Why NASDAQ Should Eliminate the Under-$1 30-Day Bid Price Rule

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Includes: ABTL, C, GS
by: GT McDuffy

On October 16, 2008, NASDAQ implemented a temporary suspension of the $1 bid price rule. This temporary extension is set to expire on Friday, January 16, 2009. Beginning January 19, 2009, NASDAQ will start a fresh clock ticking on any company whose bid price has closed below $1/share.

In other words, if, prior to the rule suspension, or during the rule's suspension, a company's share price fell below $1/share - none of that would be counted toward the 30 consecutive trading day period NASDAQ clocks before notifying the company it is bid price deficient.

Case in point: Autobytel Inc. (NASDAQ:ABTL) closed below $1/share on October 1, 2008, and has closed below $1/share for 47 straight trading days through December 5, 2008 (the date my article was written). If NASDAQ had not suspended the $1 bid price rule, Autobytel Inc. would have already been bid-price deficient as of November 11, 2008 and, as such, would have already been notified by NASDAQ.

But the rule suspension nixed all this- a freebie for Autobytel Inc. through January 16, 2009. NASDAQ would only resume counting the company's 30 consecutive trading day deficiency beginning January 19, 2009. And the company, which had closed under $1/share for 11 straight trading days as of the October 16, 2008 rule suspension date, would then have another 19 trading days beginning January 19, 2009 to close at $1 or more.

Also, beginning January 19, 2009. NASDAQ will pick up where it left off as it pertains to companies that were already in the compliance period, so for example, if, prior to the rule suspension, a company had 120 days remaining on the 180 day compliance period, beginning January 19, 2009, that company will then have 120 days left to comply.

NASDAQ implemented the bid price rule suspension back in October 2008 citing "extraordinary market conditions," noting:

Given current market conditions, Nasdaq proposes to provide issuers of common stock, preferred stock, secondary classes of common stock, shares or certificates of beneficial interest of trusts, limited partnership interests, American Depositary Receipts,and their equivalents temporary relief from the continued inclusion bid price5 and market value of publicly held shares requirements.

In the past several weeks, U.S. and world financial markets have faced almost unprecedented turmoil, and the Commission has acknowledged in several recent emergency Orders that this turmoil has resulted in a crisis in investor confidence and concerns about the proper functioning of the securities markets.7 As a result, the number of securities trading below $1 has increased dramatically. For example, as of September 30, 2007, there were 64 securities trading below $1 on Nasdaq. By September 30, 2008, that number had increased to 227 and by October 9, 2008, there were 344 securities trading below $1 on Nasdaq and over another 300 Nasdaq-listed securities trading between $1 and $2.8 Nasdaq believes that during this time there was no fundamental change in the underlying business model or prospects for many of these companies, but the decline in general investor confidence has resulted in depressed pricing for companies that otherwise remain suitable for continued listing. These same conditions make it difficult for companies to successfully implement a plan to regain compliance with the price or market value of publicly held shares tests.

All very well and good. NASDAQ-listed companies caught a 90 day break. NYSE-listed companies, not so good. NYSE, under its continued listing compliance rules keeps generating deficiency notices.

All of this leads me to the point of this article.

The real problem for investors who own stocks that are under a buck, or are thinking of buying them, is that there is the underlying risk that a company whose stock remains under a buck for 30 straight trading days is ultimately going to do the dreaded reverse-split in order to cure the deficiency during the following 180 day compliance period (the company has to get the stock price at a buck or more for 20 or more (not to exceed 30) straight trading days by the final day of the compliance period else the company will then be sent a determination letter that their stock is going to be de-listed pending appeal).

As most traders know, stocks that reverse-split to their higher share price most often sink right back down again- after all, on the one hand, any underlying negative financial issues that may have contributed to the stock price going under a dollar in the first place are still there- these don't magically disappear just because the stock price takes on a shiny new reverse-split "happy-face."

And on the other hand, most short sellers lick their chops waiting for a stock to reverse-split anticipating a bear-raid on the stock coupled with any investors wanting to buy the stock long, post-reverse split, know the shorts are going to pile in, so they aren't going to jump in.

In other words, the reverse-split is a cosmetic fix. That's it.

So, if the reality is such that a company's stock price is going to sink right back down, sometimes to exactly where it was pre-reverse-split, those long investors who seek to hold their positions pre-reverse into the reverse get tanked all over again once the share price sinks. And it does not help the exchange the company is listed on in regard to having companies stay compliant. Finally, of course, it certainly doesn't help the company that actually cares about its stock price (versus those companies- and you know who you are- who decide to use (abuse) a low stock price to initiate a share buyback- on the cheap, who first begin buying back shares under a buck, then use the reverse-split to proportionally reduce the number of publicly held shares, then wait for the stock to tank again post-reverse, and continue to buy back the reduced number of shares all over again on the cheap).

If, in the ideal stock market world, bear raids and short-seller manipulation didn't exist (see "A Remedy for Short Selling Manipulation"), and companies didn't abuse the ethical considerations and rules of the stock buyback (SEC, it's 10 o'clock - do you know where your Safe Harbor children are?), then reverse-splitting wouldn't be as dreaded as it is by longs. And the company that reverses might have a fighting chance to regain its dollar cut-off.

But, until the SEC actually effectively deals, on a sustained basis, with existing market manipulation and unsavory companies, the under-a-buck cut-off should be eliminated.

Abolished.

This way, the stock price can exist under a dollar- shorts are much less likely to pile in under a buck- and if and when the company itself actually provides investors with solid financial reasons to justify a rise in the stock price to over a buck and beyond- the stock will hit its mark. Those who have been holding the stock which fell under a dollar won't get "double-tanked" because of a cosmetic reverse-split share price that sinks back down again. And as importantly, if potential long investors know the stock won't be facing a reverse-split because of deficiency/compliance rules, they will be far more likely to buy in under a dollar- which may have the effect of actually getting the stock back over a dollar- the very thing the exchange wanted in the first place!

But, really, this whole thing about stocks under a dollar is all about "appearances." The buck cut-off is simply an elitist creation to separate the "haves" from the "have-nots." The stock market's own caste system, if you will.

And speaking of elitism: as for institutions being barred from owning exchange-deficient stocks or stocks that are under $5/share- this should be done away with altogether. The negative connotation of owning "penny stocks"- which are defined as stocks trading under $5/share- is now an outdated and inappropriate notion in 2008.

We've got elitist global companies like AIG who are now eating lunch with the taxpayer. The 3 top executives from the Big (Little) 3 car companies are cup in hand in D.C. begging to eat lunch with the taxpayer. We've got ivory-tower executives at Citigroup (NYSE:C) accepting little-people money to survive, and had stodgy Goldman Sachs (NYSE:GS) scrambling to not do a repeat of the once-mighty Lehman Bros (RIP); the elitist investment bank moniker is dead and buried altogether. And the most elitist creation of all- the hedge fund- is a half shadow of what it used to be.

Folks- let's get this whole thing cleaned up once and for all. Its time has finally come. Whether a stock is under $1 or under $5, in this crazy economic environment, or in the future, should no longer matter. It is, without question in the best interests of ALL investors, companies, the exchanges and the taxpayers (although not so good for short-sellers). The exchanges shouldn't be in the business of worrying about whether or not a company's stock price is at any particular level, or that the company maintains a certain ongoing market cap. They should accept companies into their exchanges that qualify on the basis of initial listing requirements, but, once they're in- let them play ball! Make de-listing only the result of serious infractions committed. And, as such, the SEC should then ensure such companies cannot re-enlist anywhere else.

As for the OTCBB - let them continue to be the AAA farm club league for developing companies that need to qualify for initial listing requirements of the major exchanges before being able to bump up. Let the Pink Sheets (AA league) exist for companies that are in Chapter 11 bankruptcy or are not yet ready for the OTCBB or the major leagues.

And, at the very least, do away with the dollar bid price rule. That would, surely, be a start.