A reverse stock split is a common financial move made by publicly-traded companies to boost their stock's share price. Shares of stock get divided by a multiple such as two, which effectively doubles the value of the individual share price. If you had two shares of stock worth $5 each before a 1-for-2 reverse split, you would have one share worth $10 after. The primary reason for a reverse stock split is to make the shares more attractive to institutional buyers that only purchase stocks over a certain price point. A reverse split can also drive a stock's price high enough to avoiding de-listing from a major stock exchange.
De-listing can occur from either the NASDAQ stock exchange or the New York Stock Exchange (NYSE) if a company's share price falls below $1 at market close and stays there for 30 straight days. Once either exchange determines a company is non-compliant with its share price minimum, it sends the company a notification that it has six months to regain compliance with listing requirements to avoid de-listing. The company generally responds with its plan of action, which may include a reverse stock split to boost its share price.
Reverse stock splits are costly and require detailed filings with the respective stock exchange. NASDAQ requires a minimum of 15 days advance notice before the split takes effect. The company must indicate in its notice whether it was the shareholders or the company board who voted for and approved the split. The NYSE charges companies a $15,000 application fee for reverse stock splits.
The United States Securities and Exchange Commission, which oversees corporate stock activity, indicates that shareholder approval is not required for a reverse stock split, but companies must notify shareholders of the move on its 8-K, 10-Q and 10-K form filings. Additional items included in the exchange filing are the ratio of the split, changes in outstanding shares and par value of the stock and any amendments to company articles of incorporation.
A reverse stock split could confuse the market without proper notification. Investors would see one share price the day before the effective date and a sharply higher price the next. NASDAQ adds a "D" to the company's stock symbol for 20 days, beginning with the effective date. This helps investors know that a trade at that share price follows the reverse split. This protects investors from erroneously believing that it was company performance or market conditions that increased the share price.
There are no formal limits on how many times a company can perform reverse stock splits, but there are practical limits. The company must maintain at least 500,000 outstanding shares to stay listed on the NASDAQ and 200,000 to stay on the NYSE. Each reverse split reduces the number of shares a company has. Companies may conduct their splits using any ratio, but to achieve compliance with NASDAQ, share prices must stay above $1 for at least 10 days.
- United States Securities and Exchange Commissison: Reverse Stock Splits
- Nasdaq: Continued Listing Guide
- Investopedia: Reverse Stock Split
- Zacks Investment Research: Is a Reverse Stock Split Good or Bad?
- Nasdaq Listing Center: Reference Library
- New York Stock Exchange: Schedule of Fees and Charges for Exchange Services
- New York Stock Exchange: NYSE Mkt Continued Listing Standards
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.