Equity And Debt Instruments

Understand Your Options Regarding Equity And Debt Instruments

An equity instrument can be titled common stock, preferred stock, LLC membership interest or LLC membership unit, warrant or option, each having a particular meaning and typically not interchangeable. Here, we discuss the various types of equity instruments.

LLC Membership Interest Or LLC Membership Unit

An LLC membership interest or LLC membership unit refers to the general term encompassing equity ownership in a limited liability company (LLC). Within the framework of an operating agreement, LLC members define various classes of equity and specify the associated rights and preferences for each class. The structure of an LLC is highly adaptable, allowing for diverse sets of rights and preferences—both financial and non-financial—for different classes of equity, akin to those available for common or preferred stock.

Common Stock

Common stockholders occupy a subordinate position compared to preferred stockholders concerning the entitlement to receive dividends. In the hierarchy of rights, common stockholders are behind both preferred stockholders and creditors in their claims to receive payments in the event of liquidation. Common stock is the most prevalent form of equity security. While common stock typically carries voting rights, especially in publicly traded equity markets, it can be categorized as either voting or non-voting. Common stock lacks fixed dividends or specific rights and preferences, distinguishing it from preferred stock.

Preferred Stock

Preferred stock is a widely utilized investment instrument owing to its versatility. It can be structured to encompass a spectrum of characteristics from both equity and debt, both in financial and non-financial aspects. The flexibility of preferred stock allows it to be tailored to meet the specific requirements of a given transaction. The following outlines various features that can be incorporated into a preferred stock designation:

Dividend Preference: Preferred stockholders may have priority over common stockholders in receiving dividends.
Convertible or Non-Convertible: Preferred stock can be designed to be convertible into common stock or remain non-convertible.
Cumulative or Non-Cumulative Dividends: Accumulated unpaid dividends may be carried forward for payment in subsequent periods for cumulative preferred stock.
Redemption Rights: The issuer may have the option to redeem preferred stock after a specified period.
Voting Rights: While common stock is typically associated with voting rights, preferred stock may or may not carry voting privileges.
Participation Rights: Preferred stockholders may have the right to participate in any remaining proceeds after the common stockholders receive their share.
Liquidation Preference: In the event of liquidation, preferred stockholders may have a specified claim on the company's assets.
Adjustment Provisions: Preferred stock terms may include adjustments based on certain events, such as stock splits or mergers.
Callable or Non-Callable: The issuer may have the right to call or redeem the preferred stock under certain conditions.
Exchangeable Preferred Stock: Preferred stock can sometimes be exchangeable for shares of another company.

The flexibility in structuring preferred stock allows for a wide range of possibilities, making it a versatile investment choice.

Dividends

A dividend in the context of preferred stock represents a fixed amount agreed upon to be paid per share. This amount can be determined based on either the face value of the preferred stock or the price paid for the preferred stock, which often coincide. Dividends can take various forms, including:

Return on Investment: Expressed as a fixed percentage (e.g., 8% per annum) of the face value or purchase price of the preferred stock.
Return of Investment: Involves returning a portion of the principal investment, such as 25% of all net profits until the principal investment is fully repaid.
Combination of Both: Dividends can be structured as a combination of a fixed return on investment and a return of investment.

Despite the similarities between dividends and debt instruments, legal constraints may hinder dividend payments. Creditors typically have priority over equity holders, and state corporate laws often dictate that an issuer must be solvent (able to meet its obligations to creditors) before distributing dividends. This legal requirement ensures that the issuer can fulfill its financial obligations before making distributions to equity holders.

Therefore, even if an issuer has a contractual obligation to pay dividends, its ability to do so may be constrained by legal or financial considerations. It's crucial to consider these factors when evaluating the feasibility of dividend payments.

The payment of dividends may or may not occur as initially promised, and the treatment of dividends can vary:

Accrual and Cumulation: In some cases, if a dividend is not paid as scheduled, it may accrue and cumulate. This means that each missed dividend is owed to the preferred shareholder and must be paid in the future.
Non-Accrual: Alternatively, dividends may not accrue, and if a dividend is missed, it is not carried forward to future periods. The expectation is that the shareholder did not receive the dividend for the specific period but may receive it in subsequent periods.

Dividend payments can be structured to occur at various intervals, but they are commonly arranged to be paid no more frequently than quarterly, and often annually.

Additionally, dividends on preferred stock typically hold a preferential status. This means that any accrued dividends on preferred stock must be fully paid before any dividends can be distributed to common stockholders or holders of other junior securities. The preferential treatment ensures that preferred stockholders receive their owed dividends before other shareholders or security holders receive any distributions. This feature enhances the attractiveness of preferred stock to investors seeking a stable and predictable income stream.

Voting Rights

Preferred stock can be set up to establish any level of voting rights from no voting rights at all, voting rights on certain matters (sole vote on at least one board seat; voting rights as to the disposition of a particular asset but otherwise none), or super-voting rights (such as 10,000 to 1 or 51% of all votes).

Liquidation Preferences

A liquidation preference refers to the right of preferred stockholders to receive a distribution of funds or assets in the event of a liquidation or sale of the company (Issuer). While creditors typically have precedence over equity holders in liquidation scenarios, preferred stock can be structured in a manner similar to a debt instrument. This structure allows the liquidation preference of preferred stock to be secured by specific assets, giving preferred stockholders priority over general unsecured creditors concerning those particular assets.

In addition to prioritizing preferred stockholders over common stockholders and holders of other junior equities, the liquidation preference is often defined as an amount per share. This amount is usually tied to the initial investment plus any accrued and unpaid dividends.

Preferred stockholders may also have the opportunity to participate in liquidation profits in addition to the liquidation preference. For instance:

Participation with Profit Share: The preferred stockholder may receive the entire investment amount back, along with all accrued and unpaid dividends, plus a percentage (e.g., 30%) of the profits from the sale of the company Issuer.
Participating Liquidation Preference: Alternatively, the preferred stockholder may receive the full investment amount, along with accrued and unpaid dividends, and then participate pro rata with common stockholders on any remaining proceeds. This is known as a participating liquidation preference.

These structures provide preferred stockholders with a level of protection and a defined financial benefit in the event of a liquidation or sale, contributing to the appeal of preferred stock as an investment.

Conversion Or Exchange Rights

A conversion or exchange right grants the holder the ability to convert or exchange their existing securities into a different form, typically common stock. Here are additional details about conversion rights:

Conversion Price: The conversion right includes a conversion price, which can be determined using various mathematical formulas. Examples include a discount to the market price (e.g., 75% of the average 7-day trading price immediately before conversion), a fixed price per share (e.g., preferred stock with a face value of $5.00 converts into five shares of common stock, making it $1.00 per share of common stock), or a valuation-based approach (conversion at a company valuation of $30,000,000).
Optionality for Stockholder: Generally, conversion rights are at the option of the stockholder, meaning the stockholder can choose to exercise the conversion. However, issuers may also retain conversion rights, often triggered by specific events, such as a firm commitment underwriting for a significant IPO.
Establishment of Timing: The timing of conversion rights must be defined, indicating when conversion can occur. This could be at any time after issuance, within a specified timeframe (e.g., between months 12 and 24), or within a certain period following a significant financial event (e.g., within 90 days of securing a firm commitment for financing exceeding $10,000,000).
Whole or Partial Conversion: Conversion rights often specify whether they can be exercised in whole or in part. For public companies, there are often limits set to ensure that the conversion does not result in the holder owning more than a certain percentage (e.g., 4.99%) of the outstanding common stock at the time of conversion.

Understanding and carefully defining these aspects of conversion rights are crucial in structuring agreements and providing clarity to both issuers and stockholders regarding the conditions, timing, and limitations of conversion.

Redemption/Put Rights

A redemption right in the form of a put right is the right of the Holder to require the Issuer to redeem the preferred stock investment (to “put” the preferred stock back to the Issuer); the redemption price is generally the face value of the preferred stock or investment plus any accrued and unpaid dividends; redemption rights generally kick in after a certain period (five years) and provide an exit strategy for a preferred stock investor.

Redemption/Call Rights

A redemption right in favor of the Issuer is a call option (the Issuer can “call” back the preferred stock); generally, when the redemption right is in the form of a call, a premium is placed on the redemption price (for example, 125% of face value plus any accrued and unpaid dividends or a pro-rata share of 2.5 times EBITDA).

Anti-Dilution Protection

Anti-dilution protection protects the investor from a decline in the value of their investment due to future issuances at a lower valuation. Generally, the Issuer agrees to issue additional securities to the Holder, without further consideration, if a future issuance is made at a lower valuation, such as to maintain the investor’s overall value of the investment; an anti-dilution provision can also be as to specific percent ownership (Holder will never own below 10% of the total issued capital of the Issuer).

Registration Rights

Registration rights refer to SEC registration rights and can include demand registration rights (the Holder can demand that the Issuer register their equity securities) or piggyback registration rights (if the Issuer is registering other securities, it will include the Holder’s securities).

Transfer Restrictions

Preferred stock can be subject to transfer restrictions, either in the preferred stock instrument itself or separately in a shareholder’s or other contractual agreement; transfer restrictions usually take the form of a right of first refusal in favor of the Issuer or other security holders.

Co-Sale Or Tag Along Rights

Co-sale or tag-along rights are rights of Holders to participate in certain stock sales by management or other key stockholders.

Drag Along Rights

Drag-along rights are the rights of the Holder to require certain management or other key stockholders to participate in a stock sale by the Holder.

Other Non-Financial Covenants

Preferred stock, whether stipulated in the instrument itself or outlined in a separate shareholder or contractual agreement, can encompass a wide range of non-financial covenants. Some of the most prevalent non-financial covenants include:

Board Representation: Preferred stockholders often have the right to appoint one or more individuals to the Board of Directors, allowing them to exert influence over management and operational decisions.
Management Control: The ability to assert control over management and operations, beyond board representation, may be granted to preferred stockholders.
Prohibitions on Related Party Transactions: Restrictions may be imposed on transactions involving related parties to ensure fairness and prevent conflicts of interest.
Information Delivery Requirements: Preferred stockholders may have the right to receive specific information, ensuring transparency about the company's performance and operations.
Noncompete Agreements: The company may agree not to engage in specific competitive activities, protecting the interests of the preferred stockholder.
Confidentiality Agreements: Agreements to maintain the confidentiality of certain information may be included to safeguard proprietary or sensitive data.
Limitations on Management Compensation: Restrictions on the amount and structure of management compensation may be established to align with the interests of preferred stockholders.
Restrictions on Capital Transactions: Limitations on future capital transactions, such as reverse or forward stock splits, may be outlined to protect the preferred stockholder's interests.
Prohibitions on Sale of Vital Assets or Intellectual Property: Restrictions may be placed on the sale of crucial assets or intellectual property rights to maintain the company's core value.

In essence, non-financial covenants can encompass any rights that the preferred stockholder negotiates for, providing a comprehensive framework for their involvement in the company's governance and strategic decisions.

In addition to non-financial covenants, options and warrants represent another financial instrument. An option or warrant grants the holder the right to purchase equity, usually common stock, at a predetermined price within a specified timeframe. This mechanism allows investors to benefit from potential future appreciation in the company's value.

Debt Instruments
The terms "promissory note," "note," or "debenture" are often used interchangeably to refer to a debt instrument. This instrument may or may not be convertible into equity. Conversion in this context means that instead of receiving cash, the holder accepts an equity instrument, either in whole or in part, as payment for the debt obligation.

The essential elements of a debt instrument include:

Amount: Specifies the monetary value of the debt.
Term: Indicates when the debt becomes due. The due date can be a specified date, on demand by the holder, upon the occurrence of certain events, or tied to milestones.
Interest Rate: States the rate of interest charged on the debt. It may also specify whether the interest is compounded.
Transferability or Assignability: Defines whether one or both parties can assign their rights and interests in the debt instrument to a third party.
Secured or Unsecured: Specifies whether the debt is secured by collateral, such as real or personal property, or other financial instruments (often referred to as a pledge agreement).
Guaranty: Addresses whether a third party, like a principal of the issuer, is guaranteeing the obligations in the debt instrument.
Prepayment Rights: Outlines whether the debt can be prepaid in whole or in part.
Payment Preferences/Subordination/Senior Debt: Describes contractual preferences for payment, subordination, or seniority in relation to other debts.
Convertibility: Addresses whether the debt can be converted into an equity instrument, specifying conversion price and type of equity.
Default Provisions: Details conditions that would lead to default, which may be monetary or non-monetary, and typically results in acceleration of the debt.
Non-Financial Covenants: Similar to preferred stock, non-financial covenants can be attached to a debt instrument. These can include provisions related to board representation, management control, restrictions on related-party transactions, information delivery requirements, non-compete agreements, confidentiality agreements, limitations on management compensation, and restrictions on vital asset sales.

Understanding these elements is crucial when structuring debt agreements, as they impact the rights and obligations of both the issuer and the holder.

Gayatri GuptaDecember 8, 2023

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Requirements	Equity Standard	Market Value of Listed Standard	Net Income Standard
Listing Rules	5505(a) and 5505(b)(1)	5505(a) and 5505(b)(2)	5505(a) and 5505(b)(3)
Stockholders Equity	$5 million	$4 million	$4 million
The market value of publicly held shares	$15 million	$15 million	$ 5 million
Operating History	Two years	N/A	N/A
The market value of listed securities	N/A	$50 million	N/A
Net income from continuing operations (in the latest fiscal a year or in two of the last three fiscal years)	N/A	N/A	$750,000
Publicly held shares	1 million	1 million	1 million
Bid Price	$4	$4	$4)
Closing Price	$3	$2	$43
Corporate Governance	Yes	Yes	Yes
Total Shareholders	300	300	300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

Securities Lawyer Blog

Equity And Debt Instruments

Listing Criteria For NasdaqFor a company to list its securities on Nasdaq, it must satisfy the following criteria:

Licensed in District of Columbia, State of Colorado, US District Court for the District of Columbia, US District Court for the District of Colorado, with pro hac vice Admission for the State of Maryland and Virginia.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria: