Going public is often one of the main goals of a start-up business. But getting listed on a major stock exchange like the New York Stock Exchange (NYSE) or Nasdaq isn’t just a matter of showing up.
Any time a company seeks to be publicly traded, it has to apply to be a member of the club. That way, investors and traders can evaluate whether their dollars are buying into viable businesses with good potential for profit.
“Stock exchanges are built on trust and the mechanics of how those companies are listed,” says Carol Schleif, deputy chief investment officer of BMO Family Office, a wealth management firm. “Each exchange is protective of its reputation, and that’s 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 overseas exchanges. For example, Nasdaq has a history of lower fees, which appeal to smaller companies. Yet tech giants like Google, Apple, and Amazon are traded on the Nasdaq as well.
Let’s take a look at Nasdaq listing requirements on this popular exchange.
Listing Requirements for All Companies
First of all, there are different market tiers offered by the Nasdaq, says Bob Tull, president of Pennsylvania-based asset management firm, Procure Holdings. The three tiers are the Nasdaq Global Select Market®, The Nasdaq Global Market®, and The Nasdaq Capital Market®. Most major companies look 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 continue being listed, it must adhere to a set of requirements.
“Each tier has its own criteria and fees,” Tull says. “You should also be aware of new rules around governance, like the fact that Nasdaq now has inclusion and diversity requirements.”
Additionally, the listing requirements also depend on whether the company is making an initial public offering or is a spin-off, or is a seasoned company that is currently trading common stock.
For all companies, some of the general listing requirements for an initial public offering include:
- 1.25 million publicly traded shares outstanding
- At least 450 round lot shareholders (at least 100 shares per holder) OR 2,200 total shareholders
- The market value of unrestricted publicly held shares OR the market value of unrestricted publicly held shares plus stockholders’ equity must be at least $45 million
Tull points out that a Nasdaq minimum share price might be required as well, and that amounts to $4. However, he says, there are some circumstances when a company might be able to list with a bid price of $2 or $3. Such a company might have to make up for your lower share price by compensating in other areas.
Nasdaq offers an online listing portal that offers step-by-step help, as well as the documentation needed to list. Before submitting an application, it’s useful for a company to review the requirements and make sure it has the necessary items to support an application. Depending on the application and the completeness of the documentation, a business could have an application processed and a company approved for listing in six weeks or less.
After meeting the main 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 listing on the Nasdaq,” says Schleif. “You meet the liquidity requirements then see if you can meet all the criteria in one of the financial standards. If you don’t meet the requirements of standard number one, you can look to see if a different standard better applies.”
The four standards are as follows:
Standard No. 1: Earnings
Listing requirements for the Nasdaq start with looking at earnings. First, a company can’t have reported a net loss in any of the three previous years. Once established, Nasdaq requirements include an aggregate pre-tax earning amount of $11 million for the previous three years. The previous two years must include pre-tax earnings of $2.2 million a year.
If a company can’t meet that standard, says Schleif, the next step for a business is to see if it can meet the criteria in the second standard.
Standard No. 2: Capitalization With Cash Flow
Instead of earnings, a company can choose to apply for listing using cash flow in combination with capitalization. For example, if a business has an aggregate minimum cash flow of $27.5 million during the last three years, and no negative cash flow, that is acceptable, as long as the average market capitalization during the previous 12 months is at least $550 million. However, revenues during the last fiscal year must also be at least $110 million.
Standard No. 3: Capitalization With Revenue
If the cash flow requirement in the second standard is too much to meet, a company can make up for it with a higher capitalization. With this standard, if revenues over the last fiscal year are at least $90 million and the average market capitalization during this time period is at least $850 million, a company can still be listed.
Standard No. 4: Assets With Equity
Finally, if a business doesn’t meet cash flow or revenue requirements, it can still meet listing requirements for Nasdaq if it has assets and equity. The market capitalization requirement is $160 million — as long as total stockholder equity is $55 million and company assets total at least $80 million.
Can a Company Be Delisted?
All companies that want to be listed on the Nasdaq have to pay an initial listing fee, whether they’re making an initial public offering, or whether they’re a legacy company that’s been listed elsewhere in the past, according to Tull.
“On top of that, there’s an annual listing fee to remain on the exchange,” Tull says. “[Businesses] have to pay that each year and continue meeting the minimum standards in order to stay on the Nasdaq.”
Companies must therefore make sure they can meet the Nasdaq listing requirements in subsequent years, since joining an exchange requires more than just a one-time fee. For investors, the annual fees and listing requirements are a kind of safeguard ensuring companies can’t just enter and exit the stock market exchange on a whim.
But it does happen: Each trading day, Nasdaq publishes a list of companies pending delisting or suspension from the exchange, as well as the reason for their delisting.
Any stock exchange has listing requirements for companies, whether they’re making an initial public offering or have been trading for a while. Nasdaq listing requirements have two parts: criteria for every company and a way for companies to show their viability in four different ways.
Once a company is listed, it has to maintain the minimum listing requirements or risk being removed from the exchange.