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90-16 New Interim Criteria for Initial Inclusion in the NASDAQ System

SUGGESTED ROUTING*

Senior Management
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Legal & Compliance
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*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

To protect investors and the public interest, and to respond to concerns raised by the Securities and Exchange Commission (SEC), the NASD filed February 15, 1990, a proposed rule change that applies more stringent interim criteria for initial inclusion in NASDAQ. The interim criteria, which would amend the criteria set forth in Part II, Sections 1 and 2 to Schedule D of the NASD By-Laws, apply to requests for initial inclusion filed on or after February 15, 1990. Those companies applying between February 15 and the date the SEC approves the filing could be admitted for NASDAQ listing under the previous initial' inclusion criteria but would have to meet the new criteria within 90 days of the SEC approval. The text of the rule filing follows this notice.

BACKGROUND AND EXPLANATION

In a letter dated January 10, 1990, the SEC's Division of Market Regulation expressed concern that certain promoters might attempt to circumvent the provisions of new SEC Rule 15c2-6, which imposes sales-practice requirements on broker-dealers that recommend transactions in "penny stocks," by seeking to list on NASDAQ.

In response to Rule 15c2-6, which became effective January 1, 1990, and the SEC letter, the NASD staff began an analysis of the initial inclusion criteria for NASDAQ to ensure that the financial and market requirements continue to adequately and appropriately serve the public interest.

The NASD Board of Governors will consider proposals for modification of the NASDAQ inclusion criteria, including both initial and maintenance standards, at its March 1990 meeting. The Association believes, however, that it would be contrary to the public interest and investor protection and inconsistent with the intent of the SEC letter not to modify initial inclusion criteria on an interim basis as quickly as possible. Otherwise, issuers that are unlikely to meet criteria that may be adopted by the Board at its March meeting would be able to enter the NASDAQ System and thereby avoid compliance with Rule 15c2-6. Similarly, the NASD does not believe it would be in the investing public's interest to allow issuers to enter the NASDAQ System when there is a substantial likelihood that their securities will be ineligible for continued inclusion when the NASD Board resolves this issue.

The interim criteria will not impact issuers having securities that are currently included in NASDAQ. Instead, the requirements will be fully applicable only to issuers applying for NASDAQ inclusion after SEC approval of this rule change. In addition, those issuers applying for inclusion in NASDAQ on or after February 15, 1990, and entering the system before SEC approval of the change, would have 90 days after that approval to achieve compliance with the interim standards.

To eliminate the possibility of what effectively would be a perpetual "grandfathering" of a dormant application, the proposed rule change would treat a pre-February 15 application as withdrawn if the security does not enter the NASDAQ System within 90 days of SEC approval of this rule change.

THE INTERIM CRITERIA

There are five criteria that will be imposed on an interim basis in addition to or in lieu of the criteria set forth in Part II, Sections 1 and 2 to Schedule D of the NASD By-Laws. The criteria are that the issuer shall have total assets of at least $4 million; the issuer shall have capital and surplus of $2 million or more; in the case of common stock, there shall be at least 300,000 publicly held shares; the minimum price per share shall be not less than $3; and the issuer shall have a minimum of four market makers.

Questions regarding the interim criteria for initial inclusion may be directed to Perry Peregoy, Associate Director, Market Listing Qualifications, at (202) 728-8088.

TEXT OF PROPOSED RULE CHANGE ESTABLISHING INTERIM CRITERIA FOR INITIAL INCLUSION IN THE NASDAQ SYSTEM

The NASD has determined that in order to protect investors and the public interest, the following criteria for initial inclusion of securities in the NASDAQ system shall be imposed on an interim basis in addition to or in lieu of the criteria set forth in Part II, Sections 1 and 2 to Schedule D of the NASD By-Laws.

1. The issuer shall have total assets of $4 million.
2. The issuer shall have capital and surplus of $2 million.
3. In the case of common stock, there shall be at least 300,000 publicly held shares.
4. The minimum price per share shall be not less than three dollars ($3.00).
5. The issuer shall have a minimum of four market makers.

The foregoing criteria shall be applicable to the initial inclusion of all issuers making application for quotation in the NASDAQ System after approval of such criteria by the Securities and Exchange Commission until such time as the NASD has adopted and the SEC has approved permanent changes to the NASDAQ inclusion standards. In addition, issuers that make application and are authorized for NASDAQ inclusion on or after February 15, 1990 but prior to approval of the interim standards by the Securities and Exchange Commission shall be required to demonstrate compliance with the interim standards within 90 days of Commission approval or shall be removed from the system.

An application for NASDAQ inclusion filed prior to February 15, 1990 shall be deemed to have been withdrawn and a new application will be required if the issuer has not entered the NASDAQ system within 90 days of Commission approval of the interim criteria.


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