Planning to take your company public? Be warned: Nasdaq has proposed new rules that will make it more difficult for small firms to list on its SmallCap Market.
The rules are currently under review by the Securities and Exchange Commission and are expected to be phased in starting in February.
"The changes are being made to improve the quality of companies listing, to increase safeguards protecting shareholders and to preserve firms' ability to raise capital," says Domenick Esposito, a managing partner at accounting and management consulting firm Grant Thornton in New York City and board member of Nasdaq's Listing Qualifications Committee.
According to Esposito, there are several changes that will impact small businesses' ability to list on Nasdaq. For example, firms must now meet one of the following qualifications: net tangible assets of $4 million, market capitalization of $50 million, or net income of at least $750,000 in two of the last three years. In addition, there must now be a minimum bid price of $1 (there used to be no minimum), and firms must use peer-reviewed CPA firms.
Companies wanting to be listed on the SmallCap Market must also comply with new corporate governance standards. These include having a minimum of two independent directors on your board and establishing an audit committee, a majority of whose members must not work for your company. Firms must also conduct shareholder meetings and establish a process for determining conflicts of interest.
These changes will effectively limit who can list, according to Esposito. "[Since 1991, when the Nasdaq was last changed], a number of small companies have gone public, raised capital from small investors and shortly afterward gone out of business," he says. "All of these changes mean there will be fewer companies listing than in the past, and those that do list will have been around longer and may pay considerably more attention to corporate governance."