Welcome to NASDAQtrader.com for Options and Futures

Thursday, November 17, 2022

Equity Regulatory Alert #2022 - 9
Regulatory Considerations for Small Capitalization IPOs


  • Regulatory

Markets Impacted:

Contact Information:


As a national securities exchange, Nasdaq has a regulatory responsibility to protect investors, promote capital formation and maintain market integrity. Recently, we have observed instances of unusually high price spikes immediately following the pricing of certain initial public offerings (IPOs) on U.S. exchanges, mostly with respect to small-cap companies whose offerings are less than $25 million. In many instances, the IPO securities that are the subject of these extreme price spikes then experience equally dramatic price declines to a level at or below the offering price. These extreme price spikes may occur in the opening trade on an exchange, or in continuous trading on the day of, or days immediately following, the listing.

Nasdaq Regulation is concerned that the pattern described above negatively impacts the ability of the securities markets to operate in a fair and orderly manner, to the detriment of investors. FINRA and NYSE expressed similar concerns in alerts they each issued today. Nasdaq Regulation refers our members, and the members of other self-regulatory organizations, to those alerts. Given the importance of these issues, we write separately to highlight the important role of underwriters as gatekeepers in the IPO process and the applicability of market rules and the federal securities law.

The Underwriters' Role

Underwriters play a critical role as gatekeepers to the capital markets in connection with the trading of newly issued securities. Just last year, Chair Gensler remarked that “[t]he third parties involved in the sale of the securities — such as auditors, brokers, and underwriters — should have to stand behind and be responsible for basic aspects of their work. Thus, gatekeepers provide an essential function to police fraud and ensure the accuracy of disclosure to investors." [1]

Unusual price volatility following IPOs of certain small-cap issuers highlights the essential role underwriters play. 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. A non-exhaustive list of questions each underwriter may consider asking itself in determining whether to go ahead with pricing an IPO include:

  • 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?

Underwriters are also reminded that it behooves them to conduct a due diligence review to assess whether the registration statement is complete and accurate and does not contain misleading information or material omissions. Such review may include, but is not limited to, having discussions with the issuer’s officers, examining documents in the issuer’s files, and visiting the issuer’s facilities. 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.

Manipulative Trading Concerns

Nasdaq members, as well as the members of other self-regulatory organizations, that underwrite IPOs, and that play other roles in the offering process, should expect a heightened focus when an IPO experiences unusual price movements. Nasdaq Regulation will continue to investigate to determine whether such members have complied with applicable rules designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest.[2] Areas of focus will include suspected manipulation and, beyond manipulation, whether the members are complying with their obligation to observe high standards of commercial honor and just and equitable principles of trade pursuant to Nasdaq Rule General 9, Section 1(a). That rule sets forth a standard intended to encompass a wide variety of conduct that may operate as an injustice to investors or other participants in the marketplace.


The U.S. capital markets operate best and most efficiently when there is confidence in the market. When gatekeepers such as underwriters engage in misconduct or otherwise are derelict in their duties, confidence is diminished and investors suffer. Nasdaq is committed to protecting investors, promoting capital formation, and ensuring that the trading on its markets is fair and orderly and free from manipulation. We encourage underwriters and all market participants to play their part in enhancing market quality.


[1] Chair Gensler, Remarks Before the Healthy Markets Association Conference, Dec. 2021, available at https://www.sec.gov/news/speech/gensler-healthy-markets-association-conference-120921.

[2] Nasdaq Regulation currently has open investigations relating to the activity described in this bulletin.

Please follow Nasdaq on Facebook RSS and Twitter.

Nasdaq (Nasdaq: NDAQ) is a leading global provider of trading, clearing, exchange technology, listing, information and public company services. Through its diverse portfolio of solutions, Nasdaq enables customers to plan, optimize and execute their business vision with confidence, using proven technologies that provide transparency and insight for navigating today's global capital markets. As the creator of the world's first electronic stock market, its technology powers more than 90 marketplaces in 50 countries, and 1 in 10 of the world's securities transactions. Nasdaq is home to approximately 3,900 total listings with a market value of approximately $13 trillion. To learn more, visit: business.nasdaq.com.