By Nicola M White Nasdaq’s attempt to delist tiny foreign companies with volatile trading records has run headlong into criticism that it will kick out legitimate homegrown businesses.

The exchange’s push to expel companies if their market value falls below $5 million for 30 days is part of a broader US effort to combat fraudulent trading in penny stocks, especially for firms headquartered overseas. But small domestic companies trying to build their businesses say they’re getting unfairly lumped in, and they’re putting up a fight.

The firms argue that the rule will scare off financing and strangle legitimate companies whose thinly traded shares have big price swings naturally, without any malevolent outside influence. US regulators hit pause on Nasdaq’s proposal last month and agreed to take more public input.

Nasdaq is taking aim at firms with the smallest market values, low stock prices and few shares available to trade. Those conditions make it easy for promoters to hype a stock to dizzying heights, often via social media and sometimes without the company knowing it’s happening. Fraudsters then dump their stakes for a profit before the price falls, sticking other holders with steep losses.

That’s not us, says Denver-based SeaStar Medical Holding Corp., a commercial-stage developer of treatments for children with acute kidney injury. SeaStar is among firms thated concerns with the Securities and Exchange Commission, which has the final say on Nasdaq rule changes.

“We’re a real operating company providing a real product to hospitals, ultimately to save children’s lives,” said Michael Messinger, the company’s chief financial officer. “We’re not this unknown entity that people can’t even investigate that might be overseas.”SeaStar’s market value is three times above the proposed cutoff, but it briefly dipped below the $5 million mark in 2023. The stock often moves 20% or more during the day, the company told regulators, so a single negative piece of news could make its market value plummet.

More than 190 Nasdaq-listed companies currently have market capitalizations of $5 million or less, a figure that’s roughly equivalent how Nasdaq measures value, according to data compiled by Bloomberg. Under Nasdaq’s proposal, if those firms dip below the threshold for 30 days, they’d face getting booted. About a third of the companies are based in Asia, but almost half are based in the US.

Nasdaq’s plan, which was floated in January, is among several proposals that exchanges and regulators embraced amid stepped-up scrutiny of stock manipulations fueled by social-media campaigns. The proposal didn’t single out any country or region, but Nasdaq has increased attention to firms based in China and the rest of Asia. The SEC in the past year suspended trading in more than a dozen tiny companies, all of them in Asia, and agency officials have been vocal about the need for exchanges to develop and enforce meaningful listing standards.

Earlier this year, Nasdaq raised the financial bar on initial public offerings for companies based in China, Hong Kong and Macau, saying stocks listed there are more susceptible to price manipulation by bad actors. A congressional committee has sought information on US underwriters of Chinese firms allegedly involved in such schemes. Citadel Securities, which supports the proposed rule, and Charles Schwab Corp., which caters to retail investors, have been warning for years that overseas microcaps are easy targets for manipulators.

NYSE American, which focuses on small companies, proposed a similar $5 million cutoff in March, saying the plan “seeks to address problematic trading endemic to extremely small companies.”Fewer than 20 firms on that exchange would be affected, according to data compiled by Bloomberg. The SEC has put off a final vote on that plan, too.

Representatives for Nasdaq and the SEC declined to comment. In a letter to the SEC to finalize the rule, Nasdaq said it’s trying to solve a “well-documented problem: securities that the market has assigned very low value are disproportionately vulnerable to volatility and pose sustained challenges to the maintenance of fair and orderly markets.”The damage for public investors can be costly. A Bloomberg analysis of IPOs since 2023 of microcaps — companies with debuts worth $50 million or less — showed evidence of hype campaigns and price gyrations in a quarter of those firms, most based in Asia. One- or two-day crashes have erased billions of dollars in market capitalization since 2023, the analysis found.

Of the approximately 90 US companies that might be affected by Nasdaq’s new rule, several show other signs of stress. One third of them trade below $1, according to Bloomberg data. Under current rules, once a share dips below $1, Nasdaq sends a delisting warning just on the basis of the low price. The warning doesn’t imply improper trading has taken place, and the company gets a 180-day grace period to get back to $1.

Under Nasdaq’s pending proposal, there’s no lengthy grace period. A company that falls below the $5 million threshold for 30 days would be immediately suspended and then face delisting.

One non-US company hovering around the proposed cutoff is Megan Holdings Ltd., a Malaysian shrimp farm maintenance company that reported having four employees. SEC Chairman Paul Atkins described it at a financial industry conference in May as “my favorite” example of volatile trading in the microcap market.

The stock plunged by more than 90% in a single day in March. Atkins and regulators never formally accused Megan of wrongdoing and its shares are still trading. But investors in July filed a lawsuit alleging the firm and its advisers failed to disclose that the company was the subject of a fraudulent WhatsApp group-fueled stock manipulation scheme.

Megan rejects the accusation, and will seek to get the case dismissed, the company’s attorney told Bloomberg. “This is a far-fetched theory of securities fraud, to say the least,” Angus Ni, a lawyer representing the firm, said via e-mail.

Alexander McLean, partner at law firm Harter, Secrest & Emery in Rochester, New York, said clients at small companies are considering mergers or acquisitions that would boost them over the $5 million mark and give them a buffer against getting delisted. That’s a lot of work, though, and it doesn’t help stamp out manipulative trading, McLean said.

“If you have some real bad actors who are engaged in pump-and-dump schemes, maybe Nasdaq should do something to cut that off,” he said.

While many companies lodged complaints about Nasdaq’s proposal, one formally petitioned the SEC to outright block the new rule: Cemtrex Inc., an industrial tech firm based on Long Island in New York.

Cemtrex has seen its market capitalization hover above and below $5 million since June. Losing listing status means losing access to fundraising and could impact the jobs of Cemtrex’s 300 employees, said Saagar Govil, Cemtrex’s CEO.

“It feels like you’re taking a blunt instrument to the problem,” Govil said. “If the issue is foreign issuers who are gaming the system, there’s probably more precise tools to solve that.”Cemtrex has had its own encounters with regulators. The SEC in 2021 accused the company’s founder, Aron Govil, of using millions of dollars of company funds to pay personal expenses and finance other business ventures. The agency also accused him of paying stock promoters while selling his own shares.

Aron Govil, who is Saagar’s father, agreed to pay $1.2 million to settle the allegations, without admitting or denying the regulator’s claims. A federal judge in January ordered him to return almost $10 million in alleged improper profits plus interest. Aron Govil, who is no longer a Cemtrex executive, is appealing and the case is pending before the Second Circuit, attorney Derrelle Janey said.

Saagar Govil, who in 2022 agreed to pay the SEC $350,000 to settle a probe into his role in his father’s dealings without admitting wrongdoing, said the case covered alleged actions that were investigated more than a decade ago. “We consider the matter closed,” he said.

His current battle: Making sure his company and others like it have a shot at succeeding. For every small firm that’s in the headlines for the volatile trading, Saagar Govil said, “there’s a real biotech startup that has ambitions of curing something, or there’s a lithium battery company or a drone company.”