SEC Approves Creation of NASDAQs BX Venture Market

On May 6, 2011, the Securities and Exchange Commission (“SEC”) approved NASDAQ OMX BX, Inc.’s (the “Exchange” or “BX”), proposal to create a new listing market, the BX Venture Market.

NASDAQ OMX BX, Inc. was formed in 2008, upon the completion of the acquisition of the Boston Stock Exchange by the NASDAQ OMX Group, Inc. Formed in 1834, the Boston Stock Exchange was the third oldest exchange in the United States. Upon the acquisition, NASDAQ OMX Group, Inc. delisted all securities that were previously listed on the Boston Stock Exchange. Since that time, the Exchange operated solely as a trading venue until the BX Market Venture was established.

The purpose of the new exchange is to create an intermediary platform, between the over the counter market and the national markets, for smaller and earlier stage companies to attract investors. Under the existing exchange platforms, many companies with strong business concepts and market potential could not meet the financial requirements of the national exchanges. While the quantitative financial standards for listing on the BX Venture Market are less than the national exchanges, many of the corporate governance, regulation and other qualitative requirements are similar to those of the national markets.

Like the national markets, companies that list on the BX Venture Market will need to meet certain corporate governance requirements. Some of the key requirements are:

• Maintain a fully independent audit committee
• Maintain independent director oversight of executive compensation
• Maintain a minimum of three independent directors; however, unlike NASDAQ, the majority of the directors on its boards do not have to be independent
• Independent directors must review related party transactions
• Shareholders must approve equity compensation
• Annual shareholder meetings
• Maintain a code of conduct applicable to all directors, officers, and employees
• Registration under Section 12(b) of the Act and current in its periodic filings with the SEC and, as a result, subject to the requirements of the Sarbanes-Oxley Act of 2002
• The company’s auditor will be required to be registered with the Public Company Accounting Oversight Board
• Public shells will not be allowed to list

A full listing of the requirements can be located on the BX Venture website (www.bxventure.com).

A company’s financial requirements are less cumbersome than those of the national exchanges. The BX Venture Market website includes charts detailing the specific listing requirements. The key financial requirements for initial listers are different than for companies previously listed on national exchanges and those companies not listed on a U.S. National Exchange. Companies previously listed on a national exchange, need a minimum initial bid price of $0.25. In contrast, companies not previously listed on a national exchange are required to have a $1.00 bid price; $1 million in stockholders’ equity or $5 million in assets; a one year minimum operating history; and a minimum of a twelve month plan to maintain sufficient working capital to fund operations. For both initial listers and companies previously listed on a national exchange, there is a requirement of 200,000 shares of public float, 200 total shareholders (including 100 round lot), a $2 million market value of listed securities, two market makers, and the company must meet the corporate governance requirements of the BX Market Venture. Prior to September 30, 2011, a company that was delisted from an exchange on or after January 1, 2010, would be eligible for the quantitative standards of companies that were previously listed on a national exchange. After September 30, 2011, a company would have three months to list on the BX Market Venture after being delisted.

The BX Venture Marketalso has continuing requirements that include maintaining 200,000 shares in public float, 200 total public shareholders, a $1 million dollar market value of listed securities, two market makers, a bid price of $0.25, and also meet all corporate governance requirements. In the event of noncompliance of the market value requirement, companies will be given 90 calendar days to regain compliance. Securities which fail to maintain a $0.25 per share bid price for 20 consecutive trading days will be suspended from trading on the BX Venture Market. Companies may regain compliance by achieving the minimum bid price on another venue such as the OTC Market.

In addition, to less stringent quantitative requirements, there are some significant differences between the regulations of the national exchange and those of the BX market as noted on the BX Venture website.

First, as a result of the lower financial standards, securities on the BX Venture Market will not be classified as National Market System (“NMS”) Securities. As a result, the securities will not be subject to trade-through rules. If securities are traded on more than one market, trade through rules prohibit transactions from occurring when there is a better price in one market than another. Trades completed in BX Venture Market securities will not be reported to the NMS consolidated tape plans. These “tape plans” gather and centralize data from the exchanges to provide information that allows investors access to the best price of a security.

Next, companies listed on the BX Venture Market are required to obtain shareholder approval for equity compensation. However, they are not required to obtain shareholder approval for other issuances of common stock. This differs from the rules applicable to companies listed on NASDAQ, which are also required to seek shareholder approval for any stock issuance of 20% or more at a price less than the greater of book or market value, any stock issuance that could result in a change of control, and certain stock issuances in connection with acquisitions.

The last significant regulatory difference is that “securities listed on the BX Venture Market are not exempt from state “blue sky” rules relating to the registration of securities under Section 18 of the Securities Act of 1933 and the rules there under. Companies listed on the BX Venture Market must therefore satisfy state law registration requirements and other state laws that regulate the sale and offering of securities. Furthermore, a company listed on the BX Venture Market may not rely on any exemption available to companies listed on the former Boston Stock Exchange and will be delisted if they attempt to rely on such an exemption. Securities listed on NASDAQ, in contrast, enjoy an exemption from the “blue sky” rules.”

Companies that are eligible to be listed on the NASDAQ Stock Market do not have the option to list on the BX Venture Market. This provision is in place in order to ensure that companies meet the higher listing standards and do not seek less strict guidelines and lower fees. BX Venture Market listed companies will not be able to state that they are listed on a NASDAQ market to avoid investor confusion. Listing requirements will be monitored and enforced by the staff of NASDAQ OMX Listing Qualifications. FINRA will provide surveillance of market activity in BX Venture Market-listed securities.

The exchange is focusing its marketing efforts towards companies that were delisted from national exchanges and prospective small businesses looking for a well regulated platform to go public. Companies interested in applying to list on the BX Venture Market will be able to submit applications via the Online Listing Center.The BX Venture Market is expected to launch in the fourth quarter of 2011.

Philip Weiner contributed to this article.