Over the past 12 months, Nasdaq and the NYSE have adopted restrictions on smaller initial public offerings due to concerns over volatility in the trading of shares of smaller IPO companies. For example, Nasdaq has started to require more than 50% (and in some cases, significantly more than 50%) of the shares offered for sale in a company’s initial public offering be allocated to U.S. investors; only firms listed on a certain Nasdaq-approved member firms list may now serve as the “principal underwriters” of an initial public offering for shares to be listed on Nasdaq; and since July 2024, NYSE American no longer accepts applications for initial public offerings unless the gross proceeds from the IPO are at least $10 million.

In December 2024, Nasdaq proposed a new rule that, if adopted, will prevent issuers from using shares held by existing non-insider shareholders and offered for resale (resale shares) to meet the public float requirement of Nasdaq’s initial listing standard. In other words, a company seeking to list on the Nasdaq Global Market or Nasdaq Capital Market in connection with an IPO must satisfy the applicable minimum Market Value of Unrestricted Publicly Held Shares (MVUPHS) requirement¹ of the Nasdaq Listing Rules solely from the proceeds of the IPO.² This proposed rule is based on Nasdaq’s observation that the securities of companies that meet the applicable MVUPHS requirement by including resale shares have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the IPO. This is Nasdaq’s latest attempt to ensure that there is sufficient liquidity on the date of listing and immediately after the securities are listed. These new rules and policies have made it more difficult for companies to raise smaller-size IPOs on the U.S. major stock exchanges, and particularly challenging for foreign-based micro-cap companies to raise between $5 and $10 million in an IPO in the U.S.

It has been widely reported that over half of the IPOs on U.S. stock exchanges since 2023 have come from foreign-based companies, a 20-year high. It remains to be seen if these changes in exchange rules and policies will bring back more domestic companies to the IPO market in 2025, and if the exchanges will be able to achieve the desired results intended by these new rules. 

For Chinese micro-cap companies, there are additional hurdles due to Chinese regulatory oversight of overseas listings. For example, a U.S. listing by a China-based company requires preapproval by the China Securities Regulatory Commission (CSRC). Therefore, a Chinese company must file with the CSRC a fully translated Form F-1 registration statement even if the company’s initial submission with the U. S. Securities and Exchange Commission was only a confidentially submitted draft registration statement. In addition, CSRC’s approval is valid for only one year. If the IPO in the U.S. fails to close before CSRC’s approval expires, the Chinese company will be required to reapply for CSRC’s approval. If the Chinese company collects personal information on more than 1 million users in China, it must also apply for cybersecurity review by the Cyberspace Administration of China (CAC) prior to listing in the U.S. Although most of these filing requirements are not new anymore, it is vital to the success of any IPO by a China-based company that it works with an experienced U.S. securities counsel who understands the evolving regulatory landscape in both China and the U.S.
 

¹ _{For an initial listing on the Nasdaq Global Market, a company must have a minimum MVUPHS of $8 million under the Income Standard, $18 million under the Equity Standard, and $20 million under either the Market Value or Total Assets/Total Revenue Standards. For an initial listing on the Nasdaq Capital Market, a company must have a minimum MVUPHS of $5 million under the Net Income Standard, and $15 million under either the Equity or Market Value of Listed Securities Standards.}

_{² Nasdaq is proposing to make similar changes affecting companies that apply to uplist to Nasdaq from the OTC market in conjunction with a public offering.}