Nasdaq’s move to push its smallest companies off the stock exchange could give Canada a new selling point in the global competition for public listings. 

The exchange has been seeking a new rule that would suspend and delist any company whose market value, based on the number and price of publicly-traded shares, falls below US$5 million for 30 straight business days. Nasdaq first proposed the change in January, and the U.S. Securities and Exchange Commission (SEC) approved it on July 22. before pausing implementation a week later. Despite the stay order, lawyers say companies should prepare for the possibility that the rule takes effect—a prospect that could strengthen Canada’s appeal as a home for smaller public companies.

The rule could prompt some smaller companies to reconsider listing on the Nasdaq, said Bill Gorman, a Toronto-based partner at Goodmans LLP, who advises companies on U.S. and Canadian public offerings. “It reinforces the view that it’s a lot easier to go public in Canada as a small issuer,” said Gorman. As of Thursday, there were 15 Canadian companies on the Nasdaq with market values below US$5 million. 

Nasdaq says the rule is meant to crack down on stock-price manipulation, which U.S. regulators and exchanges have said is more common among ultra-small companies. In approving the rule, the SEC argued that companies with persistently small market capitalizations tend to have smaller public floats—the total number of shares available to trade—and cited investor concerns over less institutional ownership and analyst scrutiny. Those stocks “have a greater chance of being manipulated or experiencing trading volatility,” Nasdaq said in its proposal, “because less capital may be required to undertake manipulative trading activity.” 

Canada’s public markets take a different approach. “We don’t view early stage companies as a risk to be purged,” said TSX Venture Exchange president Andy Creech. “We view them as the future of the economy.”  

Canada has several exchanges designed for small companies. The Canadian Securities Exchange caters to early-stage, microcap firms, as does the TSXV, which serves as a junior stock market where small companies can raise money before graduating to the larger TSX and potentially the Nasdaq. Neither exchange has a universal market-cap floor, and many listed companies are worth less than US$5 million. Instead, companies must meet other listing requirements, including having an active business and enough shares owned and traded by public investors. 

For companies that fall below the TSXV requirements, there’s a further step down: NEX, a smaller board where they can restructure, refinance, or operate as a shell company while seeking a new business to acquire and operate. 

Creech described NEX as a “a feature, not a graveyard.” Some companies move there after selling their business and returning cash to shareholders through dividends. “What’s left is a publicly listed vehicle with not much in it, that then transitions back to NEX,” he said, which may later list on bigger exchanges. 

Gorman noted that Canada has deliberately lower regulatory requirements for small issuers, including less onerous disclosure rules, such as for executive compensation. The country’s securities regulators have also adopted a pilot program to let certain TSXV and CSE companies report their earnings twice a year instead of quarterly. “Canada has really taken steps to promote smaller issuers,” he said. 

Still, Nasdaq’s proposed rule is unlikely to trigger a major shift in the listings landscape. Most companies considering an initial public offering on the Nasdaq are big and unlikely to fall below the US$5 million threshold when they initially list, Gorman said. 

That’s certainly the case for portfolio companies at Georgian, said Madison Elkhazin, head of capital formation and strategic investments. The Toronto-based venture capital firm invests in growth-stage companies, including some that are on a track to go public. Elkhazin said by the time Georgian companies are ready to list, their value is well beyond US$5 million. Quantum computing firm Xanadu, for instance, was the latest Georgian-backed company to go public, in a SPAC deal that valued it at US$3.6 billion.

Gorman said the bigger opportunity for Canadian exchanges may be picking up Nasdaq issuers whose value has fallen—as long as the business is healthy, he said. 

Bringing in smaller firms could also expose Canada to the same risks the Nasdaq is trying to curb with its new rule. In April, the Canadian Securities Administrators—the umbrella organization for the country’s provincial and territorial securities regulators—issued an alert about the rise of similar “ramp-and-dump” scams the Nasdaq considered in its rule change. The schemes typically involve fraudsters using social media and messaging apps to convince victims to buy low-value stocks, artificially driving up the price before the fraudsters cash out, tanking the price and leaving investors with steep losses. 

Creech said TSXV tries to mitigate those risks through extensive background checks on directors, officers and major shareholders. The exchange also requires certain insiders of newly listed companies to place their shares in escrow for up to three years, limiting their ability to quickly sell. Mining issuers face additional safeguards, including technical disclosure standards meant to prevent companies from making unsupported claims about their projects. 

Trading itself is monitored by the Canadian Investment Regulatory Organization (CIRO). Spokesperson Joanna Nicholson said its rules against manipulative and deceptive trading apply regardless of a company’s size, while investment dealers that execute the trades are responsible for reporting suspected manipulation. The CSA, meanwhile, oversees CIRO, and said it works closely with the organization through its regional enforcement divisions to monitor market manipulation. 

Nasdaq’s approach has also drawn criticism from U.S. small-company advocates. Marc Indeglia, president of the Small Public Company Coalition and partner at law firm Glaser Weil, said regulators should target misconduct in general and not use company size as a proxy for risk. “If they’re going to shut the door… it leads me to wonder where our smaller companies are going to go,” he said. “Canada may be an answer.”