Pink Sheets

What Are the Origins of Pink Sheets?

The origins of the "pink sheets" can be traced back to the turn of the 20th century with the inception of the National Quotation Bureau (NQB). Founded by financier Roger Babson and publisher Arthur Elliot, the NQB compiled and published price data on stocks and bonds.^[1] The bureau printed their price information on pink paper, thus the daily report was known as the "pink sheets." Equities that were listed in the report were aptly named "pink sheet stocks". The physical pink sheet publications remained in circulation until the marketplace went digital in the late 1990s.

What Are Pink Sheets?

"Pink sheets" are a publication that historically reported pricing for a group of corporate stocks not listed on a national exchange. Often referred to as over-the-counter (OTC) or penny stocks, pink sheet issues trade without SEC reporting requirements. Often, pink sheet stocks are modestly priced and trade with thin volumes.^[2]

OTC Markets Group: Trading The Pink Sheets

Since 2008, the trade of pink sheet stocks on the OTC marketplace has been facilitated by the OTC Markets Group. Currently, nearly 10,000 pink sheet securities are listed for trade on one of the OTC Market Group's three different marketplaces: OTCQX, OTCQB and OTC Pink. The securities are classified and offered for trade according to the transparency and quality of the financial data provided by the listed company.

OTCQX offers listings for companies that meet high financial standards and are current in their financial disclosures.^[3] Companies listed on the OTCQB are entrepreneurial in nature, and are in the growth stage of development. The minimum requirements for listing are a stock price of at least US$0.01 and a listed company that must not be currently under bankruptcy proceedings.^[4] Lastly, the OTC Pink marketplace services the trade of companies with little financial disclosure, or companies under duress. The OTC Pink is known as "The Open Marketplace", with limited regulation of the listed companies being required.^[5]

Pink Sheets: Types Of Companies Traded

Various types of companies are actively traded via the OTC marketplace. Distressed companies, microcaps and large foreign issues are the various incarnations of pink sheet securities.

Companies under financial distress often find their issues being traded on the OTC market. Upon being delisted from a larger exchange such as the New York Stock Exchange or NASDAQ, a company can be listed for trade as an OTC security. Reasons for delisting vary—failing to adhere to the SEC's filing requirements, a reduction in company credit rating or dismal stock pricing can all be reasons a company gets delisted. NASDAQ and NYSE listings are required to maintain a minimum bid price of US$1 in order to keep their spot on the exchange.^[6]

Small companies are also traded on the OTC markets. Due to the fact that there are no minimum capital requirements for a company to be traded OTC, tiny companies known as "microcaps" are able to be publicly traded. A microcap stock is a company with a market capitalisation of less than US$250 million.^[7] Microcaps often have few investors and are thinly traded. Bid/ask spreads can become quite large, and volatile pricing swings can quickly become a reality.

It is not uncommon for large foreign companies to consider being traded in an OTC capacity rather than listing on a large national exchange. One major reason for this is the cost of listing on a major exchange. Costs of listing on an OTC market are in the range of US$15,000 per year, while initial costs for listing on the NYSE are in the range of US$125,000 to US$250,000.^[8] National exchanges such as the NASDAQ and NYSE are actively regulated by the SEC. Accounting and financial reporting obligations often require a listed company to incur the cost of staffing a separate department for the sole purpose of managing compliance with SEC regulations.

Pink Sheet Securities: Risk Vs Reward

Investors are attracted to pink sheet issues for above-normal returns on investment. The low pricing of pink sheet stocks enables the investor to make sizeable purchases. Companies are often traded on the pink sheets before they become successful and are listed on national exchanges. Essentially, investors study the pink sheets in an attempt to find a company that is a "diamond in the rough."

However, the relaxed reporting requirements of pink sheet stocks also bring in an element of risk. History has shown that stock scams and fraud have been prevalent in the OTC marketplace, with the most common type of scam known as "pump-and-dump" market manipulation. A pump-and-dump stock scheme occurs when a company's stock is touted and then dumped by the stock's owners when the price rises.^[9] These schemes are often centered on pink sheet stocks with little public financial information and small issues.

Traditionally, the OTC marketplace and pink sheet stocks have been deemed risky, with their trading environment compared to the "Wild West." Experts recommend investment in pink sheet securities for experienced market participants only, along with the implementation of conservative risk parameters.

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