Dive Brief:

• The New York Stock Exchange is proposing to limit the use of reverse stock splits that companies typically use to boost slumping share prices in order to avoid delisting and get back in compliance with the requirements that average closing share prices remain at $1 or more over a 30-day trading period, according to a notice of the proposed rule change dated Oct. 10. 
• Under the NYSE’s proposal published by the Securities and Exchange Commission, section 802.01C of its rules would be amended so that the exchange would begin suspending and delisting a company if its shares stood at less than a $1 price and if it had already used reverse stock splits to boost its shares during the prior one-year period, or those which had undertaken one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one.
• The “exchange has observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits. The Exchange believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on the Exchange for investor protection reasons,” the notice states.

Dive Insight:

The NYSE’s move comes on the heels of a separate proposal from a competitor exchange, the Nasdaq, which has been faced with a surge in risky penny stock companies. The Nasdaq called for the automatic suspension of companies whose per-share price stays below $1 for a year, or if their whole stock falls below $1 after completing a reverse stock split, Industry Dive sister publication Legal Dive reported.  

A reverse stock split, sometimes known as a stock consolidation, is a strategic tactic used by companies to consolidate the number of shares into few higher-priced shares, typically dividing the existing total share quantity by a number, according to Investopedia. Among the most recent companies to execute them are the movie-theater chain AMC and Ashford Hospitality Trust, a real estate investment trust. 

The NYSE proposal is consistent with that of Nasdaq, which in 2020 sought to speed delisting of securities with a closing bid at or below $0.10 for about 10 days, as well as securities that have had one or more reverse stock splits with a cumulative ratio of one for 250 or more shares, according to a JDSupra report. But because companies continued executing on dilutive issuances, Nasdaq sought to tighten the rules in August when it proposed to delist a company if their stock fell out of compliance with pricing requirements within one year of the previous reverse split. 

Separately the NYSE strengthened its ability to respond to stock splits, filing a proposed rule change that gives the exchange the authority to“pre-emptively halt the trading of a security undergoing a reverse stock split,” according to a May 10 report from the law firm of Winston & Strawn. 

Within 45 days of the date of the notice of the latest proposed change to the rules, the commission will approve or disapprove the rule change.