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Market Capitalization Rule What It Is How It Works

Market Capitalization Rule What It Is How It Works

Market Capitalization Rule: What It Is, How It Works

Ariel Courage is an experienced editor, researcher, and former fact-checker who has worked for leading finance publications such as The Motley Fool and Passport to Wall Street.

What Is the Market Capitalization Rule?

The market capitalization rule is a requirement set by the New York Stock Exchange (NYSE) to determine a minimum market value for a listed company. The rule states that companies must maintain a minimum market cap of $15 million over a consecutive 30-day trading period, although these requirements can change as determined by the NYSE.

Key Takeaways

  • The market capitalization rule is a minimum threshold for a company’s total market value to be listed on the NYSE.
  • The rule currently stands at $15 million over a consecutive 30-day trading period.
  • If the rule is not met, the company may be delisted, but it can be temporarily altered to meet changing market conditions.

Understanding the Market Capitalization Rule

The term market capitalization or market cap refers to a company’s total market value. This metric measures a company’s size, ensuring that listed companies meet a certain size requirement. Market cap can also be called the market capitalization test.

Market cap is calculated by multiplying a company’s outstanding shares by the current market price per share. It represents the total dollar value of the company. Outstanding shares include shares held by shareholders, including institutional investors and restricted shares owned by officers and insiders.

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When applying the market capitalization rule, the NYSE considers a company’s total common stock outstanding, including treasury shares and common stock that could be issued after the conversion of another type of equity security. The NYSE also considers publicly-traded or quoted securities that can be converted into publicly traded or quoted securities, such as convertible bonds.

Lowering of the Market Capitalization Rule

Due to the global economic downturn in 2008-2009, the NYSE temporarily amended the market capitalization rule in January 2009. The minimum value was reduced from $25 million to $15 million for 30 consecutive trading days, until April 22, 2009.

This was the first time the NYSE suspended its marketing capitalization requirements for its listings. The change was made because a significantly higher number of companies failed to meet the minimum market cap during the 2008 financial crisis.

The NYSE acknowledged that the sharp fall in stock prices was due to unusual market conditions, rather than problems with the companies themselves.

In March 2020, during the 2020 crisis caused by lockdown measures to prevent the spread of the virus, the NYSE adjusted the market cap rule to prevent many companies from being delisted. Specifically, the 30-day requirement was suspended until June 30, 2020.

Delisting Procedure

If a company fails the market cap test and the NYSE decides to delist it, the NYSE will notify the company in writing. The notice will describe the basis for delisting and the criterion or policy under which the action is being taken. It will also include information about the company’s right to request a review of the decision by the Committee of the Board of Directors of the Exchange.

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To avoid delisting, some companies may undergo a reverse split of their shares. This combines several shares into one and multiplies the share price. For example, a 1 for 10 reverse split would raise the share price from 50 cents per share to five dollars per share, reducing the risk of delisting. However, this tactic does not prevent delisting due to the market capitalization rule since it does not change the total value of the company, only the share price.

To avoid delisting, some companies may undergo a reverse split of their shares. This combines several shares into one and multiplies the share price. For example, a 1 for 10 reverse split would raise the share price from 50 cents per share to five dollars per share, reducing the risk of delisting. However, this tactic does not prevent delisting due to the market capitalization rule since it does not change the total value of the company, only the share price.

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