Capital Markets | Securities Regulation

Reverse Stock Splits for Non-Lawyers

How companies fix their stock prices with reverse splits

A reverse stock split is a corporate action where a company decreases the number of its existing shares to increase the per-share market price. This is opposite to a regular stock split, which increases the number of shares and decreases the price without affecting the market capitalization of the company.

In a reverse stock split, the company combines its current shares into fewer, more valuable shares. For instance, if a company announces a 1-for-10 reverse stock split, every ten shares owned by a shareholder are merged into one share. If you held 1,000 shares in the company before the reverse split, you would own 100 shares after the split.

So, the main mechanics involve:

• Determining the ratio of the reverse split, like 1-for-10 in our example.
• Reclassifying and combining the existing shares according to this ratio.

Imagine a company named “Tech Innovations, Inc.” with 1 million outstanding shares priced at $0.50 each. The company decides to perform a 1-for-10 reverse stock split:

1. Before the split — 1,000,000 shares x $0.50 = $500,000 market cap.
2. After the split — 100,000 shares (1,000,000 / 10) but the market cap remains $500,000.