Proposed Nasdaq Rules Would Clamp Down on Risky Penny Stocks

Nvidia was once a penny stock; it sold for a split-adjusted half a buck as recently as 2015. But for every Nvidia there are countless dubious companies, and occasionally there’s outright fraud — Jordan Belfort, the “Wolf of Wall Street,” ran a penny-stock scam.

After months of criticism for listing over 400 penny stocks, Nasdaq is proposing tightened rules to crack down. Makes cents.

A Penny for Your Stocks

Because they’re always at risk of being delisted, penny stocks — basically any company whose shares sell for under a dollar — aren’t popular among institutional investors. But retail investors love them. Seven of the 10 most traded US stocks in May were penny stocks, according to Cboe Global Markets data reported in June by the Financial Times.

Under current Nasdaq rules, when a stock trades for less than one dollar for 30 straight trading days, it is deemed non-compliant. The company is then given 180 calendar days to address the situation and can request an additional 180-day grace period. Lastly, it can appeal to Nasdaq’s Listings Council, which can delay a delisting.

Penny-stock companies have also used accounting tricks to stay listed — the most popular, notably used by Chinese tea retailer-turned-crypto miner, Bit Brother, is a reverse stock split, in which shares are merged to form a smaller number with a higher value (Bit Brother is currently appealing a delisting by Nasdaq). Thus two new rule proposals, both of which require SEC approval, to prevent penny-stock traders from getting nickeled and dimed:

• The first proposed rule change would stop companies from being able to delay a delisting if they appeal the decision after their second 180-day grace period.
• The second proposed change would expedite delistings for companies that complete a reverse stock split. Nasdaq could immediately issue a delisting notice if a company’s stock drops below $1 within a year of a reverse split rather than waiting for it to trade there for 30 days.

Piggy Bank Overflow: Citing Dow Jones Market data, The Wall Street Journal reported that there were 433 stocks listed on Nasdaq that closed below $1 on Wednesday, compared to under a dozen in 2021.