During the bull market, everyone is happy. More and more companies get listed and start raking in the money. However when the bull market stalls, some companies crash to rock bottom and could be pushed towards getting delisted. Investing in companies that are delisted can be extremely risky. Lets find out how and why delisting occurs and what does that mean for both the company being delisted as well as the investors that hold the company stock.
Getting Listed On An Exchange
Most tech companies try to get listed on the Nasdaq. To get listed on Nasdaq, a company must meet the minimum standards required. For example, the 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. The 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.
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. Nasdaq puts these restrictions on companies so that only those with a respectable business model and corporate structure can make it, limiting investor risk.
To Stay Listed On An Exchange
Companies can make it to the exchange, but they still need to maintain certain standards set by the exchange to stay listed. These exchanges charge a maintenance fee to keep a close watch on the listed companies. This is beneficial to investors, especially beginners because these standards serve as a safety net that any company listed on the exchange is definitely credible no matter when they were listed. Minimum standards the company should maintain however may vary depending on the exchange. For example on Nasdaq the company must maintain 750,000 public shares outstanding worth at least $5 million. Anything less could result in a delisting from the Nasdaq.
Getting Delisted On An Exchange
As mentioned earlier the rules of getting delisted may vary depending on the exchange. On Nasdaq when a company trades for 30 trading days below the minimum stock price or market cap could lead to getting delisted. At this point Nasdaq will inform the company that it has 90 days to get back on track. The minimum stock price of $1 and a market cap of atleast $5 million should be meet to not being delisted. On few occasions the exchange makes an exception.
What Delisting Means For The Company
Once the company is delisted it is not the end of the world for them. It also doesn’t mean they are going bankrupt. It just means that they are not doing well at present. However that is no indication of their future. It is possible for a company to be delisted and still be profitable. However, delisting can make it more difficult for a company to raise money, and it sometimes is a first step towards bankruptcy. Delisting may trigger a company’s creditors to call in loans, or its credit rating might be further downgraded, increasing its interest expenses and potentially even pushing it into the red.
However after delisting the company stock can still trade at two places.
Over the Counter Bulletin Board (OTCBB): Electronic trading service with very little regulation. The companies should atleast have their financial statements current.
Pink Sheets: A quotation service. The companies do not require to register with SEC. The companies should not need require to have financial statements current. These are more riskier.
How Does It Affect Investors
Experts recommend that investors who have invested in delisted company should seriously consider selling off their position and cut off their losses. A company delisted from an exchange is very likely to go through a rough patch. The morale of the company drops and so does their trust factor. Additionally many institutional investors are restricted from researching and buying delisted stocks. Investors get directly affected since their portfolio will take a hit. With no research from institutional investors, it also becomes hard to predict the future of the company. With dropping prices its also possible that investors will be forced by their broker to liquidate their positions.
Conclusion: Opponents of delisting argue that it is too harsh to punish a company that could still recover. Supporters of delisting argue that allowing such a company to stay listed would degrade the caliber of companies that maintain certain standards. For now the supporters of delisting are winning. Delisting could make the stock drop even furthur making it a very risky trade. Investors who own delisted stocks or are planning to invest in delisted stocks should proceed with caution. Understand all the risk factors before trading such stocks.