When Nasdaq Plays Gatekeeper: The Quiet Power Grab Behind IM‑5101‑3

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I. Nasdaq’s Authority Under the Exchange Act

A. The prevailing framework

In the wake of the 1929 U.S. stock market crash, Congress sought to restore public confidence in the U.S. securities market by enacting a series of federal securities rules. Central among these was the Securities Exchange Act of 1934 (the “Exchange Act”), which created the Securities and Exchange Commission (“SEC”). The Exchange Act governs securities transactions on the secondary market, whereas the SEC attempts to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Within this framework, Section 6 of the Exchange Act provides regulatory power to national securities exchanges, such as Nasdaq and the New York Stock Exchange (“NYSE”), to police their own markets. 

While the Exchange Act and the SEC oversee the entire securities market, national securities exchanges are authorized under Section 6 of the Exchange Act to operate as self-regulatory organizations (“SRO”). These SROs are responsible for closely monitoring their listed market players, while enforcing industry standards, maintaining compliance with listing standards, and implementing market-wide circuit breakers to curb high volatility. While operating under the SEC, SROs directly benefit the SEC by enforcing its three main goals: investor protections, fair and orderly markets, and management of capital formation. 

B. Nasdaq, doing business as an SRO. 

Nasdaq is one of the largest SROs in the securities industry today. With over 4,000 global, multi-asset listings as of early 2026, it maintains compliance with the SEC and Exchange Act by maintaining its own listing rules. At Nasdaq’s Rule 5000 series, the SRO entrusts itself with broad discretionary authority over the initial and continued listing of securities. Like many SROs, Nasdaq instills this gatekeeping authority to maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. Here, Nasdaq acts as a delegated gatekeeper to the SEC and Exchange Act, particularly in its new rule: IM‑5101‑3. 

After the SEC’s approval, Rule IM‑5101‑3 became effective on December 19, 2025. The rule formalizes Nasdaq’s broad discretion to deny initial listings by introducing a qualitative, risk-based layer to its traditional rules. Rather than permitting any company that satisfies objective listing standards to access the market, the rule reserves Nasdaq’s authority to deny a listing that poses concerns to investor protection and market integrity. Nasdaq’s determination hinges on factors that make a company’s securities susceptible to manipulation. These qualitative factors include: (1) the presence and location of a company, (2) presence and location of controlling persons, (3) anticipated concerns about adequate liquidity and potential concentration, and (4) the regulatory history or prior transactions of the company's advisors, including patterns of concerning or volatile trading. 

C. The SEC gatekeeping function: Form 19b-4 

Although Rule IM‑5101‑3 expands Nasdaq’s internal discretionary authority, its authority remains vested within the SEC’s supervisory framework. Despite this new rule, exclusive to companies making an initial Nasdaq listing, the SEC continues to control as the ultimate regulator. All proposed rules by an SRO must be approved by the SEC through a Form 19b-4. Upon the SEC’s review and approval, an SRO may implement their rules into their securities scheme. The SEC is at liberty to reject any 19b-4 filings. Grounds of rejection may be insufficient information or improper filing for noncompliance with the rules of the SEC. Additionally, the SEC may also invite public participation to review newly proposed rules. 

II. Birth of IM‑5101‑3: Why and How the Rule Works

A. The market context that produced the rule

Nasdaq implemented Rule IM-5101-3 in response to recent trading patterns that posed growing concerns about potential market manipulation. These trends include the meme-stock frenzy, micro-cap IPOs, and pandemic-era Special Purpose Acquisition Company (“SPAC”) listings, each of which the underlying stocks experienced unusually elevated levels of volatility. 

The meme-stock rally in early 2021, fueled by identifiable and anonymous social media accounts, drew attention from regulators and financial market experts demanding new regulations to preserve market integrity and reduce investor risk. The SEC has recognized the prevalence of “pump and dump” schemes involving companies with market capitalizations between 50 million and 300 million dollars that are susceptible to artificially inflated stock prices resulting from fraudulent statements, which can harm unsuspecting investors when the stock inevitably and sharply declines, leaving them “holding the bag.” The use of SPACs, or public "blank check companies" that raise capital through an IPO solely to acquire or merge with a private company, has elicited scrutiny following the 2021 boom and inquiries related to how underwriters are managing the risks involved.

As the share of foreign-based companies listed on U.S. stock exchanges has risen nearly 10% in the last decade, Nasdaq considered the potential regulatory and enforcement challenges of issuers operating in foreign jurisdictions, requiring proactive oversight and assessment earlier in the listing process. Late last year, the SEC formed a Cross-Border Task Force to focus on investigating U.S. federal securities law violations by foreign-based companies due to the recent suspension of nine Asia-based companies suspected of market manipulation practices. 

B. The text and mechanics of IM‑5101‑3

Nasdaq’s new Rule IM-5101-3 expands its authority beyond the previous qualitative standards to qualitative factors, which the exchange may use to deny IPO applications at its discretion. While the previous listing process allowed companies to go public simply by checking all of the boxes in meeting objective financial and distribution thresholds, Nasdaq now has power to consider a “non-exclusive” set of factors related to susceptibility of a company’s securities to manipulation, including the company’s jurisdiction and legal enforcement, a person or entity’s substantial influence over the company, the expected public float and dissemination of the share distribution, the previous history of issues concerning the company’s advisors, the experience of the company’s management, among others. When Nasdaq decides to assert its Rule IM-5101-3 authority, it will issue a written declaration describing the basis for the initial listing denial, and the company will have four business days to make a public announcement refuting each of the specific bases claimed by Nasdaq. 

C. Nasdaq’s Rule IM-5101-3 Compared to the NYSE’s Section 101.00

  While Nasdaq is not the only major stock exchange with broad discretionary authority regarding the listing of a company, Nasdaq’s Rule IM-5101-3 is much more explicit regarding the factors it considers when determining the suitability of a company’s IPO. Section 101.00 of the NYSE’s Listing Company Manual states that “the Exchange has broad discretion regarding the listing of a company” and may “deny listing or apply additional or more stringent criteria based on any event, condition, or circumstance that makes the listing of the company inadvisable or unwarranted in the opinion of the Exchange,” even if the company meets all of the exchange’s listing standards.

One reason for the differences between the Nasdaq and NYSE rules is likely due to their market compositions, varying in sector focus, company profile, and listing style. While the NYSE is generally comprised of traditional “blue-chip” and industrial companies, Nasdaq contains companies in Internet, Biotechnology, and other growth-oriented sectors. As a greater number of companies in emerging markets seek initial listings, Nasdaq has become the exchange of choice due to its more affordable fee structure, generally capping fees at $159,000 compared to the NYSE’s $500,000 cap. In fact, Nasdaq touted that 81% of new IPOs chose its exchange in 2025.

Nasdaq’s decision to implement guardrails like Rule IM-5101-3 may be explained by the increase in the number of IPOs it saw over the past three years and as the outlook for 2026 continues to point in this direction. However, its unprecedented expansion of dominion over initial listings leaves the future of IPOs looking rather opaque.

III. Discretion in Modern IPO Markets

A. IM-5101-3 shifts IPO readiness toward judgment and credibility.

These recent regulatory changes have created a new category of IPO risk. While traditionally IPO candidates would focus primarily on financials, SEC disclosures, and satisfying an exchange’s objective listing standards, IM-5101-3 requires applicants to avoid characteristics that make the deal appear vulnerable to manipulation. Most notably, companies must now address pre-IPO secondary market activity, cap table structure, and the choice of underwriters and other advisers.

With the passage of this new rule, regulators must now look for unusual trading activity, fragmented ownership, or price signaling that calls for speculation. Any indicator that a security may be susceptible to manipulation after listing is cause for concern. Moreover, a visibly engineered shareholder base and influential insiders can raise concerns about price support, liquidity, and susceptibility to swings. This now manifests itself through flags suggesting the potential for manipulation. Because a company’s story matters, its external service providers, adviser roster, and past regulatory compliance also play a role in whether an IPO is granted. In other words, maintaining stronger reputational capital and a clean regulatory history has become much more important. Acting in an over-promotional manner can also raise concern, as IM-5101-3 is designed to filter out companies whose securities may be vulnerable to manipulation. As a result, this new rule makes IPO preparation more about presenting a transaction that looks institutionally sound, liquid, and resistant to manipulation, rather than merely meeting basic technical requirements.

B. Regulation will affect intermediaries even more than the companies going public.

The company seeking to have its IPO granted must make sure that its established connections are with groups that do not raise Nasdaq concern. This regulation now extends to the ecosystem around the issuer, creating a greater incentive for banks and law firms to intensify their screening processes for organizations using their services. The effects of this regulation include underwriters becoming more selective with respect to the companies they work with as well as limits on clientele by size, origin, and overall structure. Law firms will likely continue to build their IPO preparation around IM-5101-3 diligence, verifying that a company’s advisers, cap-table optics, and public-facing reputation are sound.

Because of the discretion regulators now must operate with, informal listing norms that never appeared in Nasdaq’s written rules may become required practice, since no corporation wants to face a discretionary denial. Such broad reach leaves room for reverse-engineering what exactly Nasdaq looks for, turning those preferences into de facto conditions for access to the public markets despite not being expressly listed. Because IM-5101-3 is qualitative and non-exclusive, it creates room for those informal expectations to develop. This discretion and lack of certainty could push some higher-risk issuers to reassess where and when they go public.

C. Conclusion

In essence, IM-5101-3 leaves one glaring question: how much discretion should an exchange have over entry to the public markets? Nasdaq, while private, performs public-regulatory functions. The SEC approved the rule because it was viewed as consistent with the goals of market integrity and investor protection. And yet, the more discretion afforded to Nasdaq, the more concern will likely arise about transparency, consistency, and equal treatment of issuers.

This much room for judgment will leave issuers uncertain as to what could trigger denial of their IPO. As with all judgment-based standards, the rule may not be applied evenly across deals, effectively making IM-5101-3 a mechanism by which Nasdaq’s authority is expanded and leaving room for Nasdaq to decide which companies are “good enough” for market access even when published standards are satisfied. This rule is the first step in what will likely become a broader trend, extending into the delisting context after SEC trading suspensions. IM-5101-3 may not be a one-off rule, but instead could mark the beginning of a shift toward more discretionary exchange gatekeeping under the auspices of risk mitigation and investor protection.

*The views expressed in this article do not represent the views of Santa Clara University.