The Pros and Cons of Going Public via the Pink Sheets
For startups and development-stage companies that aren’t big enough to go public via one of the major stock exchanges, there are what’s known as over-the-counter stocks, or the "pink sheets."
Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the U.S. Securities and Exchange Commission. The pink sheets got their name from the pink paper they were published on by the National Quotation Bureau.
The Pros
Going public via the pink sheets has its pros and cons. The main benefit is that there are no minimum requirements for annual revenue, assets, or earnings and companies do not have to be in business any minimum length of time. Companies listed on the pink sheets market do not have to have annual audits performed as do companies listed on the major exchanges.
In addition, there are no listing requirements for pink sheet companies, such as amount of capital, number of shareholders, market cap, or share price. Pink sheet companies are governed by fewer regulatory bodies and subject to fewer regulations than other public companies, which may face requirements around annual shareholder meetings, number of board members, and proxy notices, among other regulations.
Due to the increased compliance costs associated with the Sarbanes-Oxley Act of 2002, which set new or enhanced standards for all U.S. public company boards, management, and public accounting firms in reaction to a number of major corporate and accounting scandals, some public companies have voluntarily delisted from the major stock exchanges and chosen to be traded over-the-counter via the pink sheets instead.
The Cons
Be aware of the potential drawbacks to going public via the pink sheets. One of the biggest is that NQB companies are typically viewed as risky. Pink sheet companies are often confused with so-called “penny stocks.” The Securities and Exchange Commission considers pink sheet companies to be “among the most risky investments” and advises potential investors to heavily research the companies in which they plan to invest.
Also, companies listed on the NQB typically aren’t as liquid as those listed on the major stock exchanges, so bid-ask spreads can be very wide. This lack of liquidity can result in low volume, which can make it hard to find buyers for the stock. As a result, sellers may have to accept much lower prices if they want to liquidate their shares.
Because research analysts are less likely to follow pink sheet companies, institutional investors are less likely to buy them because the market is relatively small. There are also limitations on the number of investors that may invest in pink sheet companies.
Due to these limitations, many companies consider the pink sheets a stepping stone to eventually being listed on a major stock exchange as well as an opportunity to raise capital in the meantime.
Don Sadler is a freelance writer and editor specializing in business and finance.
