By Anne Sherry, J.D.
Nasdaq has proposed changes to three rules that would shore up listing and governance requirements for issuers that primarily operate in a jurisdiction that has secrecy laws, blocking statutes, national security laws, or similar restrictions on access by U.S. regulators. The changes would apply additional or more stringent listing criteria based on auditor qualifications, require a minimum offering size or public float percentage for IPOs, and require companies either to have a director or member of senior management with U.S. public company experience or retain a third-party advisor. Comments are due 21 days from publication in the Federal Register.
Qualification of management. In one of the proposals, Nasdaq seeks to require that a company primarily operating in a "restrictive market" have someone in management or on the board, or retain an advisor with familiarity with the responsibilities of being a U.S. public company. The SEC’s release relates that in some instances, Nasdaq found management was unfamiliar or "otherwise unprepared for the rigors of operating as a public company." Furthermore, the risks of unfamiliarity, such as noncompliance with disclosure obligations, increase when the company operates in a jurisdiction that restricts U.S. regulators’ access to information.
The proposal would require that applicants from restrictive markets certify to Nasdaq that they have and will continue to have a member of senior management or a director with experience or familiarity with the regulatory and reporting requirements under Nasdaq rules and federal securities laws. Alternatively, the company may retain a third-party advisor acceptable to Nasdaq that will provide guidance on the regulatory requirements. A company that falls out of compliance would be required to disclose that to investors, provide Nasdaq a plan to regain compliance, and do so within 180 days.
IPO size. The second proposal would codify Nasdaq’s discretionary authority to deny listing or apply more stringent criteria for small IPOs coming from restrictive markets. The U.S. offering would need to result in gross proceeds to the company of at least $25 million or represent at least 25 percent of the company’s post-offering market value of listed securities. This requirement, which would also apply to business combinations, mitigates concerns that there is an insufficient investor base to support trading in the secondary market, a risk compounded by barriers on access in restrictive markets, Nasdaq submits. Finally, the proposal would allow direct listings by restrictive market companies subject to certain requirements.
Auditor qualifications. Finally, Nasdaq seeks to codify its discretion to deny listing or apply additional criteria when a restrictive market company’s auditor has not been subject to PCAOB inspection, is unavailable for inspection, or "otherwise does not demonstrate sufficient resources, geographic reach or experience as it relates to the company’s audit." The rule amendment would set forth factors Nasdaq may consider in applying additional criteria based on the qualifications of the auditor. Nasdaq may also impose lock-up restrictions to prevent insiders from selling their shares if auditors have detected undisclosed, material misstatements.
The releases are No. 34-89028, No. 34-89027, and No. 34-88987.