Key Points

  • The New York Stock Exchange (NYSE) submitted a rule amendment proposal on October 10, aiming to restrict listed companies from using reverse stock splits (i.e., share consolidations) to artificially boost depressed stock prices and circumvent delisting requirements. According to a rule change notice issued by the U.S. Securities and Exchange Commission (SEC), current Rule 802.01C would be adjusted.
  • The proposal stipulates: if a company's stock price falls below $1, and it has already executed a reverse stock split within the past year, or has executed one or more reverse stock splits within the past two years with a cumulative consolidation ratio of 200 shares or more into 1 share, the exchange will initiate suspension and delisting procedures.
  • The notice states: "The exchange has observed that certain companies—often in financial distress or experiencing prolonged operational decline—exhibit a pattern of repeatedly executing reverse stock splits. The exchange believes that such behavior often indicates that the company has fallen into deep financial or operational crisis, and for investor protection reasons, such companies are no longer suitable for listing on the exchange."

In-Depth Analysis

This move by the NYSE follows a similar proposal by its competitor Nasdaq. Nasdaq previously introduced new rules in response to a surge in high-risk penny stock companies, requiring automatic delisting for stocks trading below $1 for one consecutive year, or initiating delisting procedures if the stock price falls below $1 again after a company completes a reverse stock split. According to industry media Legal Dive, Nasdaq's new rule proposal has drawn widespread attention.

A reverse stock split, also known as a share consolidation, is a strategic operation commonly used by companies. As defined by Investopedia, its core approach is to merge the total number of existing shares into a smaller number of higher-priced shares at a certain ratio. Notable companies that recently executed this operation include theater operator AMC and real estate investment trust Ashford Hospitality Trust.

The NYSE's proposal follows the same regulatory philosophy as Nasdaq's 2020 approach. According to legal information platform JDSupra, Nasdaq sought to accelerate delisting procedures in 2020, targeting securities with closing bid prices below $0.10 for approximately 10 consecutive trading days, as well as securities that had executed one or more reverse stock splits with a cumulative consolidation ratio of 250 shares or more into 1 share. However, because some companies continued to circumvent regulations through dilutive issuances, Nasdaq further tightened its rules in August of this year, proposing that if a company's stock price falls below compliance requirements again within one year after completing a reverse stock split, delisting procedures would be initiated directly.

Meanwhile, the NYSE is also strengthening its real-time oversight capabilities regarding stock split activities. According to a report released by law firm Winston & Strawn on May 10, the NYSE has submitted another rule change proposal, seeking to grant the exchange the authority to implement "preventive trading suspensions" for "securities undergoing reverse stock splits," in order to align with Nasdaq's relevant rules.

According to the regulatory process, the SEC will decide whether to approve or reject the proposal within 45 days from the date of issuance of the aforementioned latest rule change notice.