United States: the Nasdaq 20% rule, floating conversions and equity lines

A US-listed company can issue a convertible priced against VWAP at each conversion and can run a standby equity facility; the structure originated in the United States. No US securities statute fixes a conversion price, so the floating convertible is lawful and the standby equity facility is a settled product. The discipline is an exchange shareholder-approval rule and a shelf capacity cap, not a pricing formula.

Key takeaways

• Nothing in federal law sets the conversion price. A market-referenced or resetting formula is permitted. What constrains it is a listing rule about shareholder approval — not the mandatory pricing formulas that close several other markets.
• The 20% rule is a price test, not a size cap. Nasdaq Listing Rule 5635(d) requires shareholder approval before a 20% Issuance priced below the Minimum Price. Price at or above it and the same size needs no vote.
• The Minimum Price is fixed at signing. It is the lower of the closing price immediately preceding signing and the average closing price for the 5 trading days before it, which is why pricing and approval are one decision.
• The equity line is a registered offering, not an exempt one. The private placement is treated as complete at signing, and the investor's onward sales are registered as an indirect primary offering, with the investor named a statutory underwriter.
• Rule 144 is not automatic. The 6-month holding period assumes an issuer subject to Exchange Act reporting for at least 90 days. For a current or former shell company Rule 144 is unavailable except on the Rule 144(i) conditions.

The Nasdaq 20% rule: Listing Rule 5635(d) and the Minimum Price

The binding constraint is rarely the amount but the intersection of price, size and voting power, set by the exchange rather than the SEC. On Nasdaq and NYSE American a small-cap raise is usually a registered direct offering off an effective shelf, a PIPE into a resale registration, or an at-the-market program; on OTC Markets there is no shelf and no approval rule, so the deal is a placement under Rule 506(b) or 506(c) of Regulation D.

Why an unfloored convertible is treated as a 20% Issuance

This is where US practice engages with floating pricing, and it is a counting problem rather than a pricing rule. A convertible is measured on the shares underlying it, so where the conversion price is variable and unbounded the count is indeterminate and the issuance cannot be shown to fall below the threshold. Nasdaq's interpretive guidance on Future Priced Securities — the exchange's own term — treats it as potentially exceeding it. The answer is drafting: a share cap, a conversion floor, or both, so the maximum issuable is knowable at signing.

Two traps follow. A price-based antidilution reset that can drive the conversion price below the Minimum Price is caught on the same reasoning, as is paying principal or interest in stock below market. And transactions close enough in time and purpose are aggregated, so the problem surfaces on the second tranche. There is no 20% rule on the OTC Markets tiers, which is why the discounted floating convertible is predominantly an OTC-quoted instrument.

Shelf eligibility decides which structure you get

A registered direct offering is the cleanest structure for an issuer with an effective shelf: non-affiliates receive freely tradable shares at closing and there is no resale registration to negotiate. It needs Form S-3 eligibility, and an issuer with public float below US$75 million may use Form S-3 under General Instruction I.B.6 but may not sell more than one-third of that float in any rolling 12-month period.

Where the shelf does not exist or that cap bites, the deal becomes a PIPE and the negotiation moves to registration rights: which form, filed by when, effective by when. On OTC Markets, convertible notes for listed issuers and Form S-1 resale registration do most of the work. A 2026 SEC proposal would remove the one-third limitation and the US$75 million threshold; as at this page's review date it is a proposal, not law.

The equity line doctrine, and why a SEPA is registered

The standby equity purchase agreement and the committed equity facility are the same animal under different house names, and both run on a staff interpretation rather than an exemption. The private placement is treated as complete on signing of the binding purchase agreement, and the investor's onward sales are registered as an indirect primary offering by the issuer.

Four conditions hold together: a binding agreement exists when the registration statement is filed; the resale statement is on a form the issuer could use for a primary offering; there is an existing market for the securities; and the investor is named both as a statutory underwriter and as a selling shareholder. A 2020 revision dropped the requirement that the private transaction be completed before filing, provided the parties have agreed the share count, maximum amount, term and discounted price formula. That last item is the point: the formula may be a discount to a future VWAP.

Registration, Rule 144, and the shell-company gate

Securities sold in an unregistered placement are restricted. Two paths make them freely tradable: an effective resale registration statement, or expiry of the Rule 144 holding period where Rule 144 is available — 6 months where the issuer has been subject to Exchange Act reporting for at least 90 days, one year otherwise.

Rule 144 is not available for securities initially issued by a shell company, or by an issuer previously one, except on the Rule 144(i) conditions: it has ceased to be a shell, is subject to Exchange Act reporting, has filed all required reports for the preceding 12 months other than Form 8-K reports, and one year has elapsed since it filed Form 10 information. For a former reverse-merger issuer that is the whole financing question. See Rule 144 and former shell companies.

Even on a clean path the transfer agent needs an opinion to lift the legend, and the position must be DTC eligible to settle. On OTC Markets that gate most often delays closing.

The live constraint moved to the investor's side

The most important recent development here is not about the issuer at all. In SEC v. Keener the Eleventh Circuit held, on 29 May 2024, that a person whose business is buying convertible notes from microcap issuers, converting at a discount and reselling the converted stock in volume is acting as a dealer and must register under Section 15(a)(1) of the Exchange Act. The reasoning turned on business function, not on having customers.

That matters commercially. The counterparty's registration status is now a diligence item on the other side of the table, with no analogue anywhere else here.

The three facts a US desk asks for first

1. Shelf and eligibility status

   Whether an S-3 is on file and effective, and whether public float is above or below US$75 million.

2. Capacity, reporting and shell history

   Shares outstanding and everything issuable on conversion or exercise, whether all periodic reports are filed, and whether the company was ever a shell.

Then send the ticker, float and use of proceeds.

• All markets
• Canada: a conversion-price floor
• Hong Kong: 20% doing another job
• Australia: capacity, not price
• United Kingdom
• S-3 shelf registration

Primary sources

• Nasdaq Listing Rules — Rule 5635
• SEC — Rules 144 and 145
• SEC — Form S-3 General Instructions
• eCFR — Rule 506 of Regulation D

Financing US-listed issuers: frequently asked questions

Does every discounted placement on Nasdaq need shareholder approval?

No. Approval is required for a 20% Issuance priced below the Minimum Price. A placement smaller than 20% of the common stock and voting power outstanding, or priced at or above the Minimum Price, does not trigger Listing Rule 5635(d). The change of control test in Rule 5635(b) applies separately.

How is the Minimum Price calculated?

It is the lower of two numbers: the closing price immediately preceding the signing of the binding agreement, and the average closing price for the 5 trading days immediately preceding that signing. Both are measured to the signing date, so the calculation precedes agreement on terms.

Can an OTC Markets company do a registered direct offering?

Only if it is a reporting company with an effective registration statement covering the offering. Most OTC issuers have no effective shelf, so the route is an unregistered private placement followed by a Form S-1 resale registration, or Rule 144 where available.

Our company was a shell before a reverse merger. Does Rule 144 work for us?

Only on the Rule 144(i) conditions. The issuer must have ceased to be a shell, be subject to Exchange Act reporting, have filed all required reports for the preceding 12 months other than Form 8-K reports, and one year must have elapsed since Form 10 information was filed.