The stocks of well-known companies such as General Electric (GE) and Microsoft (MSFT) trade on major exchanges such as the New York Stock Exchange (NYSE) and Nasdaq. But companies like these must be listed. This means they are accepted for trading purposes by a recognized and regulated exchange prior to actually trading on a major exchange.
A stock that doesn't trade on a major exchange is said to trade over the counter (OTC). This means the stock transactions are handled between individuals connected by telephone and computer networks.
- Companies list on the OTCBB because they may be delisted or because they can't meet the listing requirements of major exchanges.
- Any company that lists on the OTCBB must meet listing requirements and must maintain regular filings with the SEC.
- A company listed on the Pink Sheets doesn't need to meet the minimum requirements or file statements with the SEC.
Why Companies Are Listed on the OTCBB
There are two main reasons why companies may be listed on the OTCBB.
Delisted From a Major Exchange
When a company faces tough times and is unable to meet the requirements for continued listing on the Nasdaq or NYSE, it will be delisted. This usually happens to companies that are under financial strain and near bankruptcy.
Even when listed on the OTCBB, companies are still required to maintain the Securities and Exchange Commission (SEC) filings and minimum requirements set by the Financial Industry Regulatory Authority (FINRA) and the OTCBB. These requirements are considerably easier to meet than those set by the national exchanges. If a company undergoes bankruptcy proceedings or misses certain SEC filings, an additional letter is added to the company's ticker symbol to notify investors of this problem.
Unable to Meet the Initial Listing Requirements of the Major Exchanges
If a company is unable to meet the initial listing requirements of the major exchanges, it may choose to test the waters of the OTCBB, using it as a stepping stone before leaping into the larger exchanges and markets.
When a company isn't listed yet, it often trades on the Pink Sheets or the Over-the-Counter Bulletin Board (OTCBB).
How Pink Sheets Differ From the OTCBB
The Pink Sheets are different from the OTCBB. Companies on the Pink Sheets are not required to meet minimum requirements or file with the SEC. So named because they were actually printed on pink paper, the Pink Sheets started out as a daily quote service provided by the National Quotation Bureau (NQS), which in 2011 changed its name to OTC Markets Group.
Typically, companies are on the Pink Sheets because they are either too small to be listed on a national exchange or they do not wish to make their budgets and accounting statements public. To avoid having to file with the SEC, some large foreign companies such as Nestle S.A. have penetrated the American securities markets through the Pink Sheets.
Effective November 8, 2021, FINRA discontinued operation of the OTCBB in favor of other Inter-Dealer Quotation Systems (IDQS).
Companies listed on the Pink Sheets are difficult to analyze because it is tough to obtain accurate information about them. The companies on the Pink Sheets are usually penny stocks and are often targets of price manipulation. They should only be purchased with extreme caution and after adequate research.