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On August 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved a set of Nasdaq board diversity rules. After a certain phase-in period, the Nasdaq Stock Exchange will require the companies listed on its exchange to meet certain requirements for diversity on their boards of directors.

Nasdaq Tiers

Companies are classified into three distinct tiers on the Nasdaq Stock Exchange. The tier depends on a company’s market capitalization. The classification is based on a company’s ability to meet certain financial and liquidity requirements. A company also must meet corporate governance standards.

There are some differences in the applicability of the new Nasdaq diversity rules. The differences depend on the particular tier a Nasdaq-listed company falls into.

• Nasdaq Global Select: This is the most exclusive tier. To fall into this tier, a company’s market value of listed securities must be greater than $850 million on average over the previous 12 months.
• Nasdaq Global Market: To fall into this tier, a company’s market value of listed securities must be at least $75 million.
• Nasdaq Capital Market: This market tier contains many early-stage companies. These companies have lower market capitalizations and face less stringent listing standards. Companies listed on the Nasdaq Capital Market must have at least $750,000 in net income from continuing operations.

Highlights of New Diversity Rules

• No later than August 8, 2022 or the date of the company’s proxy statement for its 2022 annual meeting (if later): Companies listed on the Nasdaq Stock Exchange will need to provide statistics about the number of diverse directors. The companies must disclose statistics about the diversity characteristics using a diversity matrix form that Nasdaq provides.
• No later than August 7, 2023 or the date of the company’s proxy statement for its 2023 annual meeting (if later): Companies listed on the Nasdaq Stock Exchange will need to have at least one director who self-identifies as diverse. This means identifying as female or as a member of an underrepresented minority group. Companies that do not meet the diversity requirement must explain why they could not meet it.
• No later than August 6, 2025 or the date of the company’s proxy statement for its 2025 annual meeting (if later): Companies listed on the Nasdaq Global Select and Nasdaq Global Markets will need to have at least two directors who self-identify as diverse. Companies that do not meet the diversity requirement must explain why they could not meet it.

Timing for Compliance for Newly Listed Companies

For companies that are newly listed on the Nasdaq Stock Exchange, there is a phase-in period for compliance. Companies list in connection with an initial public offering (IPO), a direct listing, a SPAC merger, or another event that results in the public listing of the company.

Compliance phase-in requirements will depend on the Nasdaq tier.

• For Nasdaq Global Select or Nasdaq Global Market: Companies in these tiers must have at least one diverse director within one year of the new rules going into effect. They must have at least two diverse directors within two years of the new rules going into effect.
• For Nasdaq Capital Market: Companies in this tier must have at least two diverse directors within two years of the new rules going into effect.

Diversity Rules for Foreign Companies

The short answer is that foreign companies listed on Nasdaq are still subject to these new diversity rules. Since the definition of an underrepresented minority may be different outside the United States, Nasdaq has provided some flexibility for foreign issuers to satisfy the new rules:

• Foreign companies can appoint two female directors to satisfy the board diversity requirements, or
• Foreign companies can provide an alternate definition of underrepresented minority that fits the demographics in the particular country that the company has its principal executive offices.

Diversity Matrix

Companies must make disclosures using a diversity matrix. Nasdaq has two standardized forms that companies will have to fill out. For U.S.-based companies, they should use the Form of Board Diversity Disclosure Matrix. There is also a Form of Board Diversity Disclosure Matrix for Foreign Issuers. The purpose of the diversity matrix is to facilitate comparability of board diversity statistics across Nasdaq-listed companies.

Exemptions for SPACs

SPACs, or special purpose acquisition companies, are exempt for the Nasdaq diversity requirements. SPACs are shell companies that are publicly traded. Investors form SPACs to find a private company with an operational business and merge with it. The merger makes the previously private company a public company. It is an alternative to the traditional initial public offering (IPO) process.

Although SPACs are not required to have a minimum number of diverse directors, once they complete their business combination with a private operating company, the resulting combined public company will be required to abide by the Nasdaq diversity rules. The combined company will have up to two years to meet the diversity requirements.