Nasdaq, faced with unusual IPO price movements, warns underwriters

Link: https://www.nasdaqtrader.com/MicroNews.aspx?id=ERA2022-9

On November 18, 2022, Nasdaq issued an “Equity Regulatory Alert” (the “Regulatory Alert”) related to the initial public offerings (“IPOs”) of a variety of “small-cap” companies, many of which raise less than $25 million. In connection with such IPOs, the pricing of the newly-registered equities typically spikes immediately. Then, the IPO securities experience equally dramatic price declines, settling eventually at a price level equal to or below the original IPO price.

For Nasdaq, such IPO price-related patterns “negatively impact the ability of the securities markets to operate in a fair and orderly manner, to the detriment of investors.”

Highlighting the role that equity underwriters play in the orderly operation of the capital markets, the Regulatory Alert advised as follows: “Nasdaq and companies undergoing their IPOs, rely on underwriters to select the selling syndicate and ensure that the shares are placed in a way that is reasonably designed to allow liquid trading, consistent with Nasdaq’s listing requirements and the successful introduction of the company to the marketplace.”

Underwriters, according to the Regulatory Alert, should thoughtfully engage with the following questions as they discuss pricing-related issues with others deal participants involved in the IPO process, including the equity issuers themselves:

– Do the total offering amount and target price per share reflect market supply and demand? Is there more diligence the underwriter should conduct to ensure that the float proposed by the issuer is sufficient to ensure fair and orderly trading?

– Who are the selling shareholders and what is their relationship with the issuer or entities or individuals to whom shares are allocated?

– Are the terms and conditions of lock-up agreements reasonable?

– What additional diligence should be conducted to ensure that those lock-up agreements are not circumvented?

– Will the lock-ups contribute to an illiquid market in the company’s shares?

– Are shares allocated broadly, in a way that ensures liquidity is sufficient to encourage, rather than inhibit, price discovery?

– What more diligence can be conducted to ensure the entities and individuals to whom shares are allocated are not restricted from trading them, thereby potentially causing the price to artificially increase due to lack of supply?

– Will shares allocated outside the United States be immediately freely tradeable or will they be subject to clearing or other logistical delays?

– Are the IPO’s terms and conditions fair and reasonable?

– Does the underwriter have any conflicts of interest with the IPO and, if so, have they been clearly disclosed?

– When releasing the security for trading in the IPO cross, is the underwriter confident that sufficient liquidity exists to ensure price stability?

– Once the IPO begins trading, is the underwriter fulfilling its obligation for price stabilization?

– What can the underwriter learn from prior IPOs that experienced unusual price movements? Is the underwriter making process improvements to mitigate the risk that an upcoming IPO will trade in a similar fashion?

As underwriters take on IPO engagements, they, according to the Regulatory Alert, should assess whether the registration statement in question is complete and accurate and does not contain misleading information or material omissions. Specifically, they should initiate discussions with the issuer’s officers, examining documents in the issuer’s files and visiting the issuer’s facilities. In Nasdaq’s view, the “underwriter may also consider whether additional information regarding trading abnormalities should be disclosed. In light of the recent price volatility in certain IPOs, the underwriters of such IPOs should reexamine their policies and procedures.”