- Nasdaq wants to delist companies whose market value stays below $5 million for 30 days, part of a wider effort against fraudulent trading in penny stocks, particularly firms headquartered overseas. The SEC paused the proposal last month to take further public input.
- The targeting does not match the stated purpose. More than 190 Nasdaq-listed companies currently sit at $5 million or less, about a third based in Asia but almost half in the United States. Of roughly 90 US companies affected, one third trade below $1.
- The removal of the grace period is the substantive change. Under current rules a stock falling below $1 receives a delisting warning and 180 days to recover. Under the proposal, 30 days below $5 million brings immediate suspension and then delisting.
- The problem being addressed is real and quantified. A Bloomberg analysis of microcap IPOs since 2023, those debuting at $50 million or less, found evidence of hype campaigns and price gyrations at a quarter of them, most based in Asia, with one and two-day crashes erasing billions in market value.
What Happened?
Nasdaq told the SEC it is addressing a well-documented problem, that securities the market values very low are disproportionately vulnerable to volatility and challenge the maintenance of fair and orderly markets. The exchange raised IPO financial requirements earlier this year for companies based in China, Hong Kong and Macau, and the SEC has suspended trading in more than a dozen tiny companies over the past year, all in Asia. Citadel Securities supports the rule and Charles Schwab has warned for years about overseas microcaps. NYSE American proposed a similar threshold in March. SeaStar Medical, a Denver developer of treatments for children with acute kidney injury, objected through its chief financial officer Michael Messinger, who said it is a real operating company supplying hospitals rather than an unknown overseas entity, noting its stock often moves 20% or more intraday. Cemtrex chief executive Saagar Govil, who formally petitioned the SEC, said it feels like taking a blunt instrument to the problem and that more precise tools exist for foreign issuers gaming the system. Bloomberg notes Cemtrex’s founder Aron Govil, Saagar’s father and no longer an executive, settled SEC allegations in 2021 for $1.2 million without admitting or denying claims and was ordered in January to return almost $10 million, which he is appealing, while Saagar Govil settled a related probe for $350,000 in 2022 without admitting wrongdoing. Nasdaq and the SEC declined to comment.
Why It Matters?
The reflexivity in the mechanism is the problem nobody in the debate names directly. A company whose shares move 20% intraday can cross a $5 million threshold on a single piece of news, and once a delisting clock starts the threat itself depresses the price, which extends the period below the threshold. Thirty days is short enough that the rule can create the condition it penalises, whereas the existing 180-day grace period for sub-dollar stocks allows a recovery to actually occur. That is a design question distinct from whether microcap manipulation needs addressing, and it explains why legitimate operating companies are objecting rather than only the firms the rule is aimed at. The timing deserves attention alongside another market structure change. From December 6, Nasdaq, NYSE Arca and Cboe EDGX extend trading to a 9pm to 4am overnight session, and SEC data shows that in August just 15 stocks accounted for half of all overnight volume, frequently sub-dollar shares of companies domiciled in China and Hong Kong. That is the same population this proposal targets. Exchanges are therefore giving the manipulated microcap segment more hours in which to trade, in a session with minimal institutional participation and wide spreads, while the delisting remedy is paused for further comment. Those two decisions sit awkwardly together. For investors holding small-cap exposure the practical consequence is that listing standards are tightening across both major exchanges, which raises the risk of forced delisting in portfolios that include very small companies, and the resulting illiquidity is severe. The Cemtrex history does not invalidate its argument, and readers are entitled to weigh who is making it.
What Next?
The SEC has final say and has delayed votes on both the Nasdaq and NYSE American proposals while gathering comment, so the thresholds and grace periods may change. Watch whether any revised version distinguishes between foreign and domestic issuers, since that is the objection being raised most forcefully. Companies near the threshold are reportedly considering mergers to build a buffer, which would be a visible consequence. The December 6 overnight trading launch is the parallel development, and whether microcap volumes concentrate further in those hours is the measure of whether the two policies are working against each other.
Affected Tickers and Coins: NDAQ, CETX, SCHW, ICE
Source: Bloomberg
