Nasdaq Lists Some Tiny IPOs That Go Up in Flames. Regulators Are Cracking Down.

Since 2023, there have been over 230 offerings below $15 million apiece on Nasdaq, compared with 33 on the New York Stock Exchange.

Employees of the hot pot chain MasterBeef Group ring the Nasdaq’s opening bell on Oct. 22. (Screenshot / Nasdaq)

Key Points

• Twelve small-cap stocks that went public on Nasdaq in the past 18 months had trading halted by the SEC due to potential manipulation.
• Over 230 offerings below $15 million apiece occurred on Nasdaq since 2023, compared with 33 such IPOs on the New York Stock Exchange.
• Nasdaq’s tally of sub-$15 million offerings this year already exceeds all of 2024 by 20%.

Nasdaq hosts more initial public offerings than any U.S. stock exchange. It’s also the leader in tiny IPOs that crash, burning public investors.

Twelve small-cap stocks that went public on Nasdaq in the past 18 months had their trading halted recently by the U.S. Securities and Exchange Commission on evidence of potential manipulation “designed to artificially inflate the price and volume of the securities.”

Since 2023, there have been over 230 offerings below $15 million apiece on Nasdaq, compared with 33 such IPOs on the New York Stock Exchange. While the capitalization-weighted Nasdaq Composite index gained almost 30% last year, over half of the exchange’s small-cap debutantes ended down more than 35%. The few small listings on the NYSE did even worse. Half were down over 50%.

Nasdaq has long said that it is legally obligated to provide fair access to companies that meet its listing standards. And it maintains that it strives to balance investor protection with a duty to promote capital formation for even the smallest companies.

The exchange’s struggle in finding that balance became clearer this year. Many of Nasdaq’s small-cap IPOs from China, Hong Kong, or Singapore rose amid social-media touting, then crashed. Along with eight of the stocks recently halted by the SEC on suspicion of manipulation, over 20 of Nasdaq’s small-cap new issues fell more than 60% in a single day.

In September, the SEC launched a task force to combat cross-border fraud harming U.S. investors, saying it was investigating “pump-and-dump” schemes in the stocks of companies from foreign jurisdictions. “We will not tolerate bad actors—whether companies, intermediaries, gatekeepers, or exploitative traders—that attempt to use international borders to frustrate and avoid U.S. investor protections,” SEC Chief Paul Atkins said.

The SEC said its task force is focusing on the underwriters that help such companies access U.S. capital markets. Some underwriters appeared repeatedly this year on China small-cap prospectuses, including Dominari Holdings, which is 12% owned by President Donald Trump’s two older sons, according to October proxy filings. Dominari and Donald Trump Jr. didn’t respond to requests for comment from Barron’s. Eric Trump declined to comment through a representative.

In late October, brokerage industry regulator Finra started conducting a “review of firm practices” at the multiple firms that underwrote small-cap foreign IPOs between 2023 and September of this year. Finra says it is reviewing underwriters involved in multiple small-cap offerings and brokers with omnibus accounts that traded those stocks. It named no firms and has accused none of wrongdoing. Along with Dominari, the most active underwriters on Nasdaq-listed small-cap offerings this year were Revere Securities and D. Boral Capital. Neither responded to Barron’s queries.

“Individuals will say, ‘I don’t think I can get scammed on a Nasdaq-listed stock.’ It’s like a big brand,” says Edwin Dorsey, a newsletter publisher whose websites track paid stock promotions and WhatsApp promotions of U.S.-listed China stocks. “I do think that Nasdaq deserves a huge amount of culpability, and I don’t think they care until there is regulatory pressure.”

Low-price stocks listed on exchanges have become today’s penny stocks—said Kenneth Bentsen Jr., the CEO of Wall Street’s trade association Sifma, in a September letter to SEC Chair Atkins and the leaders of Nasdaq and the NYSE—with the same risks of high volatility, low liquidity, information gaps, overvaluation, dilutive financings, and potential for fraud.

Nasdaq says it has limited power over the brokers and traders of its listed stocks, which can be traded on 13 other exchanges and dozens of dark pools. In the continuing investigations of small-cap trading, only the SEC has subpoena power.

In November, federal prosecutors charged a Hong Kong businessman with creating fictitious U.S. investment advisor firms that he allegedly used to tout a company that the indictment leaves unnamed. Its description of the stock’s ramp, and sudden crash on April 17, 2024, matches that of ICZoom Group, a Shenzhen, China, firm that came public on Nasdaq in March 2023. ICZoom didn’t respond to questions from Barron’s.

The SEC and Finra task forces are just getting started. Investigators tell Barron’s that they have already seen some common tactics in small-cap Chinese IPOs that will make it hard to identify potential swindlers.

Investigators say that participants often tell an underwriter to allocate most of an IPO’s shares to a handful of accounts in the name of foreign nationals. The shares move into the “omnibus accounts” used by a broker to trade with other brokers overseas. The trading records inside the omnibus accounts contain no information about the individuals making the trades.

On Dec. 4, just a day after this article was originally published, the SEC suspended trading on Magnitude International, citing potential manipulation “effectuated through recommendations made to investors by unknown persons via social media to purchase, hold, and/or sell the securities of [Magnitude] and to send screenshots documenting their transaction.” The Singapore-based electrical installation service went public on Nasdaq Capital Market in August in an $8.8 million IPO. Before the suspension, the shares had rocketed more than 350% higher over the past month. The company didn’t immediately respond to Barron’s queries.

Nasdaq has tweaked its listing rules in the past. In 2019, it stopped counting the restricted shares of corporate insiders toward the $5 million worth of publicly traded stock required from an IPO on its smallest listing tier. Then, in 2022 and 2024, Nasdaq increased its oversight of underwriters, after a spate of IPOs by small Chinese firms whose shares spiked as much as 32,000% before collapsing.

This past spring, Nasdaq raised its minimum IPO size from $5 million to $15 million. An exception still allowed offerings as small as $5 million by companies that showed a modest amount of net income.

That exception overwhelmed the rule. Before the rule took effect in early April, only a third of small-cap listing applicants sought to qualify under Nasdaq’s profitability criterion. After April, three-quarters of the applicants listed on that basis.

One of them was MasterBeef Group, which runs 12 hot pot restaurants in Hong Kong. It qualified with a 2024 profit of $4 million, after a one-time gain of $7.5 million from selling three restaurants. MasterBeef didn’t respond to Barron’s queries.

The stock quadrupled to $15 in early summer, only to tumble to $3.50 in the second week of August. On Oct. 22, MasterBeef was ringing Nasdaq’s opening bell in New York on the same morning that Jay Clayton, the U.S. attorney for Manhattan and past chairman of the SEC, sat downstairs with CNBC and confirmed to the host that he was looking at stocks listed on Nasdaq.

“We’re watching an area right now that’s bothering me,” Clayton said. “Small-cap Chinese stocks.”

Some 50 offerings came public below the $15 million threshold in the first five months of Nasdaq’s new IPO regime. About 80% were from the China region. Most weren’t good stocks. A third of the 50 stocks suffered some of the year’s worst one-day drops. Dorsey’s newsletter reported that a few of these drops were preceded by social media promotions. In July, an FBI bulletin said it had seen at least a 300% increase in victim complaints about “ramp-and-dump” frauds, where bad actors ramp up stock prices through deceptive trading before dumping the stock.

The scale of investors’ losses from listed small-cap fraud is hard to know, but individual schemes can rake in hundreds of millions of dollars. In May, federal prosecutors in Chicago announced the seizure of $214 million in proceeds from participants in an alleged pump-and-dump scheme involving China Liberal Education Holdings. Seven Malaysian and Taiwanese nationals, all still at large, promoted the stock and coordinated trades before its collapse in January, the indictment charged. The Beijing business listed on the Nasdaq Capital Market in 2020.

In September, Nasdaq proposed more revisions that will require all its IPOs to raise at least $15 million. The proposal would require an offering of at least $25 million by companies from China, to ensure that enough free-trading shares get into the hands of public investors in the U.S. China-based companies represent less than 10% of Nasdaq’s listings, the exchange notes, but they have led to 70% of its referrals for investigation by the SEC and Finra.

Nasdaq notes that every change in its rules requires the SEC’s approval. Even as Nasdaq awaits SEC ratification of its latest proposal, the exchange has continued to list offerings that don’t meet its proposed offering-size standards. By Nasdaq’s own rationale, these 18 tiny deals lack the liquidity for orderly trading and unmanipulated price discovery. Two of the newly public stocks were halted by the SEC for suspicious trading within weeks of their IPOs. In an up market, only a third trade above their IPO price.

“Investor protection and market integrity are central to Nasdaq’s mission,” said Nasdaq regulatory chief John Zecca, when introducing the Sept. 3 revisions. He said the exchange “evolves its standards in step with market realities.”

Nasdaq’s listing rules represent incremental changes—said Sifma in a recent letter to the SEC—which don’t “go far enough to address the investor protections and market integrity issues presented by the trading activity in certain Nasdaq-listed stocks.”

Nasdaq’s tally of sub-$15 million offerings this year already exceeds all of 2024, by 20%. The exchange says that it needs to attract small foreign listings to satisfy the demand of American investors for emerging Chinese companies.

Barron’s read all 93 prospectuses for Nasdaq’s sub-$15 million offerings. Happy City Holdings has three hot pot restaurants and a slew of insiders registering to sell their shares. It didn’t respond to requests for comment. Singapore-based Cuprina Holdings plans to use maggots to treat chronic wounds, and tells Barron’s it hopes for clearance by the U.S. Food and Drug Administration.

In its rules, Nasdaq claims broad discretion to refuse a listing, even when a company satisfies Nasdaq’s other listing criteria. To protect investors, it says it can deny a listing if a key person at the company has a history of regulatory misconduct. Nasdaq rarely invokes that discretion. When it has tried, it has sometimes been overruled by the SEC or courts.

Sifma’s Bentsen thinks that real listing reforms won’t happen until the SEC convenes all the competing exchanges and hammers out common standards.

A national exchange listing used to be reserved for well-capitalized companies, Bentsen said in his letter to the SEC and exchange leaders. Now, he said, it can create a false sense of safety for investors.

“An exchange listing can be seen by investors as a stamp of approval,” said Bentsen. “This scenario can allow bad actors to take advantage of investors in low-priced securities.”

Write to Bill Alpert at william.alpert@barrons.com and Nate Wolf at nate.wolf@barrons.com