Nasdaq’s Regulation A Seasoning Requirement

Nasdaq proposed to adopt a new initial listing requirement for companies listing on Nasdaq in connection with an offering under Regulation A of the Securities Act. Specifically, Nasdaq proposed to require any company listing on Nasdaq in connection with an offering under Regulation A to have a minimum operating history of two years at the time of approval of its initial listing application.

Reasons For the Regulation A Seasoning Requirement

Nasdaq believes that the proposed new minimum two-year operating history requirement would help assure that a company listing in connection with an offering under Regulation A has a more established business plan and a history of operations upon which investors can rely, has been able to fund the initial phase of its operations, and will be more likely to be ready for the rigors of being a public company, including satisfying the SEC’s and Nasdaq’s reporting and corporate governance requirements. Nasdaq stated these are important benefits given the lighter disclosure requirements associated with Regulation A offerings.

The SEC found that Nasdaq’s proposed rule change for Regulation A issuers to be consistent with the requirements of Exchange and the rules and regulations thereunder applicable to a national securities exchange. In particular, the SEC found that the proposed rule change is consistent with Section 6(b)(5) of Exchange, 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, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

The development and enforcement of meaningful listing standards for an exchange is of critical importance to financial markets and the investing public. Among other things, Nasdaq’a listing standards provide the means for an exchange to screen issuers that seek to become listed, and to provide listed status only to those 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 are also consistent with investor expectations regarding the nature of securities that have achieved an exchange listing, and the role of a securities exchange in overseeing its market and assuring compliance with its listing and compliance standards.

The SEC believes the proposed two-year minimum operating history requirement for companies that seek to list on Nasdaq in connection with an offering under Regulation A of the Securities Act would help address Nasdaq’s concerns regarding maturity and preparedness for listing of these types of issuers.

The Regulation A Exemption

Regulation A allows companies to raise money from the public in securities offerings of up to $50 million with the filing of Form 1-A but with somewhat more limited disclosure requirements than of Form S-1 for an initial public offering. For example, Form 1-A requires less disclosure about the compensation of officers and directors and less detailed management discussion and analysis of the issuer’s liquidity and capital resources and results of operations. The SEC noted that Regulation A issuers tend to be smaller companies in earlier stages of development.  As a general matter, early-stage ventures may be relying on the development of a new business, product, or service that may or may not find a market, unlike a mature business that is more likely to have a track record of revenue or income.

Nasdaq’s proposed operating history requirement may help ensure that a Regulation A company is more seasoned, and better equipped for the rigors of being a public, exchange-listed and publicly traded, company.

Nasdaq’s Seasoning Requirement

For more information about using Regulation A+ to list on Nasdaq, please contact Brenda Hamilton, Securities Lawyer, at (561) 416-8956 or by email at [email protected].   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.