Things are potentially about to get a whole lot more difficult…

As many of you may or may not know, the SEC published the Nasdaq’s proposed changes to their listing requirements Wednesday and it is most certainly a reaction to the wild price swings of low-float stocks, such as Phunware (PHUN) and Hunter Maritime (HUNT).  After all, a 3,750% rise in share price over six trading days to hit an intra-day high of $550/share with just 144,000 freely tradable shares is probably not something the Nasdaq is going to be thrilled about. But that’s exactly what happened with PHUN back in January of this year. So what does this mean for SPACs, and more importantly, how soon could these changes potentially take effect?

We recently spoke with Carol Anne Huff, at Kirkland & Ellis LLP, to get her take on the proposal and provide some much needed expertise on the situation.  Kirkland & Ellis has recently been the counsel to a number of SPACs in connection with their business combination transactions, including M III Acquisition Corp., Federal Street Acquisition Corp. and Conyers Park Acquisition Corp. and also routinely advises both SPAC issuers and underwriters in connection with SPAC IPOs.

Read on for Part I, and next week we will be publishing Part II, which will cover “how the new rules may impact business combination transactions going forward.”

Part I: NASDAQ Proposes Changes to Initial Listing Standards That May Impact SPACs

By: Carol Anne Huff, Kirkland & Ellis LLP*

The SEC published The Nasdaq Stock Market’s proposed changes to its initial listing standards on April 3, 2019.  Nasdaq’s proposed changes are aimed at ensuring listed companies have sufficient public float and trading interest to promote a liquid trading market—the concern being that less liquid securities trade in a more volatile manner because a relatively small amount of trading can result in large price swings.

The proposal would exclude “restricted shares”—shares that are not currently freely tradeable—from the definition of “publicly held shares” for purposes of several key initial listing requirements, including:

• the minimum number of publicly held shares (currently 1 million for the Capital Market);
• the minimum market value of publicly held shares (currently $15 million or $5 million for the Capital Market depending on the standard relied upon); and
• the number of round lot holders, i.e. holders of at least 100 shares (currently 300 for the Capital Market).

The proposals would also:

• amend the round lot holder rules to require for an initial listing that at least 50% of a company’s required round lot holders hold shares with a market value of at least $2,500 (currently there is no minimum market value); and
• require that an issuer that currently trades OTC have a minimum ADTV over the 30 days prior to listing of at least 2,000 shares per day in connection with listing on Nasdaq.

These rules may have an impact on SPACs, which can struggle to meet stock exchange round lot holder requirements prior to and following completion of a business combination.  Even SPACs with the requisite number of round lot holders often emerge as new public companies with low trading volume due to the reduction in public float following redemptions and the large number of shares that are subject to contractual lock-up restrictions.

RESTRICTED SHARES

Nasdaq proposes to define “restricted securities” to include securities subject to resale restrictions of any kind, including restrictions under SEC rules and those subject to contractual lock-up restrictions.  For SPACs, this could include:

• founder shares
• shares issued in pre-IPO private placements
• shares issued to PIPE investors in connection with a business combination; and
• shares issued to shareholders of the target company, either because they were issued in a private placement or because they are subject to a contractual lock-up period.

Although not specifically addressed by the rule, Nasdaq has informally indicated that shares registered for resale on a shelf registration statement would not be considered “restricted” for this purpose.

ROUND LOT HOLDERS

In addition, Nasdaq has proposed to amend its round lot holder rules to require for an initial listing that at least 50% of a company’s required round lot holders hold shares with a market value of at least $2,500.  Nasdaq indicated that it has noticed problems with listed companies where a large number of round holders hold exactly 100 shares (representing a minimum investment of as little as $400 assuming a minimum bid price of $4 per share).  Nasdaq also indicated that it believes that the rule change will make it more difficult to circumvent the rules by transferring shares for no value.

SUBMITTED PROPOSALS AND NEXT STEPS

The proposed changes are not limited to SPACs and the notice of proposed rulemaking does not specifically address SPACs.  However, when Nasdaq solicited comments in October 2018 in advance of filing its proposed rule change with the SEC, it specifically noted that the exchange has seen an increase in the number of companies seeking to list in transactions other than a traditional IPO, such as pursuant to a business combination with a SPAC.  Nasdaq noted that it was time to consider whether these types of applicants raise particular concerns for investors.  Nasdaq solicited but did not receive comments on the question of whether special considerations should be applicable to companies listing in connection with a business combination with a SPAC.

Nasdaq is not currently proposing any changes to its continued listing requirements.  Although SPACs are often listed prior to the business combination, the stock exchanges require that the surviving company meet the more stringent initial listing (rather than continued listing) standards following the business combination.

Although The New York Stock Exchange does not currently have a similar rule proposal pending, it is possible that it could also take a closer look pursuant to its discretionary authority at companies that appear to have an inadequate level of liquidity, even in cases where quantitative standards are technically met.

In October 2018, NYSE submitted a revised proposal to the SEC with respect to reducing the round lot holder requirement for SPACs from 300 to 100 holders and allowing the exchange to exercise discretion in allowing SPACs a reasonable period of time following a business combination to demonstrate compliance with its quantitative listing standards.  In January 2019, the SEC made a determination to undertake proceedings to determine whether to approve or disapprove this proposal, which proceedings are still pending. Both NYSE and Nasdaq had submitted similar proposals earlier in 2018 that were subsequently withdrawn.  Unlike NYSE, Nasdaq did not submit a revised proposal.

The SEC has solicited comments on the current proposed rule changes which will be due within 21 days of the publication of the SEC’s notice in the Federal Register and the rule changes would become effective within 45 days after such publication.

We will be following up with Part II of this article to discuss how the new rules may impact business combination transactions going forward. Stay tuned…

*Carol Anne Huff is a corporate partner at Kirkland & Ellis LLP who regularly advises on transactions involving special purpose acquisition companies.