April 18, 2012.
On January 3, 2012, The NASDAQ Stock Market LLC (“Exchange” or “Nasdaq”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 
and Rule 19b-4 thereunder,
a proposal to adopt an alternative to the $4 minimum bid price initial listing requirement for the Nasdaq Capital Market of either $2 or $3, if certain other listing requirements are met. The proposed rule change was published for comment in the Federal Register on January 20, 2012.
The Commission received one comment on the proposal.
On March 1, 2012, the Commission extended to April 19, 2012 the time period in which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved.
Nasdaq filed Amendment No. 1 to the proposed rule change on April 16, 2012.
The Commission is publishing this notice to solicit comments on Amendment No. 1 from interested persons and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.
II. Description of the Amended Proposal
Currently, issuers seeking to list their securities on the Nasdaq Capital Market must meet, among other things, the initial listing standards of the Nasdaq Capital Market. The initial listing standards include quantitative and qualitative requirements. To qualify for listing on the Nasdaq Capital Market, an issuer's security must, among other things, have a minimum bid price of at least $4 per share.
Nasdaq proposes to add an alternative to the $4 minimum bid price per share requirement. Under the proposed alternative, a security would qualify for listing on the Nasdaq Capital Market if, for at least five consecutive business days prior to approval, the security has a minimum closing price of at least $3 per share, if the issuer meets the Equity or Net Income standards,
or at least $2 per share, if the issuer meets the Market Value of Listed Securities standard.
Further, for issuers to qualify their securities under this alternative price requirement, the issuer must demonstrate that it has net tangible assets in excess of $2 million if the issuer has been in continuous operation for at least three years. If the issuer has been in continuous operation for less than three years, then the issuer must demonstrate net tangible assets in excess of $5 million. The issuer could also be listed under the alternative, lower $2 or $3 price requirement if the issuer has average revenue of at least $6 million for the last three years.
Nasdaq is proposing to add new interpretative material in connection with this alternative price requirement. Proposed IM-5505 states that an issuer that qualifies its securities for initial listing under the alternative price requirement could become a “penny stock” if the issuer fails the net tangible assets and revenue tests after listing and does not satisfy any of the other exclusions from being a penny stock contained in Rule 3a51-1 under the Act.
Nasdaq would monitor issuers whose securities are listed under the alternative price requirement, and publish on its Web site on a daily basis a list of those companies that no longer satisfy the net tangible assets or revenue tests, nor any other exclusions from being a penny stock under Rule 3a51-1. Moreover, the proposed IM-5505, as amended, would provide that if an issuer initially lists its securities under the proposed alternative price requirement and the securities subsequently achieve a $4 closing price over at least five consecutive business days 
and satisfy all other initial listing criteria, the securities would no longer be considered as having listed under the alternative price requirement, and would no longer be monitored for compliance with that requirement.
In Amendment No. 1, Nasdaq amended the proposal to state that the $4 closing price would be the Nasdaq Official Closing Price,
or if such price is not available, the consolidated closing price distributed under the applicable National Market System Plan. In Amendment No. 1, Nasdaq also stated that it would notify a company that initially lists its securities under the alternative standard of its subsequent qualification for listing under the $4 price requirement of Rule 5505(a)(1)(A).
Nasdaq's stated purpose for its proposal is to compete with NYSE Amex for initial listings of companies with securities priced between $2 and $4.
Currently, NYSE Amex is able to list companies priced between $2 and $4 without their securities being considered “penny stocks,” because NYSE Amex benefits from the “grandfather” exclusion set forth in Rule 3a51-1(a)(1) under the Act,
which does not apply to Nasdaq.
As a result, in order to compete with NYSE Amex for listing securities priced between $2 and $4, and avoid their being considered “penny stocks,” Nasdaq's proposed Rule 5505(a)(1)(B) incorporates the net tangible assets and average revenue tests contained in the alternative penny stock exclusion set forth in Rule 3a51-1(g) under the Act 
so that Nasdaq can initially list companies priced between $2 and $4 on the Nasdaq Capital Market that are not considered “penny stocks.” 
As noted above, however, ongoing monitoring of listed companies relying on this alternative penny stock exclusion is required in order to assure they continue to meet the net tangible assets and average revenue tests set forth in that exclusion.
III. Comment Summary
The Commission received one comment letter on the proposal, in which the commenter recommended that the Commission initiate a process to amend Rule 3a51-1 under the Act 
and then approve Nasdaq's proposal.
The commenter noted that NYSE Amex's initial listing price requirements—$3 per share under three of NYSE Amex's listing standards and $2 per share under a fourth listing standard—are lower than Nasdaq's current $4 per share initial listing price requirement.
The commenter stated his belief that this disparity is the main reason securities of companies trading between $2 and $4 per share list on NYSE Amex instead of the Nasdaq Capital Market.
The commenter also expressed his belief that the Commission should “level the playing field” between NYSE Amex and Nasdaq.
The commenter urged the Commission to focus on what changes to the penny stock rules must be made in order to eliminate the purported regulatory inequality between the two exchanges and carry out its mandate to ensure fair competition among the exchanges.
Further, the commenter stated that the list of issuers published on Nasdaq's Web site would be “unwieldy and certain to be less than fully transparent.” 
The commenter suggested that this aspect of Nasdaq's proposal would “allow the NYSE Amex to maintain a competitive advantage over Nasdaq” because issuers listing on Nasdaq would risk being deemed a “penny stock” in the future whereas issuers listing on NYSE Amex incur no such risk.
Again, the commenter suggested that the solution to this purported regulatory inequality is to amend the penny stock rules.
IV. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,
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 foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, 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 not be designed to permit unfair discrimination between customers, issuers, brokers or dealers.
The development and enforcement of meaningful listing standards for an exchange is of substantial 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, assuring compliance with its listing standards and detecting and deterring manipulative trading activity.
Rule 3a51-1 under the Act 
defines “penny stock” as any equity security that does not satisfy one of the exceptions enumerated in subparagraphs (a) through (g) under the Rule. If a security is a penny stock, Rules 15g-1 through 15g-9 under the Act 
impose certain additional disclosure and other requirements on brokers and dealers when effecting transactions in such securities. Currently, Nasdaq-listed securities are not considered penny stocks because they comply with the requirements in Rule 3a51-1(a)(2) under the Act,
which excepts from the definition of penny stock securities registered on a national securities exchanges that have initial listing standards that meet certain requirements, including a $4 bid price at the time of listing. Nasdaq listing standards currently include all the requirements to qualify for the penny stock exception under Rule 3a51-1(a)(2) so that today, once a security is initially listed on Nasdaq, the security will not be considered a penny stock for so long as it is listed on Nasdaq.
As noted above, the penny stock rules also exclude from the definition of penny stock, under a “grandfather” provision, securities registered on a national securities exchange that has been continually registered as such since April 20, 1992, and has maintained quantitative listing standards that are substantially similar to or stricter than those listing standards that were in place on the exchange on January 8, 2004.
NYSE Amex meets this standard, but Nasdaq, which was more recently registered as a national securities exchange, does not. Accordingly, NYSE Amex's initial listing price requirements of either $2 or $3 are grandfathered under this provision. Nasdaq has proposed its alternative price listing requirement in order to compete with NYSE Amex for listings of securities priced between $2 and $4.
The Commission has carefully considered Nasdaq's proposal under the Exchange Act requirements. Under Nasdaq's proposed alternative price standard, companies that maintain a $2 or $3 closing price for at least five consecutive business days would qualify for listing if, among other things, they meet the net tangible assets or average revenue tests of the alternative penny stock exclusion set forth in Rule 3a51-1(g).
This presents novel issues since it is the first time that an exchange-listed security could become subject to the penny stock rules following initial listing if it no longer meets the net tangible assets or average revenue tests of the alternative exclusion, and does not qualify for another exclusion under the penny stock rules.
Further, unlike securities listed under Nasdaq's existing standards, which have a blanket exclusion from the penny stock rules, broker-dealers that effect recommended transactions in securities that originally qualified for listing under Nasdaq's alternative price standard would, among other things, under Rule 3a51-1(g), need to review current financial statements of the issuer to verify that it meets the applicable net tangible assets or average revenue test, have a reasonable basis for believing they remain accurate, and preserve copies of those financial statements as part of its records.
To facilitate compliance by broker-dealers, Nasdaq has committed to monitor the companies listed under the alternative price standard and to publish on its Web site, and update daily, a list of any such company that no longer meets the net tangible assets or average revenue tests of the penny stock exclusion, and which does not satisfy any other penny stock exclusion. Nasdaq also specifically reminds broker-dealers of their obligations under the penny stock rules. The Commission believes that, although the listing of securities that do not have a blanket exclusion from the penny stock rules and require ongoing monitoring may increase compliance burdens on broker-dealers, the additional steps proposed by Nasdaq to facilitate compliance should reduce those burdens and that, on balance, Nasdaq's proposal is consistent with the requirement of Section 6(b)(5) of the Act that the rules of an exchange, among other things, be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and, in general, to protect investors and the public interest.
Further, to address concerns about the potential manipulation of lower priced stocks to meet the initial listing requirements, Nasdaq has amended its proposal to require a company to maintain a $2 or $3 closing price for five consecutive business days prior to approval for listing, rather than on a single day, as proposed.
The Commission believes that requiring the minimum $2 or $3 closing price to be maintained for a longer period should reduce the risk that some might attempt to manipulate or otherwise artificially inflate the closing price in order to allow a security to qualify for listing. In addition, Nasdaq has noted that it would exercise its discretionary authority to deny initial listing if there were particular concerns about an issuer, such as its ability to maintain compliance with continued listing standards or if there were other public interest concerns. The Commission believes these additional measures, in conjunction with Nasdaq's surveillance procedures and pre-listing qualification review, should help reduce the potential for price manipulation to meet the new initial listing standards, and in this respect are designed to prevent fraudulent and manipulative acts and practices consistent with Section 6(b)(5) of the Act.
Additionally, under Nasdaq's proposal, if securities listed under the alternative price listing standard subsequently achieve a $4 closing price over at least five consecutive business days, and the issuer and the securities satisfy all other relevant initial listing criteria, then such securities would no longer be considered as having listed under the alternative price requirement. As with the initial $2 and $3 closing price requirements, the Commission has considered whether this provision could provide an incentive for market participants to manipulate the price of the security in order to achieve the $4 closing price and no longer be considered as having listed under the alternative price requirement. The Commission notes that Nasdaq has taken several steps to address these concerns. First, Nasdaq has represented that it would conduct a robust, wholesale review of the issuer's compliance with all applicable initial listing criteria, including qualitative and quantitative standards, at the time the $4 closing price is achieved, and would have a reasonable basis to believe that that price was legitimately, and not manipulatively, achieved. Secondly, Nasdaq has further represented that it is developing enhanced surveillance procedures to monitor securities listed under the alternative price requirement as they approach $4 to identify anomalous trading that would be indicative of potential price manipulation. Finally, the amended proposal requires the $4 closing price to be met over at least a five consecutive business day period in order to reduce the potential for price manipulation. The Commission believes that these measures should help reduce the potential for price manipulation to achieve the $4 closing price, and in this respect are designed to prevent fraudulent and manipulative acts and practices consistent with Section 6(b)(5) of the Act.
In sum, the Commission believes that the Nasdaq proposal, as amended, reasonably addresses the concerns discussed above. We also note that Nasdaq's proposal is more rigorous than existing NYSE Amex listing standards in that it additionally requires the net tangible assets or average revenue test set forth in Rule 3a51-1(g) to be met. For the reasons set forth above, the Commission finds that the proposed rule change is consistent withthe Act, including the provisions of Section 6(b)(5) thereunder.
V. Solicitation of Comments of Amendment No. 1
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods:
- Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-002. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of Nasdaq. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASDAQ-2012-002 and should be submitted on or before May 15, 2012.
VI. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1
Amendment No. 1 revises the proposal to, among other things, change the minimum bid price requirement to a closing price, require that a security must have a $4 closing price for at least five consecutive business days, rather than one day as originally proposed, before it will be reevaluated under both the qualitative and quantitative initial listing standards, and require daily publication of the list of securities that become subject to the penny stock rules. The Commission believes that the changes in Amendment No. 1 strengthen the proposal and, as discussed above, address concerns about the potential for manipulation. Accordingly, the Commission also finds good cause, pursuant to Section 19(b)(2) of the Act,
for approving the proposed rule change, as modified by Amendment No. 1, prior to the 30th day after the date of publication of notice in the Federal Register.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NASDAQ-2012-002), as modified by Amendment No. 1, is approved on an accelerated basis.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.41
Kevin M. O'Neill,
[FR Doc. 2012-9795 Filed 4-23-12; 8:45 am]
BILLING CODE 8011-01-P