For stocks listed on the NASDAQ exchange, the prospect of delisting presents a serious challenge. Delisted stocks often lose a substantial portion of their market capitalization as a result of their removal from the exchange. It is important for individual investors to learn about how the delisting process works so they can make informed decisions about stocks facing the loss of their exchange status.
To maintain a listing on the NASDAQ stock exchange, corporations are required to meet minimum standards for their share price, market value and corporate governance. Generally, stocks must have a share price of at least $1 and a minimum market value of $1 million. In addition, companies listed on the NASDAQ must adhere to federal disclosure requirements for publicly traded securities and pay annual listing fees. Failure to maintain the standards -- even if the fault lies with market forces beyond the company's control -- can trigger the delisting process.
The first step in the delisting process is the deficiency notice. NASDAQ issues a notice to all companies in violation of the continued listing standards for 30 consecutive trading days. After the notice is issued, the company has 90 calendar days to regain compliance before it will lose its listing status. The company tracks compliance automatically using computer systems, and according to analyst David Westenberg at Wilmer Hale, the deficiency notice "is usually triggered by public filing of an SEC report.
Determination Letter and Trading Halt
If the company fails to regain compliance for at least 10 consecutive days during the 90-day "cure period," NASDAQ informs the company that it will be delisted in seven days and requires it to disclose the determination publicly to shareholders and potential investors. Failure to disclose results in a trading halt of the company's shares. At this point, the company also has the right to appeal the determination to NASDAQ's listing qualifications panel. The company may present the panel with a plan to achieve compliance, which the panel reviews when rendering its decision. If the panel finds the plan inadequate, the company will be delisted. The panel's decision may also be appealed to the courts and the Securities and Exchange Commission.
If the company is delisted, it is not necessarily out of business or done trading publicly. Companies delisted from the NASDAQ can continue to trade on the over-the-counter markets and the Pink Sheets, and some can even reapply to NASDAQ and regain their listing. Regardless, delisting is often hard on a company, because it can lose its access to capital, the ability to borrow and exemptions from various state laws. Share price can decline even further and the company's ability to market its shares is severely limited.
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