Nasdaq has announced tougher listing and trading rules for small-cap stocks, targeting a wave of suspected “pump and dump” scams involving Chinese companies trading in the US.
The exchange said it will introduce an accelerated process for suspending and delisting small stocks that do not meet its standards. It also plans to adjust the minimum public float requirements for companies that mainly operate in China.
These steps come after an internal review into market manipulation schemes where share prices are artificially inflated before promoters sell off their holdings.
Rising Cases of Stock Manipulation
Nasdaq has long faced challenges with pump-and-dump cases, but suspected scams linked to Chinese firms have risen sharply. According to a Financial Times report, investors lost billions of dollars on small Nasdaq-listed Chinese stocks that were heavily pushed on social media platforms.
In July, the FBI said it had recorded a 300% increase in victim complaints linked to stock fraud compared with the previous year. That same month, seven Chinese microcap stocks listed on Nasdaq plunged by more than 80% in a matter of days, erasing around $3.7bn in value. These stocks had been promoted in WhatsApp groups and on social media.
Chinese Listings Under Scrutiny
A record number of Chinese companies applied to list in the US last year, but regulators have raised concerns over transparency. The Public Company Accounting Oversight Board, the US audit watchdog, has previously struggled to inspect Chinese audit firms overseeing Nasdaq-listed companies.
John Zecca, Nasdaq’s chief legal, risk and regulatory officer, said the exchange had been closely monitoring “extreme volatility and potential trading market manipulation” in smaller Chinese firms.
To strengthen oversight, Nasdaq said it would raise the minimum value of unrestricted publicly held shares to $15mn for companies listing under its net income standard. It also reiterated its rule requiring companies from “restrictive markets” such as China to raise at least $25mn in public offerings, a rule that has been in place since 2020.
Since August 2022, almost 70% of Nasdaq’s referrals to US regulators have involved Chinese companies. In its filing, the exchange warned that high insider ownership and concentrated Chinese investor participation reduce market stability and fairness.
Mixed Reactions to the Announcement
While Nasdaq’s move has been welcomed as a step forward, some remain cautious. Edwin Dorsey, author of The Bear Cave newsletter, who has campaigned against stock promotions, described the announcement as “an OK first step”. He suggested that scammers might simply recycle the same stock tickers instead of targeting new listings.
