Public stocks are listed for trade on a stock exchange. When the issuing company fails to meet the listing exchange's criteria or chooses not to be listed, the exchange delists that stock. The stock can no longer be traded on that exchange unless the company goes through the listing approval process again.
Definition and Example of a Delisted Stock
Stock exchanges have rules and standards that companies must meet to be listed. These are called listing standards. Some exchanges have "initial listing standards" that apply to new stocks, and "continued listing standards" stocks must meet to stay on the exchange. Continued listing standards might be higher or lower than the initial standards. Others might only require that the same standard be maintained throughout a stock's listing.
Stocks can be removed from an exchange's list of tradeable stocks. When a stock is removed from an exchange, it's known as "delisting." Delisting happens when a stock doesn't meet the exchange's requirements, or a company chooses not to be publicly traded anymore.
There are more than 20 securities exchanges registered in the U.S. Each has its own listing standards.
A stock would be delisted if the issuing company failed to meet the minimum standards set by the exchange it was listed on. For example, if ABC Company was listed on the NASDAQ Global Select Market for three years, but they didn't meet the income requirements for the last two years, NASDAQ could delist that company.
How Does Delisting a Stock Work?
Delisting occurs when a stock and the issuing company do not meet the listing criteria for the exchange it is listed on. For instance, to be listed on the NASDAQ Global Select Market, a company must meet at least one of the four set standards for that market. Each of the four standards requires a minimum stock bid price of $4. For standard one, a company also needs to have:
- Pre-tax earnings: $11 million or more combined over a three year period, greater than $0 for each of the previous three years, and more than $2.2 million in each of the previous two years
For standard two, it would need:
- Cash flows: At least $27.5 million combined for the last three years, and no negative flows over the last three years
- Market cap: $550 million year-over-year with cash flow
- Revenue: More than $110 million
For standard three:
- Market cap: More than $550 million over the last 12 months
- Revenue: More than $110 million for the last fiscal year
For standard four:
- Market cap: $160 million
- Total assets: $80 million
- Stockholder's equity: $55 million
All four standards require that a company meet the various liquidity requirements that apply to the company's position—whether it is an initial public offering, a spin-off, a seasoned company, or an affiliated company.
If ABC company was listed on the Global Select Market under standard four, but its market cap dropped to under $160 million, it would be sent a notification from NASDAQ that it was not compliant. However, the exchange would likely grant the company a grace period to become compliant again.
If ABC company could not reach listing standards again, it would be delisted from the Global Select Market.
Companies can also choose to be delisted. This might happen if an issuer decided to take itself off of the public traded markets.
When a stock is going to be delisted, the exchange must file Form 25 within a reasonable time. The exchange decides on a delisting date that is at least 10 days from the day Form 25 is filed with the Securities and Exchange Commission. The exchange also is required to post a public notice on its website at least 10 days before the delisting date.
Types of Delistings
There are two types of delistings: exchange-initiated, sometimes called involuntary delisting, and issuer-initiated, sometimes called voluntary delisting.
Exchange-initiated delisting is when the exchange a stock is listed on takes action to remove a non-compliant company from the list of tradeable stocks. The exchanges do this to protect investors from failing companies, as not all companies are as transparent or follow the rules as well as others do.
An exchange will typically delist a stock after it has given the company a chance to meet listing standards again.
When a company is involuntarily delisted, it is often a bad sign of money or managerial trouble, and it often causes the stock price to fall.
A company can ask to delist its stock from the exchange on which it's traded. When a company voluntarily delists, it may not be for bad reasons. One reason could be that it wants to go private. In that case, its shares have been bought out, maybe by a private equity firm. It could be a sign of good things to come for the firm.
A stock might be delisted as a result of a merger or a financial restructuring. In these cases, its stock might move to another exchange or trade under a new ticker symbol.
What It Means for Individual Investors
Delisted stocks are removed from the exchanges they used to trade on. They're then traded "over the counter" (OTC). OTC stocks are traded through what is called a "market maker." Pricing details are provided by either the Over-the-Counter Bulletin Board (OTCBB) or Over-the-Counter Link LLC.
If the stock's price has dipped below the level required by listing standards, the company could use reverse splits to correct the pricing problem. This doesn't affect the value of your investment, but it gives you fewer shares in a company.
The main contrast between an OTC stock and a stock on a major exchange is that your broker is less likely to deal with an OTC stock. That isn't to say that they won't, but some brokers don't offer OTC stocks. If you want to keep a stock that has been delisted, you'll need to work with a broker that offers OTC trading.
Even if your brokerage doesn't deal in OTC stocks, you will likely have the chance to sell or convert your shares when the company is delisted. Your broker may also set a date that the stock can be sold or converted using its services.
If the company is delisting because it is going private, you'll probably get a buyout offer from the issuer. If you don't accept the offer, your share will lose its value when the company is delisted.
- Stocks are involuntarily delisted when the issuer fails to meet and keep the listing standards of the exchange it is listed on.
- Stocks are voluntarily delisted from exchanges by the issuers for various reasons.
- When a stock you own is delisted from a major exchange, you still own it, and the value doesn't change unless the issuer is going private or the stock's price drops.
- Delisted stocks usually move to over-the-counter trading through market makers.