Over-the-counter (OTC) securities trade through brokers, not exchanges. Companies can move to stock exchanges for visibility and liquidity if they meet listing requirements. They need to submit financial statements for approval.
Basics
Trading of various assets like stocks, bonds, currencies, and commodities is made possible through OTC markets. Unlike standard exchanges, OTC markets are decentralized and lack a physical location, often called off-exchange trading. While companies may use OTC trading for various reasons, it offers limited exposure and liquidity compared to exchanges. The question is, can companies transition from OTC to exchange trading?
Transitioning From OTC to Major Exchanges
Securities that are not found on exchanges such as NYSE or Nasdaq are OTC securities. They trade through broker-dealers due to not meeting exchange listing requirements, often being low-priced and thinly traded.
OTC trading happens through various platforms, including the Over-the-Counter Bulletin Board (OTCBB) by FINRA, and the larger OTC Markets Group, which has overshadowed OTCBB. Pink Sheets handles OTC penny stocks below $5 per share.
In contrast, securities on major exchanges are highly traded and priced higher. Listing on an exchange provides visibility and exposure. To list, companies must meet varying financial and listing criteria. Exchanges often mandate a minimum number of publicly-held shares at a specified value and require financial disclosures and paperwork.
Two Major Steps to Move
Moving from OTC to a major exchange is possible but requires several essential steps.
- Companies aiming for this transition must meet specific financial and regulatory criteria, such as price per share, total value, corporate profits, trading volume, revenues, and SEC reporting. For instance, NYSE mandates 1.1 million publicly held shares with a market value of at least $100 million, while Nasdaq requires 1.25 million shares and a market value of $45 million.
- They need approval from the chosen exchange by submitting an application and financial statements. If accepted, the company usually notifies its previous exchange of its intent to delist, which may involve a press release to shareholders.
The process doesn't involve a new IPO but a shift from OTC to the exchange. Depending on the exchange, the stock symbol may change; Nasdaq retains symbols with up to five letters, while NYSE limits them to three letters.
Reasons for Moving
Companies have different motivations for transferring to larger exchanges. Those meeting NYSE requirements often shift for better visibility and liquidity. International companies may delist from certain exchanges to reduce costs and concentrate on major investors. In some cases, firms are compelled to switch exchanges due to failing financial or regulatory criteria on their current exchange.
Delisting from Exchanges
When a listed security is removed from an exchange, it undergoes delisting, which can happen voluntarily or involuntarily. Voluntary delisting happens when a company feels its financial goals aren't met or chooses to delist from one exchange while staying on another. Involuntary delistings usually result from a company's deteriorating financial health, but other reasons include bankruptcy, mergers, acquisitions, privatization, or regulatory non-compliance. Exchanges typically issue warnings before initiating involuntary delisting actions.
Conclusion
The process of transferring a stock from the OTC market to a major exchange involves meeting certain financial and regulatory criteria, submitting an application to the desired exchange, and obtaining approval. This transition enables companies to enhance their visibility, exposure, and liquidity. Companies can voluntarily or involuntarily delist from exchanges depending on their financial condition and adherence to exchange requirements. Ultimately, moving to a major exchange offers various advantages for companies aiming to expand their market reach and engage with investors.