You might be reading this and wondering, I’ve heard of initial public offerings or IPOs, but what is uplisting?
Chances are, if you’ve been day trading for any length of time, you’ve bought or sold OTC stocks, which are generally too small to meet the stringent requirements needed to list on a formal exchange like the Nasdaq or the New York Stock Exchange (NYSE).
When a company lists its stock on over-the-counter or pink sheet markets, the shares are traded by broker-dealers that negotiate directly between one another over the phone or through computer networks.
Even though there are some reasons why a company may list its stock OTC, this is not an option that provides a lot of liquidity or much exposure. However, trading on a formal exchange does.
And that brings us to our main topic today: Uplisting.
This blog post focuses on uplisting, which is a way for an OTC stock to move to an organized exchange like the Nasdaq or NYSE.
Let’s jump in!
What is the meaning of uplisting?
In financial markets, uplisting refers to the practice of elevating a company from having its stock listed on an alternative trading platform such as the OTC Markets, ASX or the TSX, to a major stock exchange like the Nasdaq.
If a company has listed its stock on an OTC Market, this simply its shares are traded directly between competing broker-dealers instead of trading through a centralized exchange.
These broker-dealers buy and sell on behalf of clients and usually publicize quotes for a specific stock.
Examples of uplisted stocks
A few examples of stocks that were recently trading OTC or in smaller exchanges and later moved up to a bigger exchange include:
- Aurora Cannabis (NYSE: ACB)
- Dyadic International (NASDAQ: DYAI)
- Aphria (NYSE: APHA)
- Cronos Group (NASDAQ: CRON)
- Lithium Americas (NYSE: LAC)
- Hanger (NYSE: HNGR)
Understanding uplisting requirements
Uplisting is an interesting process that can help small companies open the doors to numerous opportunities for growth.
That said, there are sometimes misconceptions about the whole uplisting process and the requirements that OTC listed stocks have to meet before being moved to a major exchange.
Uplisting requirements are a set of conditions that an OTC stock must meet for it to be upgraded to a major stock exchange, such as the NYSE or the Nasdaq.
These standards generally measure the market share and size of the stock to be uplisted, as well as the underlying financial viability of the issuing company. Exchanges establish these requirements as a means of maintaining their own visibility and reputation.
With that in mind, here are a few important points that stock traders and investors ought to know regarding uplisting.
First, uplisting is not an automatic process and requirements vary by exchange. Even if a company has met every requirement for an uplisting – share price, corporate governance requirements and financial requirements – it still has to wait for final approval from the Nasdaq or Amex.
Sometimes, this happens almost without delay. But other times, the process can take several weeks. Therefore, it pays to be patient because timing on uplistings is uncertain and depends entirely on Nasdaq approval.
Second, the required price for a stock to uplist to the Nasdaq is $4.00 per share. This price is determined by the bid price of the stock and not the closing price.
Nonetheless, if a company meets varying requirements, it may qualify for uplisting under a closing price alternative of $2.00 or $3.00.
Third, a company that is not yet profitable and lacks an adequate operating history can still uplist to the Nasdaq. But it has to meet other criteria and its bid price has to be above $4 for 90 consecutive trading days for this to happen. However, this doesn’t apply to profitable companies.
Lastly, many companies also tend to conduct a reverse split to fulfill the minimum share price requirements for uplisting on Nasdaq. The exchange perfectly accepts this and will evaluate the post-split accordingly.
An example of a reverse split would be if a company had a share price of $1 and had 500,000 shares outstanding did a 1 for 2 reverse split, which would increase the share value to $2 and reduce the shares outstanding to 250,000.
If you had 500 shares of the stock at $1 then after the split goes into effect, you would have 250 shares at $2 per share.
Using a reverse split to obtain an uplisting and hike the share price is a very positive sign for a company and is much different than a company that uses a reverse split to avoid being delisted.
But in the eyes of many people, particularly those who only encounter reverse splits in the context of stocks that are attempting to avoid a delisting, a reverse split is a sign of a company that is not doing well.
Benefits of uplisting from an OTC market to a major exchange
The reasons for deciding to uplisting to a major stock exchange vary, but there are benefits to companies that do so.
First, the stock is essentially moving up the stock market food chain as the company expands and gets more successful.
Stocks that trade over OTC or pink sheet markets often operate on a much smaller scale compared to bigger stocks like Apple (NASDAQ: AAPL) or Boeing (NYSE: BA).
Second, hedge funds and institutional investors prefer large stock exchanges over OTC exchanges because there is poor liquidity.
Third, since major stock exchanges have stricter requirements, it gives a greater sense of transparency — allowing better investors to trade the stock.
For example, for a company to be listed on the Nasdaq, it has to have 1.25 million public shares owned by at least 550 stockholders with a collective $45 million market value.
And, uplisting to a formal exchange like the NYSE offers a company greater visibility — making it the best place for it to attract more interest investors.
Bottom Line
If shares of a company are traded on the OTC Markets and has news that it plans to uplist to the Nasdaq or the NYSE, it usually attracts some interest from investors.
But with a company’s shares trading on the Nasdaq or NYSE rather than the OTC market, it is likely to attract institutional investors and hedge funds that can play an important role in the further re-rating of its valuations.
This wider group of investors typically don’t trade OTC-listed stocks as there not enough liquidity. But when a stock uplists to the NYSE or the Nasdaq, they can trade it.
Additionally, stocks that uplist to a centralized exchange are seen as more growth-oriented, which means increased upside potential to go along with more volatility.
Combining uplisted stocks with strong fundamentals can work extremely well for you. However, the tricky part is finding them before they uplist.