A company that seeks to sell its stock on the Nasdaq or other major public exchanges must meet and maintain numerous listing requirements. Failure to comply with these mandates on an ongoing basis could cause the stock to become delisted from the exchange.
The chief purpose of these requirements is to increase market transparency in an effort to foster investor confidence.
- Companies that seek to sell their stocks on public exchanges must meet rigid listing requirements.
- The mandates include share price minimums, certain shareholder thresholds, and fastidious documentation of a company's performance and operational data.
- Failure to continually comply with these edicts could cause a stock to be delisted from an exchange.
- The ultimate goal of these requirements is to boost investor confidence.
- Delisted stocks may still trade on the Over-the-Counter Bulletin Board (OTCBB) or the pink sheets platforms.
What Are Some Listing Requirements?
To list a stock on an exchange, a company must satisfy the following items:
- It must open at a certain share price minimum.
- It must sell stock to a certain threshold of shareholders.
- It must maintain a certain level of shareholder equity, versus company-owned positions.
- It must document all performance and operational data with the SEC.
For example, the New York Stock Exchange (NYSE) requires companies to maintain at least 1.1 million publicly-traded shares outstanding that must be minimally worth $100 million. Furthermore, if a company fails to file performance documents such as 10-Qs or 10-Ks with the Securities and Exchange Commission (SEC), the exchange may choose to delist that company's stock.
What Happens to Delisted Stocks?
If a stock is delisted, the company may still trade over two different platforms, namely: the Over-the-Counter Bulletin Board (OTCBB) or the pink sheets system. Although both are significantly less regulated than the major exchanges, OTCBB is by far the stricter of the two.
Consequently, it tends to attract companies that are more current with the release of their financial statements. But in either case, whether a stock drops down to the OTCBB or the pink sheets, it invariably suffers a decline in investor confidence after hemorrhaging the trust of the major exchange it once traded on. And if the company remains delisted beyond a short time period, institutional investors and investment banking analysts will likely cease researching the stock altogether.
If a delisted company enters bankruptcy, preferred stockholders are entitled to be paid from any liquidated assets before common stockholders may collect any money.
As a result, individual investors have less data on which to base their investment decisions, often causing such stocks to drop off their radar screens. Not surprisingly, a delisted company's liquidity and trading volume typically plummet as a result.
How Does This Affect Share Ownership?
When a company delists from a major exchange, shareholders still legally own their shares, even if they're worthless in value. Generally speaking, delisting is regarded as a precursor to the act of declaring bankruptcy.