The Nasdaq is tightening its listing rules for micro-cap stocks after scandals involving Chinese companies, requiring a minimum public float of $15 million and IPOs of at least $25 million for risky markets.
Massive Losses and an Alert FBI
In recent months, micro-cap Chinese companies listed on the Nasdaq have seen their value skyrocket before plummeting abruptly. Seven of them lost over 80% in July, wiping out $3.7 billion in market capitalization. The scenario remains the same: stocks heavily promoted on WhatsApp and social media, followed by a sudden sell-off by insiders.
The FBI has confirmed the trend: complaints related to ‘ramp and dump’ frauds have jumped 300% in a year. For many small investors, the bill is steep, and confidence is eroding.
An Unprecedented Regulatory Tightening
Faced with this surge of manipulations, the Nasdaq now implements an accelerated process for the suspension and delisting of securities that do not meet its standards. The minimum public float threshold is now $15 million for companies eligible for the net income standard.
Another key measure: companies from ‘restrictive markets’ like China must still offer a public offering of at least $25 million, a rule introduced in 2020 but now reaffirmed with vigor.
According to John Zecca, Nasdaq’s Chief Legal and Regulatory Officer, the exchange is monitoring ‘extreme volatility and manipulation risks’ concerning these companies. Concern is heightened by the fact that Chinese investors, often heavily involved in these stocks, grant too much control to insiders, limiting liquidity and transparency.
A Signal Sent to Global Markets
Close to 70% of cases reported by the Nasdaq to US regulators since August 2022 involve Chinese companies. And the trend is not slowing down: last year, a record number of Chinese companies sought listings in the US. The issue lies in US authorities still struggling to inspect local accounting firms auditing these companies, fueling suspicions.
For some observers, these new rules will not solve everything. Edwin Dorsey, author of the newsletter ‘The Bear Cave,’ sees it as a ‘first step’ that could simply push fraudsters to recycle old tickers rather than exploit new listings.
