Nasdaq is strengthening its scrutiny of listed companies using financing to purchase cryptocurrencies and boost their stock prices.
On Thursday, according to media reports based on company documents and informed sources, the exchange now requires some companies to obtain shareholder approval before issuing new shares to purchase cryptocurrencies.
This regulatory move could slow down the current cryptocurrency frenzy, which is bringing an increasing number of alternative tokens into the mainstream market. The vast majority of crypto concept stocks trade on Nasdaq, and the exchange wants companies to slow down before transforming into crypto stocks, ensuring investors are fully aware of the associated risks.
Nasdaq's new requirements include procedures like shareholder voting, which industry participants say could delay deals and create uncertainty for the crypto boom in the stock market. Nasdaq has the authority to delist or suspend trading of companies that do not comply with the relevant rules.
Tighter Regulation Affects Financing Pace
So far this year, 124 US-listed companies have announced plans to raise over $133 billion to purchase cryptocurrencies, according to data from crypto advisory firm Architect Partners. Of these, 94 stocks are listed on Nasdaq, with only 17 trading on the New York Stock Exchange.
Companies are racing to accumulate as many tokens as possible, attempting to become the go-to stock for a specific token. Their success largely depends on the speed of financing and issuing shares. This strategy works best in a rising crypto market, so any delays could cause companies to miss the window of opportunity.
Nasdaq's strict scrutiny represents a balancing act—profiting from company listings while also bearing regulatory responsibilities.
Dan Kahan, a partner at law firm King & Spalding, said that by requiring shareholder approval, Nasdaq is essentially indicating that if you invest in a Nasdaq company, shareholders will typically have a say before the company undergoes truly transformative ownership or operational changes.
Imitating MicroStrategy's Strategy Raises Risks
These companies are emulating the strategy of Michael Saylor's MicroStrategy. This software maker's primary business now is buying Bitcoin, having accumulated $71 billion worth of cryptocurrency over the past five years, making it a hot stock.
Recently, companies have begun shifting towards purchasing smaller, newer, and less liquid tokens, which can be more volatile or susceptible to market manipulation. Nearly half of the 124 crypto stocks tracked by Architect Partners are buying these smaller tokens, including the Trump family's World Liberty token. Critics argue that these deals could be a way for token holders to sell their tokens to unsophisticated stock market investors.
Heritage Distilling became a typical case affected by Nasdaq's new rules. This Nasdaq-listed craft distiller, which focuses on military-themed whiskey, planned to accumulate the relatively new cryptocurrency IP, the native token of the Story blockchain. Heritage raised funds from investors like a16z Crypto and Polychain Capital, with part of the financing conducted in IP tokens.
Nasdaq informed Heritage that its plan required shareholder approval. The company modified the deal structure last month, offering investors pre-funded warrants instead of shares, which investors can only exercise after Heritage obtains shareholder approval. Heritage stated in securities filings that this move was to comply with Nasdaq listing rules and has scheduled a shareholder meeting for September 18.
Stephen Alicanti, a partner at law firm DLA Piper, said this is a new and evolving topic over the past few weeks and months. Some companies have had to change their deal structures after announcing transactions. You have to be very careful to comply with Nasdaq rules because if you run into problems weeks after completing a deal, you end up in a bad situation where you might have to unwind the transaction.
