http://www.businessweek.com/stories/2001-05-01/swallowed-by-wall-streets-scrap-heap

Markets & Finance

Swallowed by Wall Street's Scrap Heap


By Kathleen Turner Starr Q: At what point do stocks trade so low that they get kicked off the Nasdaq? -- V.P., Calif.

A: As many once-proud investors in hot dot-com companies may know, when a stock gets kicked off the Nasdaq -- "delisted" is the official term -- it doesn't happen all of a sudden. It comes at the end of a long, agonizing process. And it's one you want to avoid, not just for the humiliation of owning a stock that fell back to earth with a thud, but because a delisted stock will probably never fly again.

The process begins when a company fails to meet one of Nasdaq's listing requirements (see table). Depending on whether or not a company actually has any tangible assets (like a factory, a warehouse, inventory -- things you can sell), it is held to one of two standards. Standard 1 allows companies to trade as low as $1 because it also requires that the companies have at least $4 million in net tangible assets. Companies with less than $4 million in assets conform to Standard 2, and have to keep their stock prices above $5.

According to both standards, once the stock of a company trades below the minimum for thirty consecutive trading days, Nasdaq issues a deficiency notice. The company has 90 days to ask for a hearing, or hope that an improvement in the stock's trading record convinces Nasdaq officials it has a viable market. Nasdaq officials generally root for the stock to keep its standing. "We work with Nasdaq companies to help them maintain their listing, but, at the end of the day, [if they don't meet requirements] they will be delisted," says Scott Peterson, Nasdaq's director of media relations.

JUNKYARD DOGS. Small wonder Nasdaq wants to help companies stave off delisting: It fosters exactly the kind of market inefficiency stock exchanges were created to eliminate. If you think of a stock as a car, delisting is like driving it out of the dealer's lot and dumping it in the junkyard. No analyst will cover a delisted stock and no brokerage house will trade it. Once a stock is delisted it "goes

into a stock-market subculture," says George Schlieben, publisher of the Internet newsletter Global Penny Stocks.

Delisting takes the stock out of the sunny realm of easy access and active trading to the cold and lonely world of scant information and thin volume. Schlieben says his newsletter would never advise a subscriber to invest in delisted penny stocks because volume dries up to a few hundred shares in the course of a few months, or even years. It's like the stock is buried under tons of smashed-in doors, rusty hubcaps, and blackened tailpipes -- and the investors are the only ones who know it.

If for some reason you own delisted shares, then you'll have to work hard to find pricing information. If you're lucky, the stock price will be quoted on the NASD OTC Bulletin Board or the Pink Sheets, says Sigurduv Snorrason, Director of Products and Services at Pink Sheets LLC. These quotation services publish the price of unlisted stocks at the behest of a market maker. If you're not so lucky, the stock has no market maker to sponsor it, and so it trades on the "gray market" where traders have to call around to find the three best prices.

OFF THE RADAR. Digging up price quotes on an obscure stock with a low price and piddling volumes is not how traders want to spend their days. Unlike listed stocks whose prices are clearly and easily available in newspapers, on television, and on the Internet, delisted stocks' prices can be invisible to the individual investor.

Many people who own delisted stocks get frustrated. "It's virtually impossible to follow the valuation," says Keith Huber, manager of the Rockefeller Center branch of Charles Schwab & Co. "People don't read their statements, they come into the branch, they punch it up on the machine and it won't come up, so they walk over to the desk and they want to know what's going on." A delisted stock will continue to show up

on your brokerage statements, but it may have a new ticker symbol and the price may be zero -- or close to it.

Once you plug in your ticker and come up empty-handed, call your broker, assuming you have one. If you're a Schwab client, they'll help you figure out what's going on at the company -- if it's undergone reorganization or been sold, for example, and if there's any future for the stock, says Huber. You then have to make a bet on whether your stock will be reclaimed from the junkheap or left to rust under a mountain of defunct Internet startups.

GOOD RIDDANCE. If you decide to give up on the stock, Huber's advice is: Liquidate the position and take a loss. Schwab will dispose of the position for you, and they won't even charge a commission. Why should they? They're getting your nearly worthless stock for nothing and selling it for a few dollars. If that sounds like highway robbery, consider your options: You have no information, you have little or no chance of finding a buyer, and you have no recourse.

You have no choice but to surrender your investment. Your return will be the warm, fuzzy feeling you get from giving Schwab a chance to make money because you can't.

My advice: Don't let it happen to you. Although delisting is a fact of life, it comes after several months of public notification and private negotiation. Nasdaq created flexible standards and instituted a review process in order to give emerging growth companies the chance to put their ideas to work using public capital. It also gives investors the time to examine their holdings. If you own individual stocks, follow the

news as well as the price so you can make an informed decision to buy or sell. Don't let a stock's fate replicate that of a 1975 Chevy Nova.

Table: Continued listing standards and requirements

REQUIREMENT

STANDARD 1

STANDARD 2

Net tangible assets1

$ 4 million

N/A

Market capitalization

or

Total assets

AND

Total revenue

N/A

$ 50 million

or

$ 50 million

AND

$ 50 million

Public float (shares)2

750000

1.1 million

Market value of public float

$ 5 million

$ 15 million

Minimum bid price

$ 1

$ 5

Shareholders3

400

400

Market makers4

2

4

Corporate governance

Yes

Yes

Source: NASDAQ

1Net tangible assets = total assets - total liabilities - goodwill - redeemable securities

2Public float = total shares outstanding - shares held by officers, directors, or beneficial owners of 10% or more

3Round lot holders (round lot holders are holders of 100 shares or more)

4 An Electronic Communications Network is not considered an active market maker

Do you ever get the feeling you could be doing something a lot smarter with your money? Do you know how to navigate the tricky currents of the Nasdaq and the S&P 500? Ever worry that you should be dumping tech to get aboard pharmaceuticals?

If you'd like the answers to these and other questions about investing, shoot an e-mail to Ask The Analyst@businessweek.com, or send a letter to Ask The Analyst, Business Week Online, 6th Floor, 2 Penn Plaza, New York, NY 10121.

Please include your real name and phone number in case we need more information. If we use your question, only your initials and city will be given. Because of the volume of mail, we won't be able to respond to all questions personally. Questions may be edited for length and clarity.

Table: Continued listing standards and requirements

Starr writes about personal finance topics


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