Up-listing from an OTC to a National Exchange

Listing on NASDAQ or NYSE can be a ticket to new growth for many companies. However, it is difficult to meet the listing requirements for such large national exchanges. Many businesses find that they simply have no hope of premiering on such markets after their IPOs. For those companies, there are OTC markets. OTC markets are organized to provide investors and liquidity to small public companies. They cannot compete with the size of the national exchanges, nor do they try. Instead, they cater to smaller investors and smaller businesses looking to grow. They have lower listing requirements and lower investor standards.

Often times, a company will premier on OTC markets and up-list to a larger one when they are ready. There are two main reasons that companies up-list. First, they do it because they have outgrown OTC markets, and want to perpetuate further growth. These companies are often looking to expand, and increase market share. In fact, a company’s up-listing event is sometimes referred to as its second IPO. In these cases, it is common to raise capital with an underwriter or investment-banker in conjunction with the up-listing event.

The second main reason that companies up-list is simply that they qualify to do so. These companies are more passive in their up-listing, and may not contact an underwriter or investment banker. They realize that there are benefits to being listed on national exchanges other than the increased access to capital. There is a certain prestige which comes from such a listing, which opens up marketing avenues. For brokerages, there is also less liquidity risk with higher trading volumes and the ability to deposit shares into brokerages.

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Benefits of OTC Listings

The OTC Markets operates differently than regular securities exchanges. They aren’t regulated by the SEC directly, but through FINRA instead. Some types of securities you can trade on the OTC include:

  • Equities: These are stocks that do not meet the requirements of a national exchange and primarily trade on the OTC.
  • Bonds: These are debt instruments issued by a company or government to raise money.
  • Derivatives: These are financial instruments derived from other underlying assets, such as another stock, and can include options, forwards, and futures.

As a company just starting its growing phase, you might be wondering what the benefits of trading on the OTC are.

  • Lower cost: Since there is less regulation and oversight, companies typically have lower exchange fees associated with the OTC than with a national exchange. This allows smaller companies to access capital without having to pay as high of fees associated with an exchange listing.
  • Greater liquidity: The OTC markets offers greater liquidity, meaning it is easier to buy and sell stocks. This can be beneficial for companies that have a limited number of shareholders or need to quickly access capital.
  • Less Compliance: The OTC markets typically require less compliance for small companies listed on OTC than would be on a national exchange for various reasons including company size, SEC filings, etc.

Even with all these benefits, some companies still might benefit from up-listing to an exchange like NASDAQ or NYSE at some point. This can open up more opportunities for investment and increase the company’s visibility, leading to even greater growth.

When is the Right Time to Up-List?

In addition to outgrowing OTC markets and qualifying for up-listing, there are several factors to consider when deciding if it’s time to up-list from an OTC to a national exchange. These include the following.

  • When Seeking Additional Capital: When additional funds are needed for investments or acquisitions, a national exchange might be able to provide access to a larger pool of investors.
  • When Desiring More Liquidity: When trading volume has increased significantly, an up-listing could provide more liquidity in the stock which can help improve its price.
  • When Seeking Greater Visibility: A listing on a major exchange can help increase the visibility of the company, potentially leading to more coverage from market analysts and financial media. This can also help attract larger investors and increase the company’s credibility.
  • When Having Market Maturity: An up-listing may be appropriate when the company’s business model is mature and stable, as well as having adequate financial resources.

What are NASDAQ and NYSE?

NASDAQ and NYSE are two of the three most well-known national exchanges in the United States. The NASDAQ is a computerized, dealer market that trades securities electronically, while the NYSE is an auction market that matches buyers and sellers through brokers. Listing on one of these exchanges will provide companies with access to additional capital, more trading volume, and higher stock prices.

Qualifying for NASDAQ

Reaching your second IPO and entering the NASDAQ will require your company to meet certain listing standards. You must have a history of operations and financial performance, adequate capitalization, appropriate corporate governance practices, and shareholder approval. Some of the listing requirements for entering NASDAQ include:

  • Your company must have aggregate pre-tax earnings, meaning before filing, in the prior three years of at least $11 million, or pre-tax earnings in the previous two years at least $2.2 million
  • No net losses in the prior three years in a single year
  • Your company must have a minimum aggregate cash flow of at least $27.5 million for the past three fiscal years
  • No negative cash flow in any of the prior three years
  • Average market capitalization over the prior year (12 months) must be at least $550 million
  • Your revenues in the previous fiscal year must be a minimum of $110 million
  • Average market capitalization over the past 12 months is at least $850 million
  • Revenues over the prior fiscal year are at least $90 million
  • Your company’s total assets come to a combined total of at least $80 million and stockholders’ equity is at least $55 million

For more information on NASDAQ listings, click here.

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Qualifying For NYSE

In order to be eligible for listing on the NYSE, a company must meet certain financial and other requirements. These are a bit more varied than NASDAQ’s requirements and can be found here. However, the requirements include:

  • A minimum stockholder’s equity
  • A minimum share price
  • A minimum number of shareholders

Curating the Board of Directors

The board of directors is not easy to fill. Ideally, it should contain seasoned individuals with board experience. A few of these should have in-depth knowledge of the industry. However, not every company can have a perfect board. At the least, an up-listing company should strive to have a talented chair and one industry expert. This can help grease the wheels of the company during transition, and after. If no industry expert can serve on the board, find one to read and prepare the NASDAQ or NYSE application. Doing so can help reduce comments, increase response times, and speed the up-listing along.

Should Companies List on NASDAQ or NYSE?

It’s ultimately up to each company to decide which national exchange is the best fit for its business. Although it can be a difficult decision, understanding the differences between the two exchanges, as well as the requirements for listing on each, can help companies make the right choice. For instance, NASDAQ is known for its online trading capabilities, which can be beneficial for companies with a more tech-savvy customer base. Many of the world’s leading tech giants, including Google and Apple, are listed on the NASDAQ, showing its potential as an ideal platform for tech companies. On the other hand, the NYSE is known to be more stable and is the oldest and largest of the national exchanges. Companies that are more established and have a more traditional customer base may find the NYSE to be more suitable for their needs such as Berkshire Hathaway Inc. Investors also view companies on the NYSE as trusted and less volatile than those on the NASDAQ.

For some, it is tempting to up-list without paying for any consulting services. While such an approach is not destined inherently to end in failure, it is likely to be resource-intensive. It is true that listing requirements are publicly available from both NASDAQ and NYSE. However, the road to transition can be nuanced, and potholed. While many can successfully up-list without seeking help, the process can be expensive and lengthy. Such inefficiency can create undo strain in the first listed year when exchange fees can exceed $50,000. In many cases, if not most, it is advisable to pay for an experienced consultant to oversee the process.

Ultimately, up-listing from an OTC exchange to a national one can provide numerous benefits, but it is important to do adequate research and planning prior to making the move in order to maximize these benefits. Companies should be sure they fulfill all requirements and consider further consultation or assistance if needed. Doing so can save time and money while ensuring a successful transition.

Preparing for What Comes Next

Additionally, it is important to understand the requirements laid out by the exchanges for their companies. Some business owners dream of being traded on NASDAQ or NYSE and put too little thought into post-listing existence. They are then underprepared to meet reporting, meeting, and communication requirements. Those who are truly prepared to up-list have probably prepared extensively for items of corporate governance. They understand, to a tee, what is required at board meetings and annual shareholder meetings. They also understand how to meet those requirements while continuing operations successfully. Companies that fail to impress during their first year on national exchanges can lose reputation and shareholder trust.

If you represent a publicly-traded company, and you are thinking about up-listing, Colonial Stock Transfer can assist. We offer comprehensive consultation and complete transfer agent services.

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Schedule a meeting with us to discuss options for your company to uplist on to an exchange, or go public for the first time.

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Joshua Scofield
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