Please note that the original article is in Japanese. The following is a summary of its content.
Background: A Shift from Formal to Substantive Compliance
In recent years, U.S. stock exchanges have seen an increase in companies with stock prices below $1.00. Many have used frequent reverse stock splits as a formal mechanism to regain compliance with the Minimum Bid Price requirement.
This practice, which does not reflect a company’s substantive financial health, has been seen as a threat to market integrity. In response, Nasdaq has amended its rules to curb this activity and promote actual improvements in corporate value. These changes significantly alter the compliance periods and add new, stringent restrictions.
Nasdaq’s New Restrictions on Reverse Stock Splits
Nasdaq has tightened the eligibility for the 180-day compliance (grace) period awarded to companies that fall below the $1.00 minimum.
- 12-Month Restriction: A company that has conducted a reverse stock split within the past 12 months is no longer eligible for this 180-day grace period. Delisting procedures will begin immediately.
- 2-Year / High-Ratio Restriction: Furthermore, companies that have conducted a reverse split at a ratio of 250-for-1 or higher within the past two years are also ineligible for any compliance period.
New Notification Timeline (Effective Jan 30, 2025)
Effective January 30, 2025, the notification requirement for a reverse split (NASDAQ Rule 5250(e)(7)) has changed. Companies must now notify Nasdaq at least 10 calendar days prior to the record date, increased from the previous 5 business days.
Amendments to the Minimum Bid Price Compliance Process
Nasdaq has also made critical changes to the compliance and appeals process:
- Hearing Panel Stays Removed: If a company fails to regain compliance after a second 180-day extension, a Nasdaq Hearing Panel will no longer grant a stay or further extension pending an appeal. This makes delisting far more likely.
- No “Cure-and-Fail” Permitted: Crucially, if a company executes a reverse split to fix its bid price, but this action causes the company to fail another numerical requirement (e.g., the number of publicly held shares), Nasdaq will consider the company “to have not regained compliance” with the bid price rule.
Similar Rule Hardening at the NYSE
The New York Stock Exchange (NYSE) has implemented similar restrictions. Companies are now ineligible for the standard 6-month grace period if they have conducted a reverse split in the past year or a split at a ratio of 200-for-1 or higher in the past two years.
Implications for Companies and Investors
As of March 2025, these rules are in effect.
- For Companies: Reliance on reverse splits as a short-term fix is no longer a viable strategy. Companies are now compelled to focus on substantive operational improvements, such as enhancing financial structure, strengthening growth strategies, and improving investor relations.
- For Investors: These changes increase overall market integrity. However, they also increase the delisting risk for specific companies that have relied on formal compliance measures. Investors must now analyze a company’s fundamental health and long-term strategy, not just its ability to formally meet listing standards.
This trend across both major exchanges signals a clear shift from accepting formal compliance to demanding substantive corporate value.
