Discretionary Authority

Rule 5101:  Nasdaq has broad discretionary authority over the initial and continued listing of securities in Nasdaq in order to maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest.

Issue:  Was the Hearings Panel correct to affirm delisting of the Company’s securities pursuant to discretionary authority under Rule 5101?

Determination:  Affirm the decision to delist the Company.

The Council agreed that resumption of trading in the Company’s securities poses a serious threat to U.S. investors given the Executive Order applicable to the Company’s securities, which prevents any U.S. investor from purchasing the securities.  The Council believed that by preventing prohibited purchases and avoiding violations of U.S. sanctions against Russia, delisting of the Company’s securities would further protection of investors and the public interest.

In addition, the Council noted that a long-term continuation of the trading halt could mislead the investing public by signaling a level of comfort with the Company despite the Exchange’s concerns about the Company’s deep-rooted ties with Russia, tradability of the Company’s securities, impact of the sanctions on the Company, and lack of a plan that would enable trading to resume. The Council agreed with the Panel and Staff that the listing of securities on an exchange is derivative of the ability to trade those securities and that maintaining a listing for a security for a long period in a trading halt, without the ability for purchasers and sellers to come together with respect to that security, where there is no identified solution to allow trading to resume, is inconsistent with the role of an exchange. The Council noted that there did not appear to be a clear end in sight in terms of the sanctions or conflict nor had the Company presented a plan that would enable trading to resume. The Company continued to have substantial and unmitigated ties to Russia.

The Council was not convinced by the Company’s argument that leaving the securities in a trading halt is more in line with U.S. policy goals, allowing investors more time to divest from the investment. The Council noted that U.S. policy goals favor disentangling with and exiting investments in Russia, which the Council believed would be furthered by delisting of the Company’s securities. Moreover, the SEC has held, that in connection with delisting decisions “[t]hough exclusion from [Nasdaq] may hurt existing investors, primary emphasis must be placed on the interests of prospective future investors.”

The Company asserted that there were no allegations of misconduct by the Company, its officers, directors and significant shareholders and that it is unaware of any company that met all listing requirements being delisted under Nasdaq Listing Rule 5101 in the absence of any allegations of misconduct. However, the Exchange’s broad discretionary authority under Nasdaq Listing Rule 5101 is not limited to circumstances involving misconduct by a company or individuals associated with a company. Nasdaq Listing Rule 5101 was drafted broadly to enable Nasdaq to address a variety of circumstances that may arise over time which counsel against continued listing. Certainly, it is reasonable to believe that one such circumstance would be the need for Nasdaq to comply with U.S. laws and policies that govern its activities, including sanctions laws and policies.

Together, the failure of the Company to develop a plan to mitigate public interest concerns related to its extensive ties with Russia, the lack of a clear end in sight regarding the sanctions and conflict, and Nasdaq’s role as an exchange all support affirmation of the decision. The Company failed to demonstrate that the delisting decision was based on the improper exercise of discretionary authority under Rule 5101. To the contrary, given the broad discretionary nature of Nasdaq Listing Rule 5101, the decision to delist the Company’s securities was a proper exercise of discretionary authority under Nasdaq Listing Rule 5101.

Discretionary Authority

Rule 5101:  Nasdaq has broad discretionary authority over the initial and continued listing of securities in Nasdaq in order to maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest.

Rule 5250(a)(1):  Nasdaq may request any additional information or documentation, public or non-public, deemed necessary to make a determination regarding a Company's continued listing, including, but not limited to, any material provided to or received from the Commission or Other Regulatory Authority. A Company may be denied continued listing if it fails to provide such information within a reasonable period of time or if any communication to Nasdaq contains a material misrepresentation or omits material information necessary to make the communication to Nasdaq not misleading.

Issues:  Was Hearings Panel correct to delist the Company under Rule 5101 due to its alleged failure to fully investigate allegations made against it by a research firm and manipulative trading allegations made by FINRA? Was the Hearings Panel also correct to delist the Company under 5250(a) for failing to disclose the results of its internal investigation of the research firm’s allegations and for misrepresenting information about the enforcement of legal judgments against it?

Determination:  Affirm the decision to suspend and delist the Company.

The allegations made against the Company by a research firm – that the Company’s operations were a sham – and by FINRA – that manipulative trading had occurred in the wake of the research firm’s report –were serious ones. The Council agreed with Staff that the investigation that the Company conducted of manipulative trading activity was incomplete and inadequate under the circumstances.

As to the FINRA allegations, the Company failed to fully investigate all of the suspect trading that FINRA identified and the investigation it did conduct was superficial and cursory. Its attempts to refute the allegations often seemed implausible.

The Company’s failure to conduct or to otherwise demonstrate that it did conduct a thorough and complete investigation of the allegations made against it indicated that the Company either did not appreciate the gravity of its circumstances it faced or it lacked the will, the resources, or the sophistication, to do what was plainly required of it. In any case, the Council agreed with Staff that the Company failed to conduct itself in a manner that comports with Nasdaq’s expectations of its listed companies.

Such concerns about the Company were only exacerbated by the Company’s failures not only to execute, but even to make material progress towards executing, its business plan. As Staff noted, the Company failed to conduct any of the proposed activities described in the Company’s filings with the Commission and in its listing application with Nasdaq. Although the Company insisted that its progress should be measured in the medium-to-long term, the Company acknowledged that it lacked the funding required to execute its business plan. The Council agreed with Staff that it is not necessarily unusual or alarming for listed companies – and particularly small companies – to encounter difficulties in executing on their business plans in their initial stages of development; however, it was alarming in this instance that the Company made no demonstrable progress in doing so even after several years and that it acknowledged it lacked the ability to do so going forward, at least in the near-term.

Additionally, the Council was troubled that the Company failed to demonstrate anything specific its current management had done to bolster its internal controls in the wake of allegations that it had permitted internal control deficiencies to linger for several years.

Public Interest Concern, Filing Delinquency, and Failure to Pay Fees

Rule 5101: Staff has raised public interest concerns over the degree of control the Company has over subsidiary.

Rule 5250(c)(1): A Company shall timely file all required periodic financial reports with the Commission through the EDGAR System or with the Other Regulatory Authority. A Company that does not file through the EDGAR System shall supply to Nasdaq two (2) copies of all reports required to be filed with the Other Regulatory Authority or email an electronic version of the report to Nasdaq at continuedlisting@nasdaq.com. All required reports must be filed with Nasdaq on or before the date they are required to be filed with the Commission or Other Regulatory Authority. Annual reports filed with Nasdaq shall contain audited financial statements.

Rule 5250(f): A Company is required to pay all applicable fees as described in the Rule 5900 Series.

Issue: At issue is whether the company should remain listed notwithstanding that it is delinquent in filing its annual report, failed to publicly disclose material information timely, and public interest concerns raised by Nasdaq's Staff.

Determination: Affirm the decision to suspend and delist the Company.

In light of the facts and circumstances of this matter, including but not limited to, the conduct of the Company and its board of directors with respect to the Company's independent auditor, the Company's independent counsel, and Nasdaq in the delisting proceeding, particularly including: the events giving rise to the resignation of the Company's independent auditor, which concluded that it could no longer accept the representations of the Company's Chairman and CEO, and determined that it could not continue as the Company's auditor unless he was separated from the Company; the independent auditor's finding that the Company does not appear to have an effective board with the ability to discharge its responsibilities; and evidence from the Company's independent counsel that the Company made misrepresentations to Nasdaq in its effort to remain listed; the the Listing Council finds that delisting the Company is appropriate, pursuant to Rules 5101, 5250(c)(1), and 5250(f).

The Listing Council conducts a de novo review of matters before it and, accordingly, it may consider issues not raised in the matter before the Panel or relied on by the Panel as a basis for its decision.

Rule 5101 provides Nasdaq with broad discretionary authority over the listing of securities on Nasdaq in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and to protect investors and the public interest. The importance of timely filing of financial statements, as required by Rule 5250(c)(1), cannot be understated. Moreover, the Listing Council notes that the Company failed to pay its annual listing fees, as required by Rule 5250(f). Taken together, the Listing Council concludes that the Company does not fully understand the obligations of a public company. Based on the facts and circumstances of this matter and for the reasons stated above, the Listing Council  determined to delist the Company's shares from Nasdaq. Delisting does not bar the Company from applying to relist on Nasdaq, or another U.S. exchange. In this regard, should the Company resolve the issues that give rise to this matter it may reapply to list on Nasdaq.

Generally, Nasdaq will not permit the initial or continued listing of a Company that has no specific business plan or that has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.

However, in the case of a Company whose business plan is to complete an initial public offering and engage in a merger or acquisition with one or more unidentified companies within a specific period of time, Nasdaq will permit the listing if the Company meets all applicable initial listing requirements, as well as the conditions described below.
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(b) Within 36 months of the effectiveness of its IPO registration statement, or such shorter period that the company specifies in its registration statement, the Company must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the deposit account (excluding any deferred underwriters fees and taxes payable on the income earned on the deposit account) at the time of the agreement to enter into the initial combination.

Rule 5110(c): Reverse Mergers

(1) A Company that is formed by a Reverse Merger (a "Reverse Merger Company") shall be eligible to submit an application for initial listing only if the combined entity has, immediately preceding the filing of the initial listing application:

(A) traded for at least one year in the U.S. over-the-counter market, on another national securities exchange, or on a regulated foreign exchange, following the filing with the Commission or Other Regulatory Authority of all required information about the transaction, including audited financial statements for the combined entity...

Rule 5505: Initial Listing of Primary Equity Securities

A Company applying to list its Primary Equity Security on the Capital Market must meet all of the requirements set forth in Rule 5505(a) and at least one of the Standards in Rule 5505(b).

(a) Initial Listing Requirements for Primary Equity Securities:
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(3) At least 300 Round Lot Holders

Issue: May a special purpose acquisition company ("SPAC"), which has failed to consummate a business combination within the 36 month time period prescribed by IM-5101-2, nevertheless avoid de-listing because it expects to consummate a reverse merger prior to the expected date when de-listing would become effective?

Determination: Affirm the Hearing Panel decision to suspend and delist the Company.

The Company, which is a SPAC, acknowledged the ruling of the Hearings Panel that it had failed to consummate a business combination with the 36 month period required by IM-5101-2.

The Company's sole argument for asking the Listing Council to overrule the Hearing Panel decision was that the Company believed that it would be meaningless for the Listing Council to proceed with de-listing the Company's securities given that the Company did not expect Nasdaq, as a practical matter, to be able to finalize the de-listing process before the Company consummated its merger. That is, if the Company consummated its reverse merger before its de-listing became final and effective, then the merged entity would qualify for immediate initial listing on Nasdaq and it would not be subject to seasoning requirements. The Listing Council rejected this argument.

The Listing Council stated that it will not excuse a listed company for its self-acknowledged, numerous, and prolonged violations of the Listing Rules simply because the Company plans to take actions that may ultimately moot any practical impact of the punishment that Nasdaq would otherwise impose upon it. To excuse violations under these circumstances, the Council said, would diminish the importance of the Listing Rules and delegitimize the Listing Council and its work to enforce compliance with the Rules. Public confidence in Nasdaq depends upon the legitimacy of Nasdaq's system of self-regulation. The legitimacy of this system, in turn, requires Nasdaq to hold listed companies consistently accountable when they fail to satisfy the requirements of the Listing Rules. Thus, even if the practical impact of de-listing a company's securities from Nasdaq was likely to be minimal or even nil, the Listing Council determined that it must nevertheless order de-listing when the fair administration of the Listing Rules requires the Listing Council to take such action or renders it appropriate.¹

That said, the Listing Council disagreed with the Company that de-listing the Company's securities would be pointless and have no practical effect given the imminence of the Company's merger. In light of the history of this matter, the Listing Council said that it lacked confidence in the Company's latest assertions about the likelihood success of and the timing of its plan to consummate its merger. The Listing Council noted that almost a year has passed since the Company first announced its prospective merger, and the transaction had yet to close despite several assurances by the Company that it would do so. Even during the course of this appeal, the Company changed its position as to when it expected to obtain shareholder approval for the merger.

Moreover, even if the Company did consummate the merger as planned, the Listing Council did not believe that Rule 5110 required Staff to initially list the combined entity. Rule 5101 provides Nasdaq with "broad discretionary authority" over the listing of securities on Nasdaq "in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and to protect investors and the public interest." Pursuant to this authority and Nasdaq's Interpretive Material on the application of Rule 5101 (IM-5101-1), Nasdaq may "impose additional or more stringent criteria" to the application of its Rules. Thus, Staff was empowered to determine that because the Company was subject to a pending de-listing decision at the time it executed a reverse merger, the merged entity did not meet the one year prior listing requirement set forth in Rule 5110(c)(1) and must trade over-the-counter for a year prior to initial listing on Nasdaq.

Even if the Listing Council was sympathetic to the Company's plight, the Listing Council noted that it lacked discretionary authority to grant the Company further exceptions from compliance with the Rule 5505. Rule 5505 (the "Public Holder Requirement") a listed company's securities have at least 300 round lot holders. Rule 5820(d)(1) states that the Listing Council may grant an exception for a period not longer than 360 calendar days from the date of the Staff's delisting determination with respect to the deficiency for which the exception is granted; Staff issued its delisting decision for the Company's failure to comply with the Public Holder Requirement in February 2017.

The Listing Council stated that the scope of its authority to grant the Company an exception from the Business Combination Requirement was less certain. Although nothing in the Listing Rules expressly precluded the Listing Council from exercising its discretionary authority to grant exceptions under Rule 5820(d)(1), the nature of IM-5101-2 was such that this limitation could be reasonably implied. The Listing Council agreed with Staff that the Commission seemingly approved the Exchange's rules to list SPACs, in part, because the Exchange assured the Commission that any listed SPACs would face de-listing if they failed to complete a business within 36 months of the effective date of their initial public offering registration statement. See Securities Exchange Act Release No. 34-58228, 73 FR 44794 (July 31, 2008), SR-Nasdaq-2008-013 (July 25, 2008). Even if such a limitation on the Listing Council's authority was not reasonably implied, the Listing Council found good policy reasons for it to refrain from granting SPACs additional time beyond 36 months to complete their business combinations. The Council stated that the inability of a SPAC to execute a business combination, and to do so within the generous three year time period that the Exchange allots to it, strongly indicates that the SPAC is not fit for continued listing on the Exchange. It concluded that the listing of a company's securities for trading on Nasdaq is a mark of distinction that should not be afforded to companies that cannot fulfill in a timely manner even their most basic and fundamental corporate missions.

^[1]The Listing Council noted that, on a dubious basis, the Company created the very scenario that it asked the Listing Council to help it to avoid. That is, the Company filed an appeal of the Hearings Panel decision even though it expressly acknowledged in its appeal that it did not dispute the Hearing Panel's determination that the Company is non-compliant with the Listing Rules and therefore subject to de-listing. By the mere act of filing this appeal, the Company set in motion an appellate process whose only possible effect was to delay a final de-listing action by several months. Although the Listing Council encourages listed companies to file legitimate appeals to vindicate their rights under the Listing Rules, the Listing Council is loathe to reward companies that file frivolous appeals in an effort to game the system and to achieve strategic business goals for themselves. The Listing Council stated that it was especially reticent to reward such behavior when it observes that the companies which engage in it were represented by experienced advisors who are well-versed in the Listing Rules and the procedures of this Listing Council.

(1) Equity Standard: Stockholders' equity of at least $2.5 million; (2) Market Value of Listed Securities Standard: Market Value of Listed Securities of at least $35 million; or (3) Net Income Standard: Net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years.