Stock Delisting: A Summary
In order for a company to be listed on a major stock exchange such as the New York Stock Exchange (NYSE) or the Nasdaq Stock Market, the company must meet and maintain several requirements. These requirements exist to maintain the exchange’s reputation and set a quality standard for the companies that trade on them. These minimum standards imposed by major exchanges serve to restrict access to only those companies with a reasonably credible business and stable corporate structure, in accordance with the exchange rules. If a company is accepted to list on an exchange by meeting the requirements of that exchange, the acceptance is conditional on maintaining the requirements; if the requirements are not met, the company risks being delisted.
The major stock exchanges are selective in their membership, and to be listed a company must go through an application process and must pay substantial fees, including an application fee and then entry fees once accepted. On the Nasdaq exchange, for example, the listing process can take approximately 6 weeks, during which a company submits an application for listing that is thoroughly reviewed by the Nasdaq Listing Qualifications Staff. Over the next 2-3 weeks, the staff completes their review and prepares a comment letter. The applicant company is then given approximately a week to address any issues raised in the comment letter. The process is complete once the Nasdaq staff completes their review and the company is approved for listing.
In order for an exchange to maintain its credibility, the exchange requires listed companies to maintain the minimum ongoing standards imposed by the exchange. These requirements serve to vet listed companies and reassure investors that any company listed on the exchange is a suitably credible company, regardless of how long the company has been listed on the exchange.
These minimum requirements include such metrics as stockholder’s equity, number of shareholders, and share price. To maintain listing on the Nasdaq Global Market, for example, a company must have at least 1.1 million public shares outstanding worth a total of at least $8 million and a share price of at least $4 per share, in addition to numerous other requirements. Similar requirements exist for the NYSE and other exchanges around the world.
How Delisting Works
The criteria and process for delisting depend on the exchange and the specific listing requirement in question. On the Nasdaq, for example, when a company trades below the minimum bid price or market capitalization for 30 consecutive business days, the delisting process is triggered, and Nasdaq sends a deficiency notice informing the company that it has a pre-set number of calendar days (depending on the standard that is deficient) to become compliant.
For Nasdaq, once a deficiency notice has been sent, the company has 90 to 180 days to comply with the continued listing standards, depending on which specific Nasdaq market is involved. In order to be compliant, the company’s share price or market capitalization must rise above the minimum for at least 10 consecutive days in the 90-day (or 180-day) period.
Trading After Delisting
When a stock is officially delisted in the United States, there are generally two main places the stock can trade:
Over the Counter Bulletin Board (OTCBB). OTC is an electronic trading service where securities are traded in a context other than on a formal exchange, usually through a dealer network that negotiates with each other directly instead of on a central exchange. The OTC “Bulletin Board” is a quotation system to provide trading information to the dealers. Unlike trading on an exchange, where every party sees offers by every other counterparty, this may not be the case in dealer networks as there is less transparency and less stringent regulation with OTC trading. Companies usually trade on OTC because they cannot meet exchange listing requirements; however, OTC companies are current in their financial statements.
Pink Sheets. The pink sheets are a quotation service for companies that do not need to meet minimum requirements or register with the Securities and Exchange Commission (SEC). Pink sheet securities are typically traded by brokers or dealers using the OTC market. Stocks traded on the pink sheets are often referred to as Penny Stocks.
While being delisted and trading in an arena that is not a national exchange is not an ideal situation, it is possible for a company to improve their financial situation, get back into compliance and to re-list on an exchange.
Delisting does not necessarily equate to the demise of a company. While after being delisted a company is no longer trading on a major exchange, the company’s stock still exists as an ongoing entity. Although delisting can make it more difficult for a company to raise money, which can in turn, impact the success rate of the company it is possible for a company to be delisted and still be successful. With the right advice and financial partners, a delisted company can even be profitable and ultimately make its way back to being traded on an exchange.
For more on delisting and how to manage this process, contact us.
Debbie Kaster, Managing Director