Wednesday, February 18, 2009

SIRIUS XM Radio: Reverse-Split Realities

(April 2009 Update - NASDAQ has just extended the bid-price suspension date again- this time through Friday, July 17, 2009- so apply this to article below)

On October 16, 2008, NASDAQ implemented a temporary suspension of the $1 bid price rule. This temporary extension, which was originally set to expire on Friday, January 16, 2009, has now been extended through Friday, April 17, 2009. Beginning Monday, April 20, 2009, NASDAQ will start a fresh clock ticking in regard to any company's stock whose bid price then closes below $1/share (from that trading day onward).
(NASDAQ Temporary Rule Suspension)

In other words, if before October 16, 2008, a company was still compliant (was not deficient) with the $1 bid price rule, and, prior to, or during the rule's October 16, 2008 through April 17, 2009 suspension period, that company's share price fell below $1/share- none of that would be counted toward the 30 consecutive trading day period NASDAQ clocks before notifying the company it is bid price deficient.

Case in point: SIRIUS XM Radio Inc. (SIRI) closed below $1/share beginning September 22, 2008, and has closed below $1/share for 102 straight trading days through February 17, 2009 (the date of this article). If NASDAQ had not suspended the $1 bid price rule, SIRIUS XM Radio would have already been bid-price deficient as of October 31, 2008, and, as such, would had already been notified by NASDAQ promptly after that date. But the rule suspension nixed all this- a freebie for SIRIUS through April 17, 2009. NASDAQ would only begin counting any 30 consecutive trading day deficiency beginning April 20, 2009.

In other words, in SIRIUS XM Radio's case:

September 22-October 16, 2008: company was not yet bid-price deficient- even though stock price had closed below $1/share for 19 straight trading days-- none counted.
October 16, 2008-April 17, 2009: suspension period. Any consecutive trading days below $1/share-- not counted.
April 20, 2009 onward: 30 consecutive trading-day bid-price clock begins (unless NASDAQ announces another bid-price suspension extension).

However, in regard to those to companies who WERE already bid-price deficient prior to the October 16, 2008 suspension date- beginning April 20, 2009, these companies in the compliance period will pick up where they left off. So for example, if, prior to the rule suspension, a company had 120 days remaining on its 180 day compliance period, beginning April 20, 2009, that company will then resume having 120 days left to comply.

NASDAQ implemented the bid price rule suspension back in October 2008 citing "extraordinary market conditions," noting:

"Given current market conditions, Nasdaq proposes to provide issuers of common stock, preferred stock, secondary classes of common stock, shares or certificates of beneficial interest of trusts, limited partnership interests, American Depositary Receipts,and their equivalents temporary relief from the continued inclusion bid price5 and market value of publicly held shares requirements."

"In the past several weeks, U.S. and world financial markets have faced almost unprecedented turmoil, and the Commission has acknowledged in several recent emergency Orders that this turmoil has resulted in a crisis in investor confidence and concerns about the proper functioning of the securities markets.7 As a result, the number of securities trading below $1 has increased dramatically. For example, as of September 30, 2007, there were 64 securities trading below $1 on Nasdaq. By September 30, 2008, that number had increased to 227 and by October 9, 2008, there were 344 securities trading below $1 on Nasdaq and over another 300 Nasdaq-listed securities trading between $1 and $2.8 Nasdaq believes that during this time there was no fundamental change in the underlying business model or prospects for many of these companies, but the decline in general investor confidence has resulted in depressed pricing for companies that otherwise remain suitable for continued listing. These same conditions make it difficult for companies to successfully implement a plan to regain compliance with the price or market value of publicly held shares tests."

All very well and good. NASDAQ-listed companies caught a 180 day break.

Which leads me to the point of this article.

The real problem for investors who own (or are thinking of buying) NASDAQ stocks, such as SIRIUS XM Radio, that have been consistently under a buck- is that there is the underlying risk that a company whose stock remains under a buck for 30 straight trading days is ultimately going to do the dreaded reverse-split upon expiration of the 180 day compliance period, in order to cure this deficiency (barring appeal or an additional 180 day compliance extension granted- see below). Once deemed deficient (eg- a company has been notified that it is deficient), a NASDAQ-listed company would have had to then have the stock price trading at a buck or more for 10 or more (not to exceed 20) straight trading days by the final day of the compliance period. And. if this had not yet occurred through "natural" trading, the company is then sent a determination letter by NASDAQ informing them that their stock is subject to de-listing. NASDAQ can then grant another 180 days to comply, but only if the company now meets initial listing requirements (prior to the expiration of the compliance period, the company was required to meet the less stringent continued listing requirements, such as the $1 bid price) - which are much steeper. And, if the company does- this fends off the need to reverse-split for another 6 months.

If, however, the determination letter that shows up at a company's "doorstep" also includes a determination that the company does not now meet the stricter initial listing requirements, the company's only options are then to accept de-listing, to reverse-split immediately (within days-assuming shareholder approval has already been granted) or to appeal (roughly a 2 month affair)- which is a process whereby the company notifies NASDAQ it is appealing, and an appeal date, once set, allows the company, in person or in writing, to present/submit materials with an initial-listing compliance plan to a NASDAQ-independent panel, which, if approved, could result in NASDAQ granting additional time to comply, say an additional 90 days, and, perhaps set requirements to hit certain milestones toward ultimate initial listing compliance.

At the point that all available options and extensions have been exhausted, and with shareholder approval, and assuming he company isn't (or won't be) also deficient in other regards, and, of course, assuming the company wants to stay listed, the "reverse-split" then becomes the one sure-fire method for the company to "get" (and sustain) their stock price over $1 for that "10 not-to-exceed 20 trading-days" requirement. In other words, if the stock price didn't get over a dollar for 10 straight trading days as a result of "normal" trading, the company is allowed to use "artificial" means to do it- and to reverse-split to a high-enough stock price so the stock doesn't quickly drop back under a buck! After all, NASDAQ doesn't simply want that stock price over at a dollar or more. It wants it to stay over a dollar or more. So the higher the reverse-split, the better, so to speak. At least in theory- and with all good intentions.

Keep reading.

This "artificial" method by which a company is allowed to regain compliance, to say the least, is an ill-conceived (and bizarre) part of the rule.

Keep reading.

As most traders know, stocks that reverse-split to their higher share price most often sink right back down again- after all, on the one hand, any underlying negative company/financial issues that may have contributed to the stock price going under a dollar in the first place are still there- these don't magically disappear just because the stock price takes on a shiny new reverse-split "happy-face."

And on the other hand, most short-sellers lick their chops waiting for a stock to reverse-split anticipating a bear-raid on the stock. And most savvy investors potentially thinking of buying the stock long, post-reverse split, know the shorts are going to pile in, so potential-longs aren't going to jump in any time soon.

In other words, the reverse-split, most times, turns out to be a cosmetic, artificial and temporary fix, that's it.

So, if the reality is such that a company's stock price is going to sink or be pounded right back down, sometimes to exactly where it was pre-reverse-split (or even below where it was), those long investors who seek to hold their positions pre-reverse into the reverse get "tanked" all over again once the share price drops. And it does not help the exchange on which the company is listed, in regard to achieving the obvious goal- which is to have companies maintain continued listing compliance.

Finally, of course, it certainly doesn't help the company that actually cares about its stock price (versus those companies- and you know who you are- who decide to use (abuse) a low stock price to initiate a share buyback- on the cheap, who first begin buying back shares under a buck, then use the reverse-split to proportionally reduce the number of publicly held shares, then wait for the stock to tank again post-reverse, and continue to buy back the reduced number of shares all over again on the cheap).

If, in the ideal stock market world, bear raids and short-seller manipulation didn't exist (see- A Remedy for Short Selling Manipulation), and companies didn't abuse the ethical considerations and rules of the stock buyback (SEC- it's 10 o'clock- do you know where your Safe Harbor children are?), then reverse-splitting wouldn't be as dreaded as it is by longs. And the company that reverses might have a fighting chance to regain its dollar cut-off.

But, until the SEC actually effectively deals, on a sustained basis, with existing market manipulation and unsavory companies, the under-a-buck cut-off should be eliminated.


This way, the stock price can exist under a dollar- shorts are much less likely to pile in under a buck- and if and when the company itself actually provides investors with solid financial reasons to justify a rise in the stock price to over a buck and beyond- the stock may well hit its mark. Those who have been holding the stock which fell under a dollar won't get "double-tanked" because of a cosmetic reverse-split share price that sinks back down again. And as importantly, if potential long investors know the stock won't be facing a reverse-split because of deficiency/compliance rules, they will be far more likely to buy in under a dollar- which may have the effect of actually getting the stock back over a dollar- the very thing the exchange wanted in the first place!

But, really, this whole thing about stocks under a dollar is all about "appearances." The buck cut-off is simply an elitist creation to separate the "haves" from the "have-nots." The stock market's own caste system, if you will.

And speaking of elitism: as for institutions being barred from owning exchange-deficient stocks or stocks that are under $5/share- this should be done away with altogether. The negative connotation of owning "penny stocks"- which are defined as stocks trading under $5/share- is now an outdated and inappropriate notion in 2008.

It's time to get this whole thing cleaned up once and for all. Its time has finally come. Whether a stock is under $1 or under $5, in this crazy economic environment, or in the future, should no longer matter. It is, without question in the best interests of ALL investors, companies, the exchanges and the taxpayers (although not so good for short-sellers). The exchanges shouldn't be in the business of worrying about whether or not a company's stock price is at any particular level, or that the company maintains a certain ongoing market cap. They should accept companies into their exchanges that qualify on the basis of initial listing requirements, but, once they're in- let them play ball! Make de-listing only the result of serious infractions committed. And, as such, the SEC should then ensure such companies cannot re-enlist anywhere else.

As for the OTCBB- let the them continue to be the AAA farm club league for developing companies that need to qualify for initial listing requirements of the major exchanges before being able to bump up. Let the Pink Sheets (AA league) exist for companies that are in chapter 11 bankruptcy or are not yet ready for the OTCBB or the major leagues.

And, at the very least, do way with the dollar bid price rule. That would, surely, be a start.

GT McDuffy

(Disclosure: author holds no positions in any of the stocks mentioned in this article)

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