Over the years, quite a few of the companies that we follow/followed have received delisting notices from the Nasdaq Markets. The number one reason: failure to comply with the Nasdaq's minimum bid price requirement. So, what is this requirement? How does it come into effect? What can the company do about it?
What is the requirement?
The minimum bid price requirement stems from Section 5550(a)(2) of the Nasdaq's Equity Rules guide. It clearly states: "(a) Continued Listing Requirements for Primary Equity Securities: (2) Minimum bid price of at least $1 per share."
How does it come into effect?
If a company closes below a $1/share bid price for 30 consecutive days, the Nasdaq sends the company a written notice. The notice states that the company is no longer in compliance with its continued listing requirements and has 180 days to regain compliance. Otherwise, the company will face delisting.
What can the company do about non-compliance?
As stated above, the company has 180 calendar days to regain compliance. In that time frame, if the company closes at or above a $1/share bid price for ten consecutive days, the Nasdaq will inform the company that it has regained compliance, and close the issue. So, the matter then becomes raising the share price (every stock's ultimate goal). There are a few ways a company can do this:
- Good performance: Good financial performance is perhaps the most pure way to raise a stock's price. After all, better financials increase the company's value and thus its shares' value. This, however, is difficult and can take time; too much time in some cases. Good performance is also the hardest way to increase share price.
- Good press: The saying goes, "any press is good press." Why? Press drives interest. When a company makes news, people notice. Issuing press releases on what the company is doing can send investors a company's way. Increased buyers result in increased volume, which can drive share price up.
- Reverse split: We have discussed this topic time and time again. While this would most certainly raise a company's share price, it is a zero-sum transaction. That means the company's value is the same. For example, a company with 10 million shares at $0.50/share has a $5 million market cap. To regain compliance, the company enacts a 2 for 1 reverse split. The result is 5 million shares worth $1.00 each. The company is still worth just $5 million.
- Buybacks: We have discussed this quite a bit too. When a company buys back shares, it decreases the number outstanding, increasing the value of those left. Ideally, this raises a company's price per share. However, the company must have the capital to purchase shares.
If raising share price was simple, every stock would be an easy pick. However, it's not that simple. A company has to work to up its value. It has to work much harder to regain compliance if its share price has fallen below $1/share.
Investors should watch companies not meeting this requirement extra close. Why are they not meeting the requirement? Often times, poor share performance is a direct reflection of poor company performance. So, find out what is going on to drive the company's stock below the $1 mark. To the investor, the underlying issue is more important than the minimum bid requirement. Although, if a company is delisted, it's visibility could drop significantly--a story for another day.
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Information in this blog post contains references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable.
Then why do not all companies start with an initial public offering priced at say $200 a share, or $1000? That way the performance has to be really really bad for the shares to be delisted for failing to meet the $1 a share minimum. This minimum value sounds arbitrary.
Most small cap companies at risk of losing shares due to them being under 1 dollar are considered high risk. Would you want to drop 1000 dollars in there for one stock? i wouldnt, but i might put in a $10. Low Stock price offers high risk high reward that entices certain investors for quick bumps either up or down.