Pink Sheets is a stock listing service allowing stocks to be traded on over-the-counter (OTC) platforms as opposed to the NASDAQ or NYSE. Pink sheet stocks are often penny stocks, trading for $5 or less per share. They could also be foreign companies that prefer to use the over-the-counter network and not register with the SEC. In fact, two prominent pink sheets listings are foreign companies that are not small at all: Nestle (NSRGY), listed on the Swiss exchange, and Nissan (NSANY), listed on the Tokyo Stock Exchange. Neither company ever took steps to register with the SEC and get listed on the American exchanges, but they still wanted exposure to American markets—thus, on the pink sheets they remain.
Why do certain stocks get listed on the Pink Sheets?
Why would a stock choose or need to be listed as a Pink Sheet stock as opposed to being listed on a larger exchange?
- Listing on a major stock exchange can be cost-prohibitive for some companies due to high fees and listing costs.
- As mentioned above, foreign companies may not wish to register with the SEC and be traded on the major American exchanges.
- The large exchanges require stocks to adhere to specific rules that some companies may not be able to fulfill, such as maintaining a stock price of $1 or more for a certain period of time.
- A stock can be delisted from a larger exchange in what’s often called “going pink.” It’s still possible to trade this stock, but it will occur over-the-counter, and likely at a significantly lower price.
How did the Pink Sheets market get its name?
Stock price quotes used to be printed on sheets of paper that were pink. Although everything is quoted and done electronically now, the name has stuck. The term ‘pink sheets’ can refer to either the stocks themselves or the over-the-counter listing service.
The term ‘over-the-counter’ refers to the fact that these stock quotes are not made through a large exchange, but rather through a broker-dealer network.
Potential downfalls of Pink Sheets Stocks
- Because pink sheet stocks are traded directly, they don’t need to adhere to the same financial reporting as publicly-traded companies registered with the SEC and listed on major exchanges. The exception to this would be stocks traded using the OTCBB service, an over-the-counter quotation service that does require registration with the SEC. Generally speaking, less regulation and oversight gives less information to potential investors and may open the door for nefarious dealings.
- Trading in pink sheet stocks is more speculative and risky than trading on the NASDAQ or NYSE because the potential for fraudulent activity is higher.
- High volatility is common with pink sheet stocks. The outcomes for trading these stocks tend to be negative and they are usually illiquid: few participants and a low volume of activity make them harder to sell at the price being sought.
Pink Sheets and Woodruff Sawyer
Woodruff Sawyer is a leading insurance broker specializing in SPACs (Special Purpose Acquisition Companies) and the various insurance needs they have through the SPAC process. As we explore common misconceptions about various types of mergers and acquisitions, IPOs, reverse mergers, blank check companies, and the like, we delve into this topic to illustrate the differences between these types of deals and companies.
Woodruff Sawyer is a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a crucial aspect of the merger process. Woodruff Sawyer is also a leading insurance broker in the SPAC market, protecting more than $18 billion in SPAC assets.
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Considering the record-breaking number of SPACs that have gone public via an IPO, the pipeline for SPAC mergers is bound to break records in 2021.