Excerpts from Virtu Financial's Petition for Rulemaking on Exchange Listings of Penny Stocks

Added on by C. Maoxian.

Virtu Financial's Petition for Rulemaking on Exchange Listings of Penny Stocks (pdf)

  • As of December 2023, 557 U.S. listed stocks were trading below $1, with the vast majority of those listed on the Nasdaq Stock Market.

  • A primary attribute of these issuers is that they feature capital structures that result in serial dilution of the ownership interests of public purchasers of their securities.

  • Ownership of their shares is opaque, with much of their equity owned by insiders and parties who purchased significant amounts of the issuers’ outstanding common shares and derivative securities that convert into common shares in unregistered private offerings, although in some instances also registered offerings.

  • Often, their derivative securities convert to common shares at a discount to current market prices, which incentivizes short sales by the holders of these securities as both the short positions and the conversions of their derivative securities benefit from the activity.

  • As reported by the Wall Street Journal, there were 495 reverse splits of exchange-listed stocks in 2023, up from 288 in 2022 and the largest annual number in the past two decades.

  • The securities of these issuers frequently experience aberrational trading patterns with the price of the issuers’ securities increasing exponentially for no apparent fundamental reason…

  • Despite the prevalence of increased risks and greater costs for investors, exchanges like NASDAQ are incentivized by listing revenue to keep penny stocks listed. Under NASDAQ’s rules, for example, issuers have a period of 180 calendar days to bring their stock price above $1 to remain listed. And if, after 180 days a company has not achieved compliance, under certain conditions it may be granted a second 180-day grace period to achieve compliance.

  • These are classic penny stock companies that are often tied to pump-and-dump trading activity and other forms of market manipulation. They are exactly the type of stocks that the Penny Stock Reform Act and Commission rules intended to keep off the major exchanges to protect investors.

  • We recommend that a stock that trades below $1 for 15 consecutive days should be considered to have failed to meet the minimum bid requirement. Further, we recommend that the period for curing that deficiency should be reduced from 180 days to 60 days. Finally, we recommend eliminating the option for an issuer to get additional time to cure the deficiency.

  • We recommend that these rules eliminate the grace period for curing a deficiency for any issuer that has engaged in one or more reverse stock splits over the prior three-year period with a cumulative ratio of 10-for-1 or greater.

  • We are concerned that retail shareholders may not be aware of how dilutive corporate actions can negatively impact a company’s share price. Requiring issuers to affirmatively disclose their projected share issuances and conversions, and to include a hypothetical analysis that demonstrates the dilutionary effect of the conversion of restricted and/or convertible shares and insider options, would better inform investors about the potential risks of investing.