Reverse Stock Split Process: The Complete Guide for Small-Cap Investors

Introduction

A reverse stock split is a corporate action where a company reduces its total number of outstanding shares by merging multiple shares into one. In a 1-for-10 reverse split, for example, every 10 shares you own become 1 share — and the stock price adjusts proportionally upward.

On paper, a reverse split doesn’t change the value of your position. In practice, it almost always signals trouble — these are not the stock splits Apple and Nvidia do. For small-cap and micro-cap investors, a reverse split is one of the most important events to understand because it directly impacts float size, dilution mechanics, and warrant structures.

This guide walks through the full reverse split lifecycle — from the initial board proposal all the way through to split-adjusted trading — so you know exactly what to expect and what to watch for at each stage.

Why Companies Do Reverse Splits

Exchange Compliance

The most common reason is simple: the stock price has fallen below the exchange’s minimum bid price requirement. Nasdaq and NYSE both require a minimum closing bid of $1.00. When a stock trades below $1.00 for 30 consecutive business days, the exchange issues a deficiency notice.

From there, the company typically gets 180 days to regain compliance — meaning the stock needs to close at or above $1.00 for at least 10 consecutive business days. If that doesn’t happen, the company can sometimes request an additional 180-day extension, but eventually, a reverse split becomes the last resort to avoid delisting.

Other Motivations

Beyond compliance, companies may pursue a reverse split to:

Attract institutional investors — many funds have minimum price thresholds and won’t touch sub-$5 stocks
Reduce share count before a new offering — a lower share count can make a subsequent dilutive offering appear less severe on paper
Clean up the capital structure — particularly after years of heavy dilution have pushed the outstanding share count into the billions

Regardless of the stated reason, a reverse split is almost always a sign that the stock price has been in sustained decline. That context matters when evaluating what happens next.

The Reverse Split Process: Step by Step

Step 1: The Board Proposes the Split

The process begins when the board of directors decides to put a reverse split proposal before shareholders. The board will typically propose either a fixed ratio (e.g., 1-for-10) or a ratio range (e.g., between 1-for-5 and 1-for-50), giving themselves discretion to choose the final number later.

The ratio range approach is more common because it lets the board calibrate the split to wherever the stock price is trading when they actually execute it — which could be months after shareholder approval.

Step 2: Proxy Materials Are Filed (DEF 14A)

Once the board sets a shareholder meeting date, the company files a DEF 14A (definitive proxy statement) with the SEC. This is the official document sent to shareholders that describes everything being voted on at the meeting.

In the proxy, look for:

The proposed split ratio or ratio range
Whether the board has discretion on timing (most do)
How fractional shares will be handled (usually cashed out)
Whether the authorized share count will be reduced proportionally (often it is not, which preserves the company’s ability to issue more shares later)
The impact on outstanding warrants and convertible securities

You can find DEF 14A filings on SEC EDGAR. Sometimes a preliminary proxy (PRE 14A) is filed first for SEC review before the definitive version goes out.

Step 3: The Shareholder Meeting and Vote

Shareholders vote on the reverse split proposal at the scheduled meeting — either in person or by proxy. The required approval threshold is typically a majority of outstanding shares, though this varies by state of incorporation and company bylaws.

A critical issue at this stage is quorum. If not enough shareholders submit their votes, the meeting can’t proceed and must be adjourned to a later date. This happens frequently with small-cap companies where retail shareholders don’t bother voting. Adjournments can delay the process by weeks or months.

Step 4: Vote Results Are Disclosed (8-K Filing)

After the vote, the company files an 8-K with the SEC disclosing the results. This filing will confirm whether the reverse split proposal was approved or rejected, along with the vote tallies.

Approval does not mean the split is happening immediately. In most cases, the board has been granted discretion to execute the split at any point within a defined window — often up to one year from the date of approval.

Step 5: The Board Sets the Effective Date

This is where the board pulls the trigger. They announce the final split ratio (if a range was approved) and the effective date. This announcement typically comes via a press release and an 8-K filing.

The gap between shareholder approval and the board’s execution can range from days to many months. Boards often wait because:

They’re hoping the stock price recovers on its own
They’re timing it around other corporate events (like a capital raise)
They want to execute at a ratio that gives them the most favorable post-split price

Step 6: Trading Begins on a Split-Adjusted Basis

On the effective date, shares begin trading at the split-adjusted price. Here’s what happens mechanically:

Your share count is reduced by the split ratio
The stock price is multiplied by the same ratio
Fractional shares are typically cashed out at the split-adjusted market price
The stock’s CUSIP number usually changes
Historical price charts are retroactively adjusted

Most brokers process the share adjustment overnight, so you’ll see the updated position when markets open on the effective date.

Case Study: Aterian (ATER)

Aterian’s reverse split is a textbook example of how the process unfolds over an extended timeline.

Date	Event	SEC Filing
June 2023	Proxy materials distributed proposing reverse split	DEF 14A
July 2023	Shareholder meeting scheduled — adjourned due to lack of quorum	8-K
August 2023	Reconvened meeting — reverse split proposal approved by shareholders	8-K
March 2024	Board announces March 22, 2024 as the effective date	8-K
March 22, 2024	Stock begins trading on a split-adjusted basis	—

Key takeaways from the ATER timeline:

The process took 9 months from proxy filing to execution
The initial meeting failed due to quorum — a common occurrence that delays the timeline
The board waited 7 months after approval before setting the effective date, using their discretionary window

Case Study: Mullen Automotive (MULN)

Mullen Automotive provides a more extreme example — and a warning about what happens when a reverse split becomes a recurring event.

In August 2023, MULN executed a 1-for-9 reverse split after its stock had fallen below $1.00. But the underlying business continued to deteriorate, and the stock fell below $1.00 again within months. In May 2024, MULN executed a second reverse split — this time at 1-for-100.

The MULN case is important because it illustrates a pattern that experienced small-cap investors know well:

A reverse split fixes the price mechanically but doesn’t fix the business
If the same dilution patterns continue post-split, the stock will grind back down
Serial reverse splits are a major red flag — they indicate ongoing heavy dilution and fundamental deterioration
Each successive reverse split compounds the destruction of shareholder value

How Reverse Splits Affect the Stock Price

While every situation is different, there are reliable patterns in how stocks behave around reverse splits:

High Float Stocks (50M+ Shares)

Stocks with large floats tend to decline on and after the split date. The reverse split doesn’t change the supply/demand dynamics, and the higher per-share price can actually reduce retail trading volume — fewer retail traders are willing to buy a $5 stock that was just $0.50.

Low Float Stocks Near All-Time Lows

This is where things get interesting. A reverse split dramatically reduces the float, and if the stock is already near all-time lows with significant short interest, the post-split environment can create extreme volatility. The reduced share count means each share represents a larger piece of the company, and the tighter float can amplify moves in both directions.

Pre-Split Price Action

Stocks often run up in the days leading into the effective date as traders position for post-split volatility. This front-running means the first day of split-adjusted trading can trigger a sell-the-news reaction, even when the split was well-telegraphed.

Long-Term Performance

The data is not kind to reverse splits. Research consistently shows that the majority of stocks that undergo reverse splits underperform over the following 12 months. A study on long-run returns found that reverse-split stocks underperformed the market by an average of 15–20% in the year following the split. This shouldn’t be surprising — the conditions that led to needing a reverse split (declining business, heavy dilution) don’t disappear when the share count changes.

Reverse Splits and Warrants: The Hidden Dilution Risk

This is arguably the most overlooked aspect of reverse splits — and where the real value destruction hides.

How Warrant Adjustments Work

When a reverse split occurs, outstanding warrants are adjusted proportionally. In a 1-for-10 split:

A warrant to purchase 10 shares becomes a warrant to purchase 1 share
The exercise price is multiplied by 10

On the surface, this is a neutral adjustment. But many warrants — particularly those issued in connection with registered direct offerings and PIPEs — contain reset provisions that go beyond the standard proportional adjustment.

Reset Provisions

Some warrant agreements include anti-dilution clauses that reset the exercise price if the company issues shares below a certain price threshold. Here’s where it gets dangerous: after a reverse split, the stock often continues to decline. If it falls below the warrant’s reset trigger price, the exercise price ratchets down — and in many cases, the number of warrant shares increases proportionally.

This creates a vicious cycle:

Reverse split temporarily raises the stock price
Stock declines post-split (as most do)
Warrant reset provisions are triggered
More shares become issuable at lower prices
Additional dilution pushes the stock price down further
More reset provisions are triggered

What to Look For

Before a reverse split, read the warrant agreements carefully. Key things to check:

Does the warrant have anti-dilution or reset provisions?
What triggers a reset? (Usually issuance of shares below exercise price)
Does the reset affect both exercise price and the number of underlying shares?
Is there a floor on the exercise price?

You can find warrant terms in the original registration statement (S-1 or S-3) or in the exhibit filed with the relevant 8-K at the time of the offering.

How to Track Reverse Splits

Staying ahead of reverse splits requires monitoring several SEC filing types:

Filing Type	What It Tells You
PRE 14A	Preliminary proxy — an early signal that a reverse split vote is being proposed
DEF 14A	Definitive proxy — confirms the meeting date, split ratio, and voting details
8-K	Current report — used to disclose vote results and the effective date announcement
Deficiency Notice	Exchange notice of non-compliance — often the first sign a reverse split may be coming

Key dates to track:

Date of the deficiency notice (starts the compliance clock)
Shareholder meeting date
Any adjournment dates
Date of shareholder approval
Effective date announcement
First day of split-adjusted trading

Conclusion

A reverse stock split is more than just a mechanical share consolidation. It’s a signal — about the company’s financial health, about its compliance status, and about the board’s expectations for the stock price going forward.

For small-cap investors, the key is to look beyond the headline ratio and dig into the details: What happens to the authorized share count? Are there warrants with reset provisions? Is this the company’s first reverse split or its third?

Understanding the full process — and the downstream effects on dilution, float, and warrant structures — is what separates informed investors from those who get caught off guard. DiluTracker monitors SEC filings, warrant structures, and compliance notices so you can stay ahead of these events in real time.