SEC Grants Nasdaq Discretion to Deny Certain Initial Listings
Commentary by Steven Lofchie
The Nasdaq Stock Market LLC ("Nasdaq") proposed a rule change to grant it discretion to deny initial listings to companies deemed susceptible to market manipulation.
In the SEC filing, Nasdaq explained that it recently observed problematic price spikes and unusual trading patterns in certain newly listed securities—often associated with third-party social media "pump and dump" schemes—which have led to SEC trading suspensions. Although existing rules allow Nasdaq to deny listings based on a company's direct misconduct, the exchange noted that it lacked explicit authority to deny an applicant based solely on the potential for third-party manipulation or similarities to previously suspended issuers.
Under the proposed rule, IM-5101-3, Nasdaq may exercise discretion to deny an initial listing, even if the applicant meets all technical listing requirements, if the company shares characteristics with other companies that have experienced problematic trading. The rule outlines non-exclusive factors Nasdaq will consider, including: (i) the jurisdiction of the company or its controlling persons and the availability of legal remedies to U.S. shareholders; (ii) the regulatory history of the company’s advisors (including underwriters, auditors, and legal counsel) and their involvement in prior transactions that exhibited volatile trading; (iii) concerns regarding the planned public float and share allocation; and (iv) the management's familiarity with U.S. reporting requirements.
Under the proposal, if Nasdaq exercises this discretion, it will provide a written determination, and the company must publicly disclose the specific basis for the denial within four business days.
Nasdaq filed the proposal for immediate effectiveness, and the SEC waived the 30-day operative delay, making the rule effective as of December 12, 2025, subject to "temporarily suspen[sion] of the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest." Comments are due on or before January 20, 2026.
Commentary
One would expect to see all of the listing exchanges give themselves similar discretion, if they do not already have it. It is to be expected that the exchanges will start to take a much harder look at issuers whose assets are largely outside the United States and that do not have a significant prior trading history on a major non-U.S. exchange.