[Federal Register Volume 85, Number 209 (Wednesday, October 28, 2020)]
[Notices]
[Pages 68400-68403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23794]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90245; File No. SR-NASDAQ-2020-069]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
1, To Exclude Special Purpose Acquisition Companies From the 
Requirement That at Least 50% of a Company's Round Lot Holders Each 
Hold Unrestricted Securities With a Market Value of at Least $2,500

October 22, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 8, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On October 
21, 2020, the Exchange filed Amendment No. 1 to the proposed rule 
change, which amended and replaced the proposed rule change in its 
entirety. The Commission is publishing this notice to solicit comments 
on the proposed rule change, as modified by Amendment No. 1, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to exclude special purpose acquisition 
companies from the requirement that at least 50% of a company's round 
lot holders each hold unrestricted securities with a market value of at 
least $2,500. This Amendment No. 1 replaces and supersedes the original 
filing in its entirety.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these

[[Page 68401]]

statements may be examined at the places specified in Item IV below. 
The Exchange has prepared summaries, set forth in sections A, B, and C 
below, of the most significant aspects of such statements.

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

1. Purpose
    Nasdaq proposes to exempt Acquisition Companies listed pursuant to 
IM-5101-2 whose business plan is to complete one or more acquisitions, 
prior to the completion of any such acquisitions (``SPACs'') from the 
requirement that 50% of a company's required minimum number of round 
lot holders need to hold $2,500 worth of securities at the time of 
initial listing.
    Nasdaq's listing requirements include a number of criteria designed 
to ensure that a listed security has adequate liquidity and is thus 
suitable for listing and trading on a national securities exchange. 
These requirements are intended to ensure that there are sufficient 
shares available for trading to facilitate proper price discovery in 
the secondary market. Among these is the requirement for a company to 
have a minimum number of publicly held shares, market value of publicly 
held shares and round lot holders in order to list a security on the 
Exchange. These measures help assure that there will be sufficient 
investor interest and trading to support price discovery during the 
initial public offering (``IPO'') process and once a security is 
listed.
    On July 5, 2019, the Commission approved Nasdaq's proposed changes 
to enhance its initial listing standards related to liquidity 
(``Initial Liquidity Amendments'').\3\ Under the revised standards, 
securities subject to resale restrictions for any reason (``restricted 
securities'') are excluded from the calculation of publicly held 
shares, market value of publicly held shares and round lot holders for 
initial listing purposes.\4\ Nasdaq designed the Initial Liquidity 
Amendments to help ensure adequate distribution, shareholder interest 
and a liquid trading market for a security. The Initial Liquidity 
Amendments also imposed a new requirement that at least 50% of a 
company's minimum required round lot holders must each hold 
unrestricted securities with a market value of at least $2,500 (the 
``Required Minimum Amount'').
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    \3\ See Securities Exchange Act Release No. 86314 (July 5, 
2019), 84 FR 33102 (July 11, 2019) (approving SR-NASDAQ-2019-009).
    \4\ Rule 5005(a)(37) defines ``Restricted Securities'' as 
``securities that are subject to resale restrictions for any reason, 
including, but not limited to, 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; (2) acquired through an employee stock benefit plan or as 
compensation for professional services; (3) acquired in reliance on 
Regulation S, which cannot be resold within the United States; (4) 
subject to a lockup agreement or a similar contractual restriction; 
or (5) considered ``restricted securities'' under Rule 144.''
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    Nasdaq imposed the Required Minimum Amount to help ensure that at 
least 50% 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. It also 
serves to assure that investors purchasing shares in an IPO at the 
offering price are making a large enough investment that the price 
established in that offering is reliable. Prior to adopting the Initial 
Liquidity Amendments, Nasdaq had noticed problems with companies 
listing where a large number of round lot holders held 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 alternative price criteria. In 
adopting the Initial Liquidity Amendments, Nasdaq believed that the 
Required Minimum Amount is a more appropriate representation of genuine 
investor interest in the company and would make it more difficult to 
circumvent the round lot holder requirement through share transfers for 
no value.
    Since implementing the Initial Liquidity Amendments, Nasdaq has 
determined that the requirement for 50% of a company's required minimum 
number of round lot holders to hold $2,500 worth of securities is not 
appropriate for the listing of SPACs. SPACs are Special Purpose 
Acquisition Companies that raise capital in an initial public offering 
(``IPO'') to enter into future undetermined business combinations 
through mergers, capital stock exchanges, asset acquisitions, stock 
purchases, reorganizations or other similar business combinations with 
one or more operating businesses or assets. At least 90% of the gross 
proceeds raised in the IPO and any concurrent sale of equity securities 
must be deposited into a trust account.\5\ Within 36 months or such 
shorter time period as specified by the SPAC, the SPAC must complete 
one or more business combinations having an aggregate fair market value 
of at least 80% of the value of the trust account.\6\ Shareholders have 
the opportunity to redeem their shares for a pro rata portion of the 
trust at the time of the business combination.\7\
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    \5\ See Nasdaq IM-5101-2(a).
    \6\ See Nasdaq IM-5101-2(b).
    \7\ See Nasdaq IM-5101-2(d) and (e).
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    In the offering of an operating company, the underwriters and 
investors determine a valuation of the company based on its revenues, 
future cash flow expectations, business activities and peer valuations, 
among other metrics. Nasdaq believes that imposing the Required Minimum 
Amount on operating companies helps to ensure that the price arrived at 
by the underwriters reflects demand from shareholders investing a 
meaningful amount in the securities. In contrast, in the Exchange's 
view, the value of a SPAC prior to a business combination is not based 
solely on investor demand for the security but is based primarily on 
the value of the cash held in the trust account.\8\ Nasdaq therefore 
believes that the requirement for at least half of a SPAC's required 
unrestricted round lot holders to hold at least $2,500 of shares is not 
relevant to help establish the legitimacy of the offering price.
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    \8\ Nasdaq analyzed the trading history from January 2020 
through June 2020 of 57 active, Nasdaq-listed Acquisition Companies 
listed as of June 30, 2020. Nasdaq observed that shares of all 
reviewed Acquisition Companies traded, on average, close to the 
$10.00 redemption value with the median of the average daily range 
equal to $0.04. This range was the same for those Acquisition 
companies listed before and after the Initial Liquidity Amendments 
became operative on August 5, 2019 (25 and 32 companies, 
respectively).
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    As noted above, prior to adopting the Initial Liquidity Amendments, 
Nasdaq noticed problems with companies listing with a large number of 
round lot holders holding exactly 100 shares. Such holders held shares 
in the company prior to its IPO, and Nasdaq believed that such amount 
was not a representation of genuine investor interest in the company 
sufficient to support an exchange listing. In contrast, typically the 
only investors holding shares in a SPAC prior to an IPO are its 
founders and all other round lot holders represent new investors in the 
SPAC's IPO. Nasdaq therefore believes that SPACs do not present a 
similar risk of circumventing the round lot holder requirement through 
share transfers for no value, and Nasdaq has not observed this problem 
with SPACs. Furthermore, SPAC shareholders are afforded the opportunity 
to redeem or tender their shares for a pro rata portion of the value of 
the IPO proceeds maintained in a trust account in connection with the 
SPAC's business combination, which must occur within 36 months of the

[[Page 68402]]

IPO. As such, the SPAC structure provides an alternative liquidity 
mechanism that operating companies do not offer. Accordingly, based on 
the unique structure of SPACs, Nasdaq believes that SPACs should be 
excluded from the Required Minimum Amount and is proposing to revise 
Rules 5315(f)(1)(C), 5405(a)(3) and 5505(a)(3) to exclude SPACs from 
the Required Minimum Amount.\9\ As a result of these changes, SPACs 
must satisfy the Exchange's initial listing requirements at the time of 
the IPO.\10\ However, the requirement that 50% of the SPAC's required 
minimum number of round lot holders hold the Required Minimum Amount at 
the time of initial listing will not apply.
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    \9\ This change will also align Nasdaq's treatment of SPACs with 
the treatment of warrants under this rule. In this regard, the 
valuation of a warrant is similar to the valuation of a share of a 
SPAC in that the warrant's value is derived from the value of the 
underlying security and the value of a SPAC share is derived from 
the value of the underlying trust account. See Initial Liquidity 
Amendments at 33112.
    \10\ Those requirements currently include a minimum number of 
publicly held shares, minimum market value of publicly held shares, 
minimum number of round lot holders and minimum bid price.
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    SPACs will also continue to remain subject to unique listing rules, 
which provide shareholders the right to redeem or convert their shares 
for a pro rata share of the trust in conjunction with the business 
combination. Following a business combination, in order to remain 
listed, the combined company must meet Nasdaq's initial listing 
requirements.\11\ Nasdaq believes that although SPACs will be excluded 
from the Required Minimum Amount at the time of initial listing, 
requiring SPACs to satisfy Nasdaq's other initial listing standards 
will continue to help ensure that SPACs have sufficient public float, 
investor base, and trading interest likely to generate depth and 
liquidity to support exchange listing and trading, which should help to 
protect investors and the public interest.
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    \11\ Those requirements currently require 50% of the post-
business combination entity's minimum number of round lot holders to 
hold the Required Minimum Amount.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ 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, by removing a listing requirement from a security that is not 
an appropriate measure of liquidity based on the unique structure of 
the listed company while ensuring adequate distribution, shareholder 
interest, a liquid trading market and investor protections through 
other listing standards.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Specifically, as noted above, prior to adopting the Initial 
Liquidity Amendments, Nasdaq noticed problems with companies listing 
with a large number of round lot holders holding exactly 100 shares. 
Such holders held shares in the company prior to its IPO, and Nasdaq 
believed that such amount was not a representation of genuine investor 
interest in the company to support an exchange listing. In contrast, 
typically the only investors holding shares in a SPAC prior to an IPO 
are its founders and all other round lot holders represent new 
investors in the SPAC's IPO. SPACs also offer alternative mechanisms to 
provide liquidity by affording shareholders the opportunity to redeem 
or tender their shares for a pro rata portion of the value of the IPO 
proceeds maintained in a trust account in connection with the SPAC's 
business combination. Nasdaq therefore believes that SPACs do not 
present a similar risk of circumventing the round lot holder 
requirement through share transfers for no value and that removing this 
requirement will not impact the protection of investors.
    Further, the Exchange believes that excluding SPACs from the 
Required Minimum Amount avoids imposing an unnecessary impediment to 
the mechanism of a free and open market and is not unfairly 
discriminatory. As noted above, SPACs provide their shareholders with 
an alternate mechanism for obtaining liquidity, through the ability to 
redeem or tender their shares, which other companies do not provide. As 
such, it is not unfairly discriminatory to treat SPACs differently than 
operating companies. Further, in an initial offering of an operating 
company, the underwriters and investors determine a valuation of the 
company based on its revenues, future cash flow expectations, business 
activities and peer valuations, among other metrics. Nasdaq believes 
that imposing the Required Minimum Amount on operating companies helps 
to ensure that the price arrived at by the underwriters reflects demand 
from shareholders investing a meaningful amount of unrestricted 
securities. In contrast, the Exchange has observed that SPACs generally 
have historically traded close to the value in the trust during the 
period between its public offering and the consummation of a business 
combination.\14\ This suggests that the value of a SPAC's security 
derives from the value of the underlying trust. Nasdaq therefore 
believes that the requirement for at least half of a SPAC's required 
unrestricted round lot holders to hold at least $2,500 of shares is not 
relevant to help establish the legitimacy of the offering price.
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    \14\ See supra note 8.
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    This proposed change will also align Nasdaq's treatment of SPACs 
with the treatment of warrants under this rule. In this regard, the 
valuation of a warrant is similar to the valuation of a share of a SPAC 
in that the warrant's value is derived from the value of the underlying 
security and the value of a SPAC share is derived from the value of the 
underlying trust account. SPACs are also similar to warrants in that 
warrants represent a right to purchase a share in a company in the 
future, and SPACs represent a right to convert shares of common stock 
into a pro rata share of the aggregate amount then in the trust account 
or into a share of the future post-business combination entity.
    In adopting the Initial Liquidity Amendments, Nasdaq believed, and 
the Commission concurred,\15\ that it is not unfairly discriminatory to 
treat warrants differently and that excluding warrants avoids imposing 
an unnecessary impediment to the mechanism of a free and open market. 
The Exchange believes that because the valuation of a SPAC's security 
is similar to the valuation of a warrant, it is not unfairly 
discriminatory to treat SPACs differently than other company's listing 
common stock.
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    \15\ See Initial Liquidity Amendments at 33112.
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    The Exchange believes that other listing standards will help it to 
ensure adequate distribution, shareholder interest and a liquid trading 
market of a SPAC's security at the time of IPO and following a business 
combination. In both cases, a SPAC must satisfy Nasdaq's initial 
listing standards.\16\ Nasdaq believes that although SPACs will be 
excluded from the Required Minimum Amount at the time of initial 
listing, requiring SPACs to satisfy Nasdaq's other initial listing 
standards will continue to help ensure that SPACs have sufficient 
public float, investor base, and trading interest likely to generate 
depth and liquidity to support exchange listing and trading, which 
should help to protect investors and the public interest.
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    \16\ See supra notes 10 and 11.
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    SPACs will also continue to remain subject to unique listing rules. 
Until the

[[Page 68403]]

SPAC has completed a business combination of at least 80% of the trust 
account value, the SPAC must, among other things, submit the business 
combination to a shareholder vote.\17\ Any public shareholders who vote 
against the business combination have a right to convert their shares 
of common stock into a pro rata share of the aggregate amount then in 
the trust account, if the business combination is approved and 
consummated.\18\ If a shareholder vote on the business combination is 
not held, the SPAC must provide all shareholders with the opportunity 
to redeem all their shares for cash equal to their pro rata share of 
the aggregate amount then in the trust account.\19\ In addition, 
following a business combination, the post-business combination entity 
must meet Nasdaq's initial listing requirements in order to remain 
listed.\20\ Nasdaq believes that these additional investor protection 
standards will continue to provide safeguards to shareholders who 
invest in SPAC securities.
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    \17\ See Nasdaq IM-5101-2(d).
    \18\ See Nasdaq IM-5101-2(d).
    \19\ See Nasdaq IM-5101-2(e).
    \20\ See supra note 11.
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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. The Exchange notes that NYSE 
Rule 802.01B(ii) requires SPACs to have a minimum number of 300 round 
lot holders (``public stockholders''),\21\ however, NYSE does not 
require such public stockholders to hold a minimum investment amount. 
NYSE American Rule 119 also does not require public stockholders of a 
SPAC to hold a minimum investment amount. As a result of the proposed 
change, round lot holders of SPACs listed on Nasdaq would not be 
required to hold the Required Minimum Amount, similar to round lot 
holders of SPACs listed on NYSE and NYSE American. As a result, the 
proposed rule change will promote competition among exchanges since it 
will allow Nasdaq to list SPACs that currently could list on NYSE and 
NYSE American. In addition, the proposed rule change will apply equally 
to all SPACs listing on Nasdaq and so won't impact competition among 
SPACs.
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    \21\ NYSE Rule 802.01B(ii)(B) states that ``Shares held by 
directors, officers, or their immediate families and other 
concentrated holdings of 10% or more are excluded in calculating the 
number of publicly-held shares.'' 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.''
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-069 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-2020-069. 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 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-2020-069 and should be submitted 
on or before November 18, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23794 Filed 10-27-20; 8:45 am]
BILLING CODE 8011-01-P


