market value 
of publicly held shares, round lot and public holders and it is 
similarly appropriate to consider whether or not the underlying 
security is freely tradable in its home country market when determining 
unrestricted publicly held shares, market value of unrestricted 
publicly held shares, and round lot holders. Excluding securities that 
are only restricted from resale or trading in the United States would 
be not be an appropriate measure of investor interest in or liquidity 
of the underlying security because the underlying security will not be 
listed or trading in the U.S. Moreover, applying the new definition of 
restricted securities to securities trading on a foreign market, if the 
securities trading on the home country market are not already 
restricted by the examples set forth in the new definition of 
restricted securities, would unduly impose the requirements of a U.S. 
national securities exchange on those securities, which will not be 
listed in the U.S. For the foregoing reasons, Nasdaq believes that this 
provision will promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
    Further, the Exchange believes that this provision is not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers. While the Exchange's Initial Liquidity Calculations for ADRs 
would be calculated differently than other securities, these 
differences are not unfair because they recognize the unique structure 
of ADRs, as already reflected in the existing treatment of ADRs under 
Nasdaq's rules, where Nasdaq looks to the underlying security in order 
to ensure sufficient investor interest and adequate liquidity and 
distribution of the foreign issuer's underlying security, which is 
represented by the ADR.
II. Minimum Value Requirement for Holders
    The Exchange proposes adopting a new requirement that at least 50% 
of a company's round lot holders hold unrestricted securities with a 
market value of at least $2,500. Nasdaq believes that the proposed 
$2,500 minimum value is reasonable because the Exchange has noticed 
problems with companies listing where a large number of round lot 
holders hold exactly 100 shares, which would be worth only $400 in the 
case of a stock that is trading at the minimum bid price of $4 per 
share, or as little as $200 in the case of a stock listing under the 
alternative price criteria. Nasdaq notes that the proposed $2,500 
threshold is from 6.5 times to 12.5 times larger than the existing 
minimum investment, and Nasdaq believes that this increased amount is a 
more appropriate representation of genuine investor interest in the 
company and will make it more difficult to circumvent the requirement 
through share transfers for no value. As such, Nasdaq believes that 
these amendments will promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and protect investors and the 
public interest by requiring more than half of the required number of 
shareholders hold a more significant investment in the company, and 
that the company will therefore have an adequate distribution, 
shareholder interest and a liquid trading market of a security.
    Nasdaq does not propose to impose this requirement on the initial 
listings of warrants because warrants do not have a minimum price 
requirement and may have little value at the time of issuance. The 
value of warrants is derived from the value of the underlying security, 
which must be listed on Nasdaq or be a covered security and Nasdaq has 
not

[[Page 33110]]

observed problems with the trading of warrants. As such, Nasdaq 
believes that it is not unfairly discriminatory to treat warrants 
differently under this proposal and that excluding warrants avoids 
imposing an unnecessary impediment to the mechanism of a free and open 
market.
III. Average Daily Trading Volume
    The proposed amendments will generally impose a minimum average 
daily trading volume over the 30 trading days prior to listing of at 
least 2,000 shares a day (including trading volume of the underlying 
security on the primary market with respect to an ADR), with trading 
occurring on more than half of those 30 days (i.e., at least 16 days). 
This will apply to primary equity securities, preferred stock, 
secondary classes of common stock and ADRs previously trading OTC in 
the United States that apply to list on the Exchange. Nasdaq believes 
this proposed change will promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest by helping to assure adequate liquidity and price 
discovery of a security. The Exchange believes that companies trading 
at least 2,000 shares a day over a period of 30 trading days prior to 
listing, with trading occurring on more than half of those 30 days, can 
demonstrate sufficient investor interest to support sustained trading 
activity when listed on a national stock exchange.
    The proposed rule change will provide a limited exemption to this 
requirement for securities (including ADRs) listed in connection with a 
firm commitment underwritten public offering of at least $4 million. 
Nasdaq believes that it is consistent with the protection of investors 
and the public interest, and not unfairly discriminatory, to exempt 
from the proposed average daily trading volume requirement securities 
satisfying this exemption because underwriters facilitate appropriate 
price discovery and will generally make a market in the securities for 
a period of time after the offering, assisting in the creation of a 
liquid trading market. Further, Nasdaq believes that this exemption is 
consistent with the protection of investors and the public interest, 
and not unfairly discriminatory, because the proposed minimum $4 
million firm commitment underwritten public offering is large enough to 
represent a fundamental change in how the company will trade following 
the offering, such that the prior trading volume will not be 
representative of the volume following the offering.
    Under the proposed rule, Nasdaq would consider trading in the 
security underlying an ADR on the foreign issuer's primary market 
together with the average daily trading volume of the ADR in the U.S. 
OTC market in determining whether a foreign issuer seeking to list ADRs 
satisfies the requirement. Nasdaq believes that this distinction is not 
unfairly discriminatory because the trading volume in the underlying 
security on the foreign issuer's primary market represents interest in 
the foreign issuer's security and that interest is reasonably likely to 
be indicative of investor interest in the ADR.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. All domestic and foreign 
companies seeking to list primary equity securities, preferred stock, 
secondary classes of common stock or subscription receipts would be 
affected in the same manner by these changes, across all market tiers. 
As discussed above, companies listing ADRs would be treated differently 
in some respects than companies listing other primary equity 
securities, but those differences reflect the unique characteristics of 
ADRs and does not impose an unnecessary burden on competition.
    To the extent that companies prefer listing on a market with these 
proposed listing standards, other exchanges can choose to adopt similar 
enhancements to their requirements. As such, these changes are neither 
intended to, nor expected to, impose any burden on competition between 
exchanges.

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

    On October 5, 2018, Nasdaq launched a formal comment solicitation 
on proposals to exclude restricted securities from the Exchange's 
Initial Liquidity Calculations and adopt a new initial listing criteria 
related to prior trading volume for securities that are currently 
trading OTC (``2018 Solicitation''), a copy of which is attached hereto 
as Exhibit 2.\42\ No comments were received in response to the comment 
solicitation.
---------------------------------------------------------------------------

    \42\ The Commission notes that Exhibit 2 is attached to the 
Exchange's Amendment No. 3 and not to this notice and order.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 3, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\43\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 3, is consistent with Section 6(b)(5) of the Act,\44\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest; and are not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \44\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The development and enforcement of meaningful listing standards for 
an exchange is of critical importance to financial markets and the 
investing public. Among other things, listing standards provide the 
means for an exchange to screen issuers that seek to become listed, and 
to provide listed status only to those that are bona fide companies 
with sufficient public float, investor base, and trading interest 
likely to generate depth and liquidity sufficient to promote fair and 
orderly markets. Meaningful listing standards also are important given 
investor expectations regarding the nature of securities that have 
achieved an exchange listing, and the role of an exchange in overseeing 
its market and assuring compliance with its listing standards.\45\
---------------------------------------------------------------------------

    \45\ See, e.g., Securities Exchange Act Release Nos. 65708 
(November 8, 2011), 76 FR 70799 (November 15, 2011) (SR-Nasdaq-2011-
073) (order approving a proposal to adopt additional listing 
requirements for companies applying to list after consummation of a 
``reverse merger'' with a shell company); 63607 (December 23, 2010), 
75 FR 82420 (December 30, 2010) (SR-NASDAQ-2010-137) (order 
approving a proposal to amend initial listing standards to list 
securities of special purpose acquisition companies); and 57785 (May 
6, 2008), 73 FR 27597 (May 13, 2008) (SR-NYSE-2008-17) (order 
approving a proposal to adopt new initial and continued listing 
standards to list securities of special purpose acquisition 
companies).
---------------------------------------------------------------------------

    Nasdaq has proposed to make more rigorous certain of its initial 
listing

[[Page 33111]]

standards in order to help assure an adequate level of liquidity exists 
for securities that are listing on the Exchange for the first time. The 
Exchange has proposed to exclude securities subject to resale 
restrictions from the Exchange's Initial Liquidity Calculations. The 
Commission believes the proposed changes to the Exchange's calculation 
of a company's publicly held shares, market value of publicly held 
shares, and round lot holders for purposes of qualifying the company's 
securities for initial listing, including the proposed new definitions 
of ``Restricted Securities,'' ``Unrestricted Publicly Held Shares,'' 
and ``Unrestricted Securities,'' and the proposed amended definition of 
``Round Lot Holder,'' are consistent with the requirements of the Act, 
including the protection of investors, the prevention of fraudulent and 
manipulative acts and practices, and the promotion of fair and orderly 
markets.
    As noted by the Exchange, Exchange rules currently only exclude 
from the publicly held share requirement shares held, directly or 
indirectly, by officers, directors or any person who is the beneficial 
owner of more than 10 percent of the total shares outstanding.\46\ 
Nasdaq's publicly held share and market value of publicly held share 
requirements, as well as its round lot holder requirement, however, 
currently do not exclude restricted shares that would not be freely 
tradeable at the time of listing. As a result, under the Exchange's 
current initial listing standards,\47\ a security that may not have a 
substantial number of unrestricted, freely transferable securities 
outstanding and may be considered illiquid may nevertheless satisfy the 
Exchange's current initial listing requirements related to liquidity 
and qualify to list on the Exchange. Nasdaq notes that an illiquid 
stock may trade infrequently and may be subject to volatility as well 
as potentially more susceptible to manipulation.\48\
---------------------------------------------------------------------------

    \46\ See definition of ``Publicly Held Shares'' in Nasdaq Rule 
5005(a)(35).
    \47\ See supra Section II.A.1.I (Restricted Securities).
    \48\ See id.
---------------------------------------------------------------------------

    The proposed amendments should allow the Exchange to more 
accurately determine whether a security has adequate distribution and 
liquidity and is thus suitable for listing and trading on the Exchange. 
The Commission believes that these amendments should help to ensure 
that the Exchange lists only securities with a sufficient market, with 
adequate depth and liquidity, and with sufficient investor interest to 
support an exchange listing.
    With respect to a company applying to list on the Exchange through 
a direct listing, the Exchange amended its proposal to specify that for 
a company that has not had sustained recent trading in a private 
placement market prior to listing, Nasdaq will determine that the 
company has met the Market Value of Unrestricted Publicly Held Shares 
requirement if the Company satisfies the applicable Market Value of 
Unrestricted Publicly Held Shares requirement set forth in Nasdaq Rule 
5315 and provides a Valuation evidencing a Market Value of Publicly 
Held Shares of at least $250,000,000.\49\ The Commission believes that 
this change is reasonable given that a company applying to list on the 
Exchange through a direct listing that is subject to the $250,000,000 
valuation requirement would also be required to comply with the initial 
listing standards set forth in Nasdaq Rule 5315, including the revised 
Initial Liquidity Calculations.
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    \49\ See supra Section II.A.1.I.B (Market Value of Publicly Held 
Shares). The Exchange originally proposed that it would determine 
that such a company had met the Market Value of Unrestricted 
Publicly Held Shares requirement if the company provided a valuation 
evidencing a Market Value of Unrestricted Publicly Held Shares of at 
least $250,000,000. See Notice, supra note 3, 84 FR at 14174. The 
Exchange states that the $250,000,000 valuation requirement is 
designed to be a measure of the size of the company rather than a 
measure of its liquidity. See supra Section II.A.1.I.B (Market Value 
of Publicly Held Shares).
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    With respect to ADRs, the Commission believes that it is reasonable 
and consistent with the Act for the Exchange to consider restrictions 
that prohibit the resale or trading of the foreign security underlying 
the ADR on the foreign issuer's home country market (rather than on the 
U.S. markets) when determining whether a security is restricted for 
purposes of the Initial Liquidity Calculations. The Exchange states 
that for ADRs, the purpose of the Initial Liquidity Calculations is to 
establish investor interest in the foreign issuer and ensure adequate 
liquidity and distribution of the foreign issuer's underlying security 
on its home country market, which is held by the depositary bank and 
represented by the ADR; therefore, excluding securities that are only 
restricted from resale or trading in the United States would not be an 
appropriate measure of investor interest in or liquidity of the 
underlying security because the underlying security will not be listed 
or trading in the U.S.\50\ The Commission notes that pursuant to 
current Nasdaq Rule 5215(b), the Exchange looks to an ADR's underlying 
foreign security for purposes of the Initial Liquidity Calculations, 
and that the proposal should help to ensure adequate liquidity and 
distribution and sufficient investor interest in the company's 
underlying security on its home country market to support the listing 
of an ADR in the U.S.
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    \50\ See supra note 28 and accompanying text.
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    The Commission received one comment letter that generally supported 
the proposed changes but requested that SPACs be given additional time 
to comply with the new requirements after a business combination.\51\ 
The commenter notes that the Exchange currently provides a 30-day grace 
period for a former SPAC to demonstrate compliance with the round lot 
requirement, if the business combination is structured in a certain 
way, and states that a grace period will become more important if the 
new standards are approved and should be allowed regardless of the 
transaction structure. Nasdaq has not proposed a grace period for SPACs 
so the comment is beyond the scope of this proposal. The Commission 
notes, however, that it previously stated, in reviewing a Nasdaq 
proposal providing for a grace period for SPACs to comply with the 
holder and other requirements after a business combination, that 
initial listing standards, absent an explicit exception, apply upon 
initial listing.\52\ The Commission also recently disapproved a NYSE 
proposal requesting additional time for a post-business combination 
SPAC to comply with listing standards.\53\ As noted above, the 
Commission believes that the proposed standards should help to ensure 
upon initial listing (including for SPACs and former SPACs after the 
business combination) that there is adequate depth and liquidity and 
investor interest to support exchange listing and trading, which should 
help to protect investors and the public interest.
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    \51\ See Kirkland Letter, supra note 7.
    \52\ See Securities Exchange Act Release No. 82478 (January 9, 
2018), 83 FR 2278 (January 16, 2018) (SR-NASDAQ-2017-087) (Order 
Instituting Proceedings).
    \53\ See Securities Exchange Act Release No. 86117 (June 14, 
2019), 84 FR 28879 (June 20, 2019) (SR-NYSE-2018-46).
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    The Commission also believes the proposed new initial listing 
requirement that at least 50% of a company's required Round Lot Holders 
hold Unrestricted Securities with a market value of at least $2,500 is 
consistent with the Act, including the protection of investors, the 
prevention of fraudulent and manipulative acts and practices, and the 
promotion of fair and orderly markets. The Exchange stated that it has

[[Page 33112]]

noticed problems with companies listing where a large number of Round 
Lot Holders hold exactly 100 shares, worth as little as $400 in the 
case of a stock that is trading at the minimum bid price of $4 per 
share, or as little as $200 in the case of a stock listing under the 
alternative price criteria.\54\ The Exchange stated that the proposed 
$2,500 threshold is 6.5 times to 12.5 times larger than the existing 
minimum investment, and that it believes this increased amount is a 
more appropriate representation of genuine investor interest in the 
company and will make it more difficult to circumvent the Round Lot 
Holder requirement through share transfers for no value.\55\ The 
Commission believes that the proposed new minimum value requirement is 
reasonably designed to ensure that at least 50% of the required number 
of Round Lot Holders have a sufficient investment in the company and 
that the company should therefore have adequate distribution and 
liquidity and shareholder interest to support an exchange listing.
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    \54\ See supra Section II.A.2.II (Minimum Value Requirement for 
Holders).
    \55\ See id. Nasdaq Rule 5505(a)(1)(B) allows, under certain 
conditions, for companies to list with a minimum price of $2.00 or 
$3.00 per share.
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    The Commission believes that it is reasonable and not unfairly 
discriminatory for the Exchange not to impose this minimum value 
requirement on the initial listing of warrants. The Exchange states 
that warrants do not have minimum price requirements and may have 
little value at the time of issuance.\56\ The Exchange also represents 
that it has not observed problems with the trading of warrants.\57\ The 
Commission notes that the security underlying a warrant must be listed 
on the Exchange or be a covered security, as defined in Section 18(b) 
of the Securities Act of 1933.\58\
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    \56\ See supra Section II.A.1.II (Minimum Value Requirement for 
Holders).
    \57\ See id. As Nasdaq stated, warrants are often issued as part 
of a unit and the common stock component of the unit would be 
required to satisfy the minimum value requirement. See id.
    \58\ See Nasdaq Rules 5410(b) and 5515(a)(2).
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    The Commission further believes that the Exchange's proposal to 
impose a new minimum average daily trading volume requirement for the 
initial listing of securities trading OTC at the time of their listing 
is consistent with the Act.\59\ The Exchange states that it believes 
that companies trading at least 2,000 shares a day over a period of 30 
trading days prior to listing, with trading occurring on more than half 
of those 30 days, can demonstrate sufficient investor interest to 
support sustained trading activity when listed on the Exchange and help 
to promote price discovery of a security when listed.\60\ The 
Commission believes that the proposed requirement is reasonably 
designed to ensure that companies trading OTC prior to listing have 
adequate liquidity and trading activity to support an exchange listing.
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    \59\ The trading volume provisions apply to primary equity 
securities, ADRs, preferred stock, secondary classes of common stock 
and paired share units to the extent there is trading in these 
securities in the U.S. OTC market. See supra Section I.A.1.III 
(Average Daily Trading Volume).
    \60\ See id.
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    With respect to ADRs, the Exchange amended its proposal to make 
clear that, to the extent the ADR has trading in the U.S. OTC market, 
such daily trading volume will be combined with trading volume of the 
security underlying the ADR in the foreign issuer's primary market. The 
Commission believes that combining the trading volume of the ADR and 
the security underlying the ADR to meet this standard is consistent 
with the Exchange's purpose to ensure there is sufficient interest and 
trading activity to support an exchange listing of the ADR and help in 
price discovery upon listing.
    In addition, the Commission believes that the proposed exception to 
the minimum average daily trading volume requirement for securities 
listed in connection with a firm commitment underwritten public 
offering of at least $4 million reasonably accommodates issuers that 
may not meet the requirement but should nevertheless have adequate 
liquidity upon an exchange listing. As noted by the Exchange, it has 
proposed this exception to the trading volume requirement because it 
believes the underwritten offering process is designed to promote 
appropriate price discovery and provides a basis for believing that a 
liquid trading market will likely develop for the securities after 
listing. The Commission notes that the underwriters in a firm 
commitment underwriting will typically have ``indications of interest'' 
from prospective investors and will use this information to recommend a 
price for the shares \61\ and, as the Exchange stated, will generally 
make a market in the securities for a period of time after the offering 
and thereby assist in creating a liquid market. While the dollar amount 
for the exception of a $4 million underwritten public offering is 
relatively low,\62\ particularly when compared to the higher listing 
standards of the Global Select and Global tiers, the Commission notes 
that the other changes to the liquidity requirements, as well as other 
listing standards, will all still have to be met upon initial listing.
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    \61\ See ``Investor Bulletin: Investing in an IPO,'' issued by 
the Commission, available at https://www.sec.gov/files/ipo-investorbulletin.pdf.
    \62\ See, e.g., Nasdaq Rule 5110(c)(3) (providing an exception 
to certain initial listing requirements for a ``reverse merger'' 
company completing an underwritten public offering of at least $40 
million).
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    Nasdaq states that it is not proposing to change the requirements 
for continued listing at this time, and believes that the proposed 
heightened initial listing requirements will result in enhanced 
liquidity for the companies that satisfy them on an ongoing basis.\63\ 
The Commission would expect Nasdaq to review its experience with the 
new initial listing standards and consider whether the adoption of the 
new rule has addressed the concerns identified by Nasdaq and propose 
any appropriate changes, if necessary, to its listing standards, 
including continued listing standards.
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    \63\ See supra note 9 and accompanying text.
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    For the reasons discussed above, the Commission believes that 
Nasdaq's proposal will further the purposes of Section 6(b)(5) of the 
Act by, among other things, protecting investors and the public 
interest, and preventing fraudulent and manipulative acts and 
practices, as well as promoting fair and orderly markets under the Act.

IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule 
Change

    Interested persons are invited to submit written views, data, and 
arguments concerning whether Amendment No. 3 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-2019-009 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2019-009. 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 website (http://www.sec.gov/rules/sro.shtml). 
Copies of the

[[Page 33113]]

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 website 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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2019-009 and should be submitted 
on or before August 1, 2019.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 3, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
3 in the Federal Register. The Commission notes that the original 
proposal was published for comment in the Federal Register.\64\ The 
Commission notes that Amendment No. 3 clarifies and provides additional 
explanation relating to the proposed rule change. The changes and 
additional information in Amendment No. 3 assist the Commission in 
evaluating the Exchange's proposal and in determining that it is 
consistent with the Act. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\65\ to approve the proposed 
rule change, as modified by Amendment No. 3, on an accelerated basis.
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    \64\ See Notice, supra note 3.
    \65\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\66\ that the proposed rule change (SR-NASDAQ-2019-009), as 
modified by Amendment No. 3, be, and it hereby is, approved on an 
accelerated basis.
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    \66\ Id.
    \67\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\67\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2019-14723 Filed 7-10-19; 8:45 am]
 BILLING CODE 8011-01-P


