What Is the Market Capitalization Rule?
The market capitalization rule is a rule set by the New York Stock Exchange (NYSE) to determine a minimum market value for a company to continue to be listed on the exchange. The market capitalization rule states that companies must maintain a minimum market cap of $15 million over a consecutive 30-day trading period. The value requirements can change as determined by the NYSE.
- The market capitalization rule is a minimum threshold criterion for a company's total market value for it to be listed and remain listed on the New York Stock Exchange (NYSE).
- The market capitalization rule currently stands at $15 million over a consecutive 30-day trading period.
- If the rule is not met, the company may be delisted from the stock exchange, but the rule can be temporarily altered to meet changing market or economic conditions.
Understanding the Market Capitalization Rule
The term market capitalization or market cap refers to the market value of a company’s outstanding shares. This metric is used to measure a company’s size; therefore, a market capitalization rule guarantees that companies must be of a certain size in order to remain listed on the NYSE. The market capitalization rule may also be called the market capitalization test.
Market cap is calculated simply by multiplying a company's outstanding shares by the current market price of one common share. Since a company is represented by X number of shares, multiplying X with the per-share price represents the total dollar value of the company. Outstanding shares refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders
The NYSE will usually look at a company’s total common stock outstanding when applying the market capitalization rule. This can include treasury shares and common stock that could be issued after the conversion of another type of outstanding equity security. The NYSE will consider securities that are, therefore, either publicly-traded or quoted, or those that can be converted into publicly traded or quoted securities (e.g. convertible bonds).
Lowering of the Market Capitalization Rule
Due to the downturn of the global economy in 2008-2009, the NYSE temporarily amended the market capitalization rule in January of 2009. The minimum value was reduced so that companies who are able to maintain a market value of over $15 million (down from $25 million) for 30 trading days in a row would remain listed until April 22, 2009.
This marked the first time that the NYSE suspended its marketing capitalization requirements for its listings. The NYSE’s oversight body chose to lower the market cap requirements after a “significantly higher” than normal number of companies failed to meet the market cap minimum in the wake of the 2008 financial crisis.
In lowering the limit, the NYSE acknowledged that the “unusual market conditions” of the time were to blame for the sharp fall in many companies’ stock prices, rather than problems with the companies themselves.
The exchange also adjusted the market cap rule in March 2020 during the 2020 crisis, which resulted in a severe economic decline due to lockdown measures to prevent the spread of the virus. Many companies were in danger of being delisted at current levels and so the NYSE decided to suspend the market cap rule for companies in danger of being delisted, specifically the 30-day requirement, until June 30, 2020.
If the NYSE decides to delist a company due to its failure of the market cap test, it will notify that company in writing. The notification will describe the NYSE’s basis for delisting and the criterion or policy under which the delisting action is being taken. The notice will also include information about the company’s rights to request a review of this decision by the Committee of the Board of Directors of the Exchange.
To avoid being delisted, some companies will undergo a reverse split of their shares. This has the effect of combining several shares into one and multiplying the share price. For example, if a company executes a 1 for 10 reverse split, it could raise their share price from 50 cents per share to five dollars per share, in which case it would no longer be at risk of delisting. This tactic, however, would not prevent a stock from being delisted due to the market capitalization rule since the reverse split would not change the total value of the firm but rather the share price of the firm.