Nasdaq tightens rules on small-cap stocks to prevent "pump-and-dump" schemes

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The Nasdaq Stock Exchange is taking action to tighten listing and trading rules for small companies, aiming to combat market manipulation and maintain market order.

On Wednesday, Nasdaq announced that it has submitted a proposal for rule revisions to the U.S. Securities and Exchange Commission (SEC). The core changes include introducing “accelerated” suspension and delisting procedures for companies with listing deficiencies, as well as raising the minimum public float threshold for the listing of certain new stocks.

This move comes at a time when trading activity in small-cap stocks is facing increasing scrutiny. According to previous media reports, investors have lost billions of dollars on some small-cap stocks that were heavily hyped on social media. The U.S. Federal Bureau of Investigation (FBI) also stated in July that complaints from victims involving “pump and dump” stock frauds have increased by 300% year-on-year.

John Zecca, Nasdaq’s Global Chief Legal, Risk and Regulatory Officer, said in a statement, the exchange has been monitoring “extreme volatility and potential trading market manipulation observed in U.S. markets.” He emphasized that this rule adjustment reflects Nasdaq’s ongoing commitment to keeping its standards in sync with market realities and aims to improve liquidity for public investors.

Raising Listing Standards and Accelerating Delisting Procedures

According to documents submitted by Nasdaq to the SEC, the core of this rule change is raising the liquidity “baseline” for listed companies.

The proposal requires that, for companies applying for listing under the exchange’s “net income standard,” the minimum market value of unrestricted public float will be increased to $15 million.

Additionally, Nasdaq reiterated a standard established in 2020, requiring companies from “restricted markets” to raise at least $25 million in their IPO.

At the same time, the new rules will grant the exchange faster resolution powers. For companies with listing deficiencies and a market value of listed securities below $5 million, Nasdaq will be able to initiate accelerated suspension and delisting procedures. This is designed to promptly remove thinly traded stocks that are vulnerable to manipulation from the market.

Edwin Dorsey, author of The Bear Cave newsletter, said Wednesday’s announcement is “a pretty good first step.” However, he also pointed out that these measures may only lead “scammers to recycle the same (stock) codes” rather than target newly listed companies.

Nasdaq emphasized that it will continue to refer potentially manipulative trading behavior to the SEC and FINRA, while deepening cooperation with domestic and international regulatory agencies to jointly maintain market integrity.

Aiming to Counter Market Manipulation and Extreme Volatility

Nasdaq stated that the rule adjustment was made after conducting an internal review of trading activity. The review identified patterns “associated with ‘pump and dump’ scams,” especially in the U.S. cross-market trading environment.

A “pump and dump” is a classic market manipulation scam in which stakeholders artificially inflate a company’s stock price, then suddenly sell off their holdings at the high point, causing the stock price to crash and leaving investors who bought in late with heavy losses.

As the main market for new stock listings in the U.S., Nasdaq has long been working to address such issues, and in recent months, suspicious scam activity related to certain companies has seen a sharp increase.

According to an exchange document, since August 2022, nearly 70% of the cases Nasdaq reported to U.S. regulators involved the trading of companies primarily operating in China. Nasdaq stated in the document:

“Heavy investor participation, combined with insiders retaining large shareholdings, poses a risk that undermines the formation of a sufficient investor base and trading interest to support fair and orderly secondary market trading.”

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