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Pink Sheet Requirements
We will hereby take a look at quotation requirements for the Pink Sheets now that we know what it takes to be quoted by the OTCBB. A corporation needs to find one market maker that is willing to quote their stock to be quoted on the Pink Sheets. That is basically it! The Pink Sheets note on their website that more than two hundred market makers involve themselves in trading pink sheet stocks and they even provide a link that offers information on how to make contact with these market makers. There aren’t any listing requirements to be quoted on the Pink Sheets and issuers are not required to pay any fees. Once listed, the Pink Sheets does not have a requirement that the issuer continue to make available updated financial information. However, federal law does require that "adequate current information" be publicly available when an issuer's securities are trading under certain circumstances. When you look at the requirements for pink sheet stocks even, the OTCBB looks quite inflexible. Just about anyone with a little cash can have a stock listed on the pink sheets. All you have to do is hire a market maker to file a form 211.
(AN UPDATE OF APRIL 2006) The new OTCQX trading platform offered by the Pink Sheets LLC has very severe requirements that rival those of the larger exchanges.
I got into this discussion on listing requirements because we were discussing where a stock would most likely move if it was to graduate from the OTCBB or Pink Sheets. History shows us that Pink Sheet stocks frequently graduate to the OTCBB, OTCBB stocks frequently graduate to the AMEX, and AMEX stocks frequently graduate to the NASDAQ. Last, but not least, a few NASDAQ stocks move to the NYSE. This is generally done as a matter of prestige as the NYSE is considered by many to be the world's top securities exchange.
There are the chances that unless you were already in the stock that is making a move to a bigger exchange, you are not going to be able to take advantage of the stock's appreciation in the six weeks leading up to its graduation. You would not officially know about the move to the larger exchange until a few days before it happened as companies typically wait until the last minute before announcing their moves, even if you were already invested in the stock in question. What would you do when you did hear this news? If you are like everybody else, you would jump for joy, you would add more shares to your position, and wait for the stock to skyrocket once it hit the bigger exchange. Well, did you know that if your stock behaves like most others, you are in for a big surprise? What happens when a stock makes the jump you ask? First of all, in the primary six weeks following a move from the OTCBB to a larger exchange, stocks fell an average of 5% from the closing price just prior to the graduation date and had a corresponding decline in volume. Extremes of an 82% gain and a 42% loss were also noted during the six week post jump period.
The results of this six week period will create confusion and despair for many people. The excitement of the pre-graduation escalation speedily fades and reality sets in. What could have possibly happened? Investors were expecting many things after their stock graduated to a larger exchange, but a 5% loss and dramatic drop in volume were not what they had in mind. A quantity of investors will sell their -positions and move on to other stocks. This is reflected in the stock's activity following the initial six weeks after graduation.