Everything that reaches a certain height also has to come back down sometime over the period. Same happens with the stocks. When they are at their maximum achievable heights and scarping mounds of money, one feels nothing could go wrong, and it will continue as it is. However, just as the top of a rolling wheel has to pass the bottom in a revolution, same occurs with the stocks leading mostly to their de-listing situations. And it has happened many a times in the history of stock markets. This article is going to examine the causes and occurrences of delisting & the impacts it poses at the delisted company and its stock-holder investors.
Stock Market Membership:
Getting listed on a stock market is just like getting a membership of some high-class family club. The New York Stock Exchange & the Nasdaq are considered to be the most exclusive of all markets, and to get listed there, you must fit in a certain criterion and follow a number of regulations. For example, a company must pay an entrance fee of $ 25,000 if it wishes to get listed at the Nasdaq Global Market. This doesn’t even confirm its registration; it just helps the company get into the consideration category of listing. And if it gets successful, it should be expecting to pay around $125,000 to $225,000. The standards the companies are required to meet include: minimum stockholders equity & minimum number of shareholders, among many others. This can be exemplified with an example from Nasdaq Global Market, in whose case; a company wanting to get listed must have at minimum 1.1 million public shares with a minimum worth of $8 million, and a per share price of no less than $4 before it can even be mulled over about being listed. The list of rules is quite long, but these are the threshold limits that must be reached to step into the consideration criteria. Similar requirements exist for the NYSE.
Image And Reputation:
Stock exchanges are picky about their clients and thus put all the requirements in the way of their listing as their whole image & reputation depends on the status of investors trading on them. And it doesn’t come as a bolt from the blue that they simply want the best of the lot. Thereby these limits act as sieves to filter out only the cream of the crop, i.e. companies with a stable business & excellent reputation. This works the same way as any top school or university during their entrance.
Staying Listed:
The scrutiny doesn’t end with the company’s listing at the exchange. Just like at universities, students must maintain a minimum score to stay enrolled, the companies at the stock market also have to take some measures to stay listed. These include the maintenance of exchange’s regular rules & standards. Periodic fees are compulsory to finance this inspection. For example, on the Nasdaq Global Market, annual fees ranging from roughly about $30,000 to $100,000 were charged in 2010. These charges are increased with the increase in shares outstanding of the firm. The ongoing minimum standards are usually less rigorous than the initial standards. In Nasdaq Global Market, one criteria standard is that a listed firm must maintain 750,000 public shares with a minimum outstanding worth of $1 million – less than that would lead to de-listing. Precisely put, if a company does not abide by the designed rules, it will be simply kicked off of the membership list of this prestigious club. In penny stocks, the stocks could be very easily influenced, so the exchanges delist such companies, which are vulnerable to such activities, to save their reputation.
De-listing Rules:
Delisting rules differ from exchange to exchange and the requirements that need to be met. For example, in case of Nasdaq, delisting process starts if a company is involved in dealings with below the minimum bid price or market cap for 30 days at a stretch. A deficiency notice, stating a warning of 90 calendar days to raise the standards or 180 calendar days in case the problem is related to a least bid price requirement, is sent to the company by Nasdaq’s Listing Qualifications Department. Minimum bid price & the market value requirements are the most frequent standards, which most of the companies fall short to uphold. The rules, although meant to be followed at all instances & times, could be revised for a short span if the exchange feels necessary. For instance, a three month long freeze on price & market value listing requirements was imposed on September 27th, 2001 by the Nasdaq, to normalize the disturbance created by the 9/11 attacks. Many companies found them delisted when the freeze completed its duration on January 2nd, 2002. Hundreds of companies dropped below the $1 threshold limit during the 2008 Global financial crises, so same steps had to be taken. The 90 days-limit could also be extended for good companies having a net income of $750,000 total market value of $50 million or stockholders’ share of $50 million.
If The Company Gets De-listed:
Delisting doesn’t always necessarily imply that a company is going to go bankrupt. However, when a stock gets delisted, two fates could occur to it:
- Over the Counter Bulletin Board (OTCBB) – it comes under the Financial Industry Regulatory Authority (FIRA) and is an electronic trade service with very little rules and regulations. Companies with current financial statements get to trade here.
- Pink Sheets – this is a quotation service and is pretty risky as compared to the OTCBB. They do not have any sort of regulations and don’t even require the companies to get a registration with the SEC or even remain current in their periodic findings.
Even if a company gets delisted, it could still be profitable; the difference would only be that it won’t be trading on the exchange anymore. However, delisting is usually termed as the first step towards getting broke, since it gets really tricky to raise money after being delisted.
De-listing Affects:
Being delisted from a prestigious market such as the NYSE or Nasdaq, it like a big black mark on a company’s credibility, just as it is a great honor to be listed there. So as a shareholder, before investing, you must consider your decisions and try cutting your losses. Definitely, being delisted proves that the company is not in a good status to be invested in. The trust factor diminishes just the moment a company gets delisted, no matter how well it starts doing afterwards. People are ready to pay premium money for shares in reputed firms that are listed in exchanges such as the Nasdaq or the NYSE, instead of those delisted and shifted to OTCBB or the pick sheets. The main reason for these is the strong regulations implemented in the NYSE and Nasdaq which are not a very strong part of these other trading sectors. Problem again rises for the firm when the institutional investors are restricted from trading or researching its stocks after it gets delisted. Because of all these pressures, the company is left with even a higher target to achieve to regain its position.
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