Trade Finance Advice

The Nasdaq logo seen displayed with a stock growth bar chart on a smartphone illustrates the risks & consequences of Nasdaq delisting.

Understanding the Risks & Consequences of Nasdaq Delisting

Most investors have stocks listed on a major stock exchange, like the New York Stock Exchange (NYSE) or the Nasdaq (NASDAQ INDEX:^IXIC). A company must follow the guidelines of the stock market in which it is listed in order to maintain its listing. If they don’t, they’ll be taken off the market (delisted). The term “delisting” is used by investors to refer to the forced delisting process launched by an exchange, even if delisting may be started by the company itself.

Here’s what follows when a stock gets delisted. Having been out of compliance, an exchange will issue a warning to the company. When a company receives such a warning, it has a certain amount of time to fix the problem before it is taken from the exchange and forced to trade over the counter (OTC), or via a dealer network. Trading in the stock continues to function in the same way, and the core aspects of the company have not changed. Your investment is not immediately at risk, but the company’s delisting from the exchange is often a hint that it is insolvent, near-bankrupt, or otherwise unable to fulfill the exchange’s basic financial standards. When a company gets delisted, institutional investors often decide to stop contributing to the company.

When is a Stock Delisted?

A stock may be delisted for a variety of reasons. The Nasdaq must adhere to these three key regulations:

  • Minimum $1 share price required.
  • More than 400 stockholders in total.
  • Minimum of $50M in market value, $50M in total assets, or $50M in total revenue.
  • Minimum of $10M in shareholders’ equity.

In addition, businesses must comply with a number of ongoing corporate governance requirements, including the timely disclosure of all material news to the Securities and Exchange Commission (SEC), the filing of quarterly and annual reports, and the timely disclosure of financial information to shareholders. If the firm fails to fulfill any of the standards, its shares may be removed from the exchanges.

Delisting is an option for companies. They become private when they are acquired by another firm or when they combine with another public company. The firm may decide to list its shares on a new market, liquidate its assets, and distribute the money to shareholders, or it may simply cease operations and dissolve.

Is It Possible to Relist a Stock That Has Been Delisted?

Relisting a delisted stock on a major market is possible in theory, but in practice it doesn’t happen very often. In order to regain compliance with the exchange’s criteria, the delisted firm would need to escape bankruptcy, fix the problem that led to its delisting, and reappear on the exchange’s trading floor.

Most delisted companies eventually go bankrupt, rendering the delisted shares worthless, rather than being relisted. The bankruptcy process might result in a private investor acquiring the firm or the company being pushed into liquidation. The firm may also undergo a reorganization and ultimately issue new shares of stock to investors as part of an initial public offering (IPO). While the business itself remains unchanged, the bankruptcy process often results in the loss of all of the original shareholders’ financial stakes.

How Are Investors Affected by Delisting?

Investors who owned delisted stocks retained ownership of those shares. Yet, once a stock is delisted, it frequently loses all or almost all of its value. So, even though a shareholder has legal ownership of the shares, that ownership will likely be greatly diminished. Investors stand the risk of total loss of their investment capital in certain stock market crashes.

Even if a delisted firm is still able to function profitably, it may have a trust problem since it will no longer have the same aura of confidence and accuracy in its reports. When a company is delisted because it fails to fulfill the standards of the main exchanges, it typically suffers reputational and stigmatic damage.

Voluntary delisting provides investors with a monetary buyout or the opportunity to acquire shares in the acquiring business.

Also Read: Unlock Cost Savings with Blockchain: Harnessing Potential in Trade Finance

What to Do if You Want to Sell a Stock That Has Been Delisted?

You should definitely sell your shares at current share price if you know there’s a chance the firm could be delisted. The value of a firm drops due to involuntary delisting and the circumstances leading up to it, and if bankruptcy ensues, your investment may be completely wiped out. Your stock may be converted to cash or swapped for the stock of the acquiring business at a set conversion rate if the share is delisted as result of a merger or because the firm is being taken private.

If a firm operates over the counter, you can still get rid of your stock, but you could have trouble finding purchasers ready to pay your market price. Delisted stocks may be sold over-the-counter (OTC) just like any other stock, however certain brokerages may place restrictions on such trading. Even if a corporation goes bankrupt, a stock that has been delisted may trade freely over the counters for years.

If you’re thinking that delisted stocks are cheap, you should avoid falling into this trap. These stocks generally behave like penny stocks since the company behind them is either in the midst of bankruptcy or facing very difficult financial times.
The Nasdaq delisting process is a complex and often difficult one to navigate. Every company should be aware of the potential consequences of delisting, including the loss of liquidity, reduced investor confidence, and increased financial and regulatory risks. Companies should take proactive steps to ensure they remain in compliance with Nasdaq rules and regulations in order to avoid the costly consequences of delisting.

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