Pink sheets get their name from the pink papers that once carried share price quotes. While we now have real-time electronic quotes for the shares via the Over the Counter Bulletin Board (OTCBB), the name remains and refers to over the counter (OTC) stock listings. Also known as pink sheet listings, these are usually penny stocks that trade for $5 or less per share through the OTC Market. They do not trade on the major stock exchanges.
There are several reasons why you might want to take your company public via the pink sheets:
- You require funding for your business.
- Your small company doesn’t meet the eligibility criteria of the major stock exchanges like the National Association of Securities Dealers Automated Quotation (NASDAQ), the New York Stock Exchange (NYSE), and the American Stock Exchange (AMEX). Perhaps you are delisted from them due to a fall in share price or an inability to meet financial dues.
- Like Nestle or Nissan, you may want to avoid registering with the U.S. Securities Exchange Commission (SEC). Pink sheet companies are not legally obliged to report their business and financial dealings.
- You willingly delist from the major stock exchanges to avoid the increasingly high corporate compliance costs.
Whatever the case, let’s consider the pros and cons of listing your business on the OTC stock market.
Pros of Going Public via the Pink Sheets
There is no minimum listing requirement for assets, capital, earnings, share price, or the number of shareholders.
You don’t need to show that you have been in business for any specific length of time.
You are not subject to too many regulations.
You can do without annual audits and annual shareholder meetings.
You don’t need to have a specified number of board members.
You can use a stock differentiation tier system that will help investors gauge if your business is high-risk or low-risk.
Cons of Going Public via the Pink Sheets
- In general, the public views the unlisted companies trading in the OTC Market as high-risk ventures. The SEC echoes this view and advises caution and research before investing in them.
- Institutional investors often bypass pink sheet companies as their advisors are less likely to research them.
- Pink sheet companies have lower liquidity as compared to the companies listed on the major stock exchanges, and that can make it hard to find buyers. To offload your shares, you may have to sell your stocks at a drastically reduced price.
Minimum Requirements for Businesses to Enter the Market
Since pink sheet listed companies have no listing requirements, you only need to engage a market maker to file Form 211 on your behalf with the OTC Market services. That’s all it takes to enter the market. It is up to you how much or how little company information you are willing to divulge to potential investors. Unlike for the companies on the major stock exchanges, financial and business transparency is not compulsory in the pink sheet listings.While investors may view this as risky, it can work out in favor of the companies. The lack of regulations may give them just the boost they need. Additionally, they can raise capital and stay afloat until they become eligible to be listed on the major stock exchanges.