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When stocks are soaring and initial public offerings (IPOs) are raking in the money, it can seem like a bull market will never end. Nevertheless, market downturns are inevitable, and when the fall from grace occurs - as it has many times in the stock market's history - textbook conditions for delisting can be created. Here we examine how and why delisting occurs and what this change in status means - for both the company being delisted and the individual investors that hold its stock.
Getting Listed
You can think of major stock exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq as exclusive clubs. To get listed on a major exchange like the Nasdaq, a company must meet the minimum standards required by the exchange. On the Nasdaq, for example, a company must pay a $5,000 application fee before its stock can even be considered for listing, and it can expect to pay at least $100,000 in listing fees if successful.
As for other requirements, companies must meet minimum standards such as minimum stockholder's equity and a minimum number of shareholders, among many other things. Turning again to the Nasdaq as an 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 $5 per share before it can be considered for listing on the exchange. There are numerous other rules that apply, but until a company reaches these minimum thresholds, it has no chance of being listed on the Nasdaq. Similar requirements exist for the NYSE and other reputable exchanges around the world. Why the Prerequisites?
Stock exchanges have these requirements because their reputations rest on the quality of the companies that trade on them. Not surprisingly, the exchanges want only the cream of the crop - in other words, the companies that have solid management and a good track record. Thus, the minimum standards imposed by major exchanges serve to restrict access to only those companies with a reasonably credible business and stable corporate structure. Any top university or college has strict entrance requirements; top exchanges work the same way. (For further reading, try Getting To Know Stock Exchanges and The Tale Of Two Exchanges: NYSE And Nasdaq.) Staying Listed
However, an exchange's duty to maintain its credibility isn't over once a company becomes successfully listed. To stay listed, a company must maintain certain ongoing standards imposed by the exchange. These requirements serve to reassure investors that any company listed on the exchange is a suitably credible firm, regardless of how much time has passed since the firm's initial listing. To fund their ongoing scrutiny, exchanges charge periodic maintenance fees to listed companies. On the Nasdaq, annual listing fees range from approximately $20,000 to $70,000 (higher fees are charged to companies with more shares outstanding). To extend the university analogy, these ongoing requirements are much like the minimum grade point averages students must maintain once admitted. For stock exchanges, the ongoing minimum standards are similar to the initial listing standards, but they're generally a little less stringent. In the case of the Nasdaq, one ongoing standard that a listed company must meet is to maintain 750,000 public shares outstanding worth at least $5 million - anything less could result in a delisting from the Nasdaq.
In other words, if a company messes up, the exchange will kick the company out of its exclusive club. A stock that has experienced a steep price decline and is trading below $1 is very risky because a relatively small price movement could result in a huge percentage swing (just think - with a $1 stock, a difference of $0.10 means a change of 10%). In low volume penny stocks, the fraudsters flourish and stocks are much more easily manipulated; major exchanges don't want to be associated with this type of behavior, so they delist the companies that are liable to be affected by such manipulation. (To learn more, see The Lowdown On Penny Stocks and Catching A Lift On The Penny Express.)
How Delisting Works
The rules for delisting depend on the exchange and which listing requirement needs to be met. For example, on the Nasdaq, the delisting process is set in motion when a company trades for 30 consecutive business days below the minimum bid price or market cap. At this point, Nasdaq's Listing Qualifications Department will send a deficiency notice to the company, informing it that it has 90 calendar days to get up to standard in the case of the market value listing requirement or 180 calendar days if the issue is regarding the minimum bid price listing requirement. The minimum bid price requirement, which is $1, and the market value requirement (minimum $5 million, provided other requirements are met) are the most common standards that companies fail to maintain. Exchanges typically provide relatively little leeway with their standards because most healthy, credible public companies should be able to meet such requirements on an ongoing basis.
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