Always Evolving And Adapting

NASDAQ Rule 5210 – Listing Prerequisites

In March 2024, the Nasdaq Stock Market quietly amended Rule 5210, requiring all lead underwriters on an IPO to be Nasdaq members or limited underwriting members as a prerequisite to applying for a listing. The new rules also created the “limited underwriting member” class and accompanying rules applicable to the group and its associates, including eligibility, application process and ongoing requirements. Although the amendment garnered little attention then, it now loudly impacts the Small Cap IPO market.

5210’s Key Prerequisites For Nasdaq Listing

Nasdaq Rule 5210 sets forth the prerequisites for a company to apply for a Nasdaq listing. Until October 2023, the Rule had 12 subparts, with new Rule 5210(l) added in October 2023 and new Rule 5210(m) added in March 2024. Rule 5210(l) requires that any company listing on Nasdaq comply with the recovery of erroneously awarded compensation (Clawback) rules. For more on the Clawback rules (see our article here on this top). New Rule 5210(m) requires that all lead underwriters be special members of Nasdaq, as further discussed below.

Nasdaq Rule 5210 Requirements

Here is a brief overview of the rules for all lead underwriters:

All companies must be registered under the Securities Exchange Act Section 12(b) unless specifically exempted by the SEC;
An independent auditor registered with the PCAOBE must audit each company;
All securities must be eligible for a Direct Registration Program unless those that are book-entry only;
The Company pays the Nasdaq listing fees;
All companies must be current in their SEC filing requirements and not suspended from trading by the SEC or its country of domicile;
Nasdaq shall have certified the Section 12(b) registration;
All companies must have a transfer agent and a CUSIP number;
Limited Partnership roll-ups must comply with specific rules;
Following a reverse merger, the seasoning rule must be adhered to – for more on the seasoning rule, (see our article here on this topic);
Companies listing in connection with a Regulation A offering must have a minimum of two years operating history;
Any company that operates in a Restrictive Market must meet specific U.S. investor allocations. For more on Restrictive Markets and the Holding Foreign Companies Accountable Act, (see our article on this here);
All companies must comply with the Recovery of Erroneously Awarded Compensation (Clawback) rules; and
All companies applying for an initial listing in connection with a transaction involving an underwriter must have a principal underwriter who is a Member or Limited Underwriting Member of Nasdaq.

New Underwriter Membership Class Introduced

In March 2024, Nasdaq added a new Section (m) to Rule 5210, requiring that all companies applying for an initial listing in connection with a transaction involving an underwriter must have a principal underwriter who is a Member or Limited Underwriting Member of Nasdaq and creating a new limited underwriter membership group. A “principal underwriter” is defined as “an underwriter in privity of contract with the issuer of the securities as to which he is underwriter.” “Limited Underwriting Member” is defined as a broker or dealer admitted to limited underwriting membership in Nasdaq. A “limited underwriting membership,” in turn, allows a broker or dealer to act as a principal underwriter without having the right to trade on the exchange.

As noted above, the amendments also added new rules applicable to limited underwriting membership, including eligibility, application process, procedural and governance obligations, and ongoing rights, obligations and requirements for such an underwriter and its associated persons. Those particular rules are beyond the scope of this page.

The SEC’s Approval Process Took Three Amendments

Nasdaq first published the initial rule change on July 12, 2023, and went through three amendments before being approved by the SEC. The rule release provides insight into Nasdaq’s actions, comments and questions during the application process in recent years. In its release, Nasdaq states that “underwriters play a critical role as gatekeepers to the capital markets in connection with the trading of newly issued securities” and that “it relies on underwriters to select the selling syndicate and ensure that the shares are placed in a way that is reasonably designed to allow liquid trading, consistent with Nasdaq’s listing requirements, and the successful introduction of the company to the market place.”

Nasdaq continues that despite this critical gatekeeping role, before the rule change, underwriters who were not members of Nasdaq would not be required to respond to ongoing inquiries or participate in investigations (though they could do so voluntarily). By requiring all principal underwriters to either be full or limited underwriting members of Nasdaq, such underwriters would be under the exchange’s jurisdiction and required to respond to inquiries directly during and following an IPO process. Nasdaq created a separate class of “limited underwriting membership” to accomplish its goal while also offering underwriters the ability to select a less burdensome membership category.

Small Cap IPO Spikes Spurred Change

The rule release explains that in the Fall of 2022, Nasdaq observed unusual trading in certain issuers immediately following the pricing of an IPO, including extreme spikes in trading prices followed by a crash. As I wrote about in December 2022, as a result of these activities, Nasdaq completely shut down all small-cap IPOs for several months and slowly re-opened the gates with a much different process and attitude (see our article here on this topic).

There Is Additional Scrutiny

In particular, Nasdaq asked for early information on allocations, including pre-pricing indications of interest and potential syndicate members. Moreover, after a deal was priced but before it started trading, investment banks were asked to provide a complete list of syndicate firms and each of their allocations. Further, once a deal started trading, Nasdaq wanted final deal information, including all investors that received shares directly from lead underwriters and syndicate firms. It became apparent that some syndicate members were problematic, and a listing would not be approved if they were involved. We believe some of the problematic firms were involved with the unusual market activity and refused to provide post-closing information.

Only Allowing Principal Underwriters

Over time, and especially as the final iteration of the new rule was approaching, Nasdaq started refusing listing applications where certain underwriters were involved, even if such underwriters were unaware of being subject to a regulatory issue. In hindsight, it is clear that those underwriters were not Nasdaq members. Moreover, following the passage of the final new rule, Nasdaq completely refused to review allocations or other pre-pricing information regarding a listing application where the principal underwriter is not a member or limited underwriting member, even where an issuer would have time to add such an underwriter prior to a deal closing.

Although this article does not cover the plethora of rules regarding eligibility, application and related processes applicable to becoming a limited underwriter member, you can be sure they are extensive and arduous.

SEC’s Approval and Rationale Behind the Rule Change

In approving the final rules, the SEC noted that, as required by law, they are “designed to prevent fraudulent and manipulative acts and practices, 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, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers and brokers, or dealers.” Furthermore, the SEC notes that the new listing standards provide Nasdaq with the means 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 to provide the depth and liquidity necessary to promote fair and orderly markets.”

The Bottom Line

Not only must the principal underwriter be a Nasdaq member or limited underwriting member, Nasdaq will not approve a listing where there is not a sufficient widespread allocation of a float to ensure an active trading market and limit the ability for manipulation.

Stay Compliant With Nasdaq’s New Rules

Ensure your IPO process aligns with the latest Nasdaq Rule 5210 requirements. Contact ANTHONY, LINDER & CACOMANOLIS, PLLC’s legal team for effective, up-to-date guidance and support. Call 877-541-3263 or email us now to schedule an appointment.