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Going public is often one of the main goals of a startup company. But getting listed on a major exchange like the New York Stock Exchange (NYSE) or Nasdaq is not just a matter of appearing.
Any time a company wants to be listed on the stock exchange, it must apply to join the club. That way, investors and traders can evaluate whether to buy their dollars in viable companies with good earning potential.
“Stock exchanges are built on trust and the way those companies are listed,” said Carol Schleif, deputy chief investment officer of BMO Family Office, an asset manager. “Every exchange protects its reputation, which is why listing requirements are so important.”
Each exchange has its own listing requirements, so the Nasdaq exchange has different criteria than the New York Stock Exchange or foreign exchanges. For example, Nasdaq has a history of lower fees, which appeal to smaller companies. But tech giants such as Google, Apple and Amazon are also traded on the Nasdaq.
Let’s take a look at the Nasdaq listing requirements for this popular exchange.
Listing requirements for all companies
First of all, there are different tiers of market offered by the Nasdaq, said Bob Tull, president of the Pennsylvania-based wealth management firm, Buy participations† The three levels are the Nasdaq Global Select Market®, The Nasdaq Global Market® and The Nasdaq Capital Market®. Most major companies appear to be listed on the Nasdaq Global Select Market tier, but each tier has its own listing requirement.
Each exchange has its own requirements and in order for a company to remain listed it must adhere to a series of requirements.
“Each tier has its own criteria and fees,” Tull says. “You also need to be aware of new governance rules, such as the fact that Nasdaq now has requirements for inclusion and diversity.”
In addition, listing requirements also depend on whether the company is doing an initial public offering or is a spin-off, or a seasoned company currently trading common stock.
For all companies, some of the general IPO requirements are:
1.25 million publicly traded shares outstanding At least 450 round lot shareholders (minimum 100 shares per holder) OR 2,200 total shareholders The market value of unrestricted public shares OR the market value of unrestricted public shares plus equity must be at least $45 million
Tull points out that a minimum price for Nasdaq stock may also be required, which amounts to $4. However, he says there are some circumstances where a company can offer a bid price of $2 or $3. Such a company may need to offset your lower share price by offsetting in other areas.
Nasdaq offers an online listing portal that provides step-by-step help as well as the documentation needed to advertise. Before a company submits an application, it is helpful to review the requirements and ensure that it has the necessary items to support an application. Depending on the application and the completeness of the documentation, a company can process an application in six weeks or less and have a company approved for listing.
After meeting the key liquidity requirements for all companies, a company must also qualify by meeting all the criteria in one of four categories of standards.
“There are two parts to note on the Nasdaq,” says Schleif. “You meet the liquidity requirements and then check whether you can meet all the criteria of one of the financial standards. If you do not meet the requirements of standard number one, you can see if another standard is more applicable.”
The four standards are as follows:
Standard No. 1: Earnings
Listing requirements for the Nasdaq start with looking at earnings. First, a company cannot have reported a net loss in any of the previous three years. Once established, the Nasdaq requirements include a total pre-tax profit amount of $11 million over the past three years. The previous two years must include pre-tax profits of $2.2 million per year.
If a company can’t meet that standard, Schleif says, the next step for a company is to see if it can meet the criteria of the second standard.
Standard No. 2: Capitalization with Cash Flow
Instead of profit, a company may choose to request a listing using cash flow combined with capitalization. For example, if a company has a total minimum cash flow of $27.5 million over the past three years, and no negative cash flow, that’s acceptable as long as the average market cap over the previous 12 months is at least $550 million. However, last fiscal year’s income must also be at least $110 million.
Standard No. 3: Capitalization with Income
If the cash flow requirement in the second standard is too high to meet, a company can compensate with a higher capitalization. With this standard, a company can still be listed if its revenue for the past fiscal year is at least $90 million and its average market capitalization during this period is at least $850 million.
Standard No. 4: Equity Assets
Finally, if a company doesn’t meet cash flow or revenue requirements, it can still meet Nasdaq listing requirements if it has assets and equity. The required market cap is $160 million – as long as total equity is $55 million and company assets are at least $80 million.
Can a company be scrapped?
All companies seeking to be listed on the Nasdaq must pay an initial listing fee, whether they make an initial public offering or are a legacy company that has historically been listed elsewhere, Tull said.
“In addition, there is an annual listing fee to stay on the exchange,” Tull says. †[Businesses] must pay that every year and continue to meet the minimum standards to stay on the Nasdaq.”
Companies should therefore ensure that they can meet Nasdaq listing requirements in subsequent years, as participating in an exchange requires more than just a one-time fee. For investors, the annual fees and listing requirements are a form of security that prevents companies from entering and exiting the stock market on a whim.
But it does happen: Every trading day, Nasdaq publishes a list of companies pending delisting or suspension, as well as the reason for their delisting.
Every exchange has listing requirements for companies, whether they are making an initial public offering or have been trading for a while. Nasdaq listing requirements consist of two parts: criteria for each company and a way for companies to demonstrate their viability in four different ways.
Once a company is listed, it must adhere to minimum listing requirements or risk being delisted.