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Nasdaq May Rethink Delisting Rules

Trading: The market, which already has eased requirements for stocks under $1, may consider new steps to help more companies stay listed.


The Nasdaq Stock Market may have to rethink whether shares trading under $1 should automatically be pushed off its market, given the sheer number of companies whose stocks have been pummeled under that threshold, Nasdaq's chief said Thursday.

Any such change in listing rules could throw a lifeline to many California companies whose stocks now are threatened with delisting from Nasdaq--a move that would effectively banish them from many or most investors' radar screens.

Nasdaq Chairman Hardwick Simmons, speaking at the Security Traders Assn. annual conference in Boca Raton, Fla., said about 500 of Nasdaq's 3,800 stocks are priced under $1, as the long bear market has hammered equity values.

"That's putting us to the test of whether we want to change our old rules about delisting stocks trading under $1," he said. "Some of these are real companies with real balance sheets."

Simmons did not give specifics about revising Nasdaq's rules, and Nasdaq representatives in Washington offered no further comment.

Nasdaq already has taken steps to help companies that are in danger of violating its listing rules. Under previous rules, a company on the Small Cap market (the lower tier of Nasdaq) whose stock fell below $1 for 30 days had 90 days to bring the shares back above that level before facing delisting. Nasdaq extended that grace period to 180 days in January.

"If a company's stock price goes under a dollar, the company knows best what kinds of transactions will enhance its business and financial stability, many of which take longer than 90 days to complete," said Helen Scott, co-chair of Nasdaq's listing and hearing review council.

After the initial grace period, if a company meets one of three listing standards--market capitalization of $50 million, net annual income of $750,000 or stockholders' equity of $5 million--the firm can apply for an additional 180-day grace period to bring its stock price back up.

The loosened rules have helped reduce the number of Nasdaq delistings this year, despite the continuing bear market. Through August, 188 companies were deleted from Nasdaq, a 42% decrease from the 324 firms deleted during the same period last year.

Not all of those deletions are formal delistings: Some companies disappear through mergers or because they start listing on the New York Stock Exchange. But Nasdaq representatives say the decline in deletions this year is in part because of the longer grace periods.

Even the new grace periods, however, haven't been enough to help some companies escape delisting. Nasdaq this year has delisted California companies including IPrint Technologies Inc., a Santa Clara online printing service; VantageMed Corp.; a Rancho Cordova-based software healthcare information firm; and Aqua Care Systems Inc., a Vista-based maker of water filtration systems.

With a Nasdaq address, companies can maintain an image of respectability and potentially maintain brokerage research coverage. Delisting usually pushes a stock from Nasdaq to the OTC Bulletin Board or the so-called Pink Sheets market. Those are electronic markets, like Nasdaq. But stocks listed on those markets can become nearly invisible to many investors, jeopardizing a company's ability to raise capital.

"When a company is delisted entirely, at that point it becomes extremely difficult to develop a turnaround plan," said Michael Emen, a senior vice president of listing qualifications for Nasdaq. The longer grace periods give companies "time to raise more capital and turn their business around. Then we've helped shareholders and we've helped the company," he said.

While some critics say Nasdaq shouldn't be helping "penny stock" companies to attract new capital--given the historically high risk inherent in such shares--others argue that there also is a fairness issue with regard to current shareholders.

"Who should the markets favor? Would-be shareholders, existing shareholders, the customers?" said Junius Peake, professor of finance at the University of Northern Colorado and an expert on Nasdaq. "As long as the proper disclosure is being made, there's not a problem here."

Bloomberg News was used in compiling this report.

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