Listing on a Stock Exchange (#69)
/This podcast episode covers the essentials of what it takes to be listed on a stock exchange, including the application process and listing fees. Key points made are noted below.
The Need to Trade on an Exchange
If a company wants to be publicly held, there’s not much point in doing so unless it involves trading on an exchange. Without being on an exchange, a company has all kinds of costs associated with being public, but there’s not much of a market for its stock. Instead, it’ll probably trade on the over the counter bulletin board market, and not many people trade there.
The reason it’s so hard to trade over the counter shares is that institutions, like pension funds, don’t trade there. Their investment rules very specifically state that their investment managers can only buy or sell the stocks or bonds of businesses that are on an exchange. In a lot of cases, the rules are way more restrictive than that, so a company has to be trading on a specific exchange, or be listed within a certain index on an exchange.
Which Exchange to Pick
So, in short, you have to be on an exchange in order to experience any significant trading volume. The next question is, which exchange? There are many exchanges all over the world, but in most cases, a company likes to stay close to home and use an exchange right in its home country. It’s just easier from a regulatory perspective.
In this case, since I’m in the United States, I’ll focus on the key exchanges there, which are the American Stock Exchange, the NASDAQ, and the New York Stock Exchange. The American Stock Exchange is called the AmEx for short.
The Listing Application
To be listed on one of these exchanges, you have to go through a listing application, which takes anywhere from three to six months to complete. I generally see the process taking closer to six months than three months. The exchange sends you a boilerplate set of questions, which cover things like the total number of shares outstanding, the number of shares held by insiders, the number of independent directors on the audit committee, and whether there’s any fund raising activity going on. The questions aren’t especially difficult, but it’s only the first round of questions.
Once the exchange receives your answers, it assigns a listing analyst to the application. That person is overworked, and might not even open up the file for a month. Eventually, he’ll review it, and dig through all of your latest public filings, and then send back more questions that are a lot pickier. Expect at least three rounds of these questions. Then the listing analyst sends the application to a supervisor, who does another review. This one tends to be shorter, but by this time, three months have very likely already gone by.
Targets to Pass
Now the exchange will look at some hard quantitative targets. You’ve got to pass each one of these, or you will not be listed. The first one is the total number of round lot shareholders. A round lot shareholder is anyone owning at least 100 shares of your stock. The American and New York Exchanges require at least 400 of them, and the NASDAQ requires 300. The reason for this rule is that the exchanges want the shares to be owned by quite a few investors, so there’s a better chance of trading occurring. If there were just one shareholder, it’s possible that nobody would buy or sell it. So this is a volume trading requirement.
Another requirement is the market valuation of the company. The exchanges don’t want tiny little companies trading on them, so they have some hard requirements to keep out the small guys. This is called a market capitalization test. Market cap is the total number of shares outstanding times the current stock price. The market valuation test varies quite a bit by exchange, so under one very specific scenario, you can get away with just a $50 million market cap on the AmEx, whereas the New York Stock Exchange can require a market cap of as much as $375 million.
And then we come to a very troublesome requirement, which is proving that the company is profitable. Each exchange has a several different set of standards that you can try to qualify under. So for example, the AmEx will let you in if you’ve had $750,000 of pretax income and stockholder’s equity of $4 million, and will even waive the market capitalization requirement if you have that. On the other hand, one of the standards imposed by the NASDAQ requires aggregate pre-tax earnings of $11 million in the past three years.
And then there’s the stock price. The larger exchanges don’t like low stock prices, so they impose minimum limits for listing applicants. You generally need at least a $2 stock price on the American, and $4 or $5 on the NASDAQ. Some companies will try a reverse stock split in order to increase their share price, but that’s usually a bad idea. A reverse split attracts short sellers, so a company may find that its stock price did not double as a result of the split, and in fact it may be close to what it was before the split.
By the way, if you can get your stock price up to the minimum requirement for just one day, that’s not good enough. The listing analyst will review a short-term history of the stock price to see if it appears to be sustainable at the minimum level. If there are a few dips below the minimum, that’s OK – but there can’t be a trend where the price appears to be permanently heading below the minimum level.
This may sound like a lot of requirements, but I’m actually painting a simplified picture. Each of the exchanges use multiple listing standards that you can qualify under, so for example, if you’re not profitable, then maybe you can qualify under another standard that has more onerous requirements for market capitalization or retained earnings.
Generally speaking, a smaller company wants to start on the American Stock Exchange, because its listing requirements are easier. It can also choose to list on the NASDAQ Capital Market, which has roughly the same standards, but a higher stock price standard. If it’s bigger or more profitable, then it can try the NASDAQ Global Market, which has tougher standards. The largest companies will want to list on the New York Stock Exchange, which has the hardest of all the listing requirements.
Staying on an Exchange
Now what about staying on an exchange? Each exchange has continuing listing standards which are easier than the initial entry requirements. The main sticking point is the stock price. Basically, if it drops under $1, the exchange drops you. This is not the case for the American Stock Exchange, which doesn’t have a minimum standard – but they will delist you if you get into financial difficulties.
The Cost of Being Listed
And finally, what does all of this cost? The AmEx and NASDAQ Capital Market both charge about the same initial listing fees, which are $45,000 to $75,000. The NASDAQ Global Market’s listing fee is in the range of $100,000 to $150,000, and the New York Stock Exchange will usually charge somewhere between $150,000 and $250,000.
But of course, they’ll also impose an ongoing annual fee for you to remain on the exchange. The current maximum annual fee for the AmEx is $34,000, the NASDAQ Capital Market charges about $28,000, and the NASDAQ Global Market charges $95,000. The New York Stock Exchange has a much broader fee structure, but basically caps its annual fee at a half a million, though it’s possible to pay under $100,000.
Parting Thoughts
This has been an extremely condensed view of the listing process. A really complete treatment would need a podcast about 20 times longer, but the basic premise is that if you’re fairly small and not very profitable, you start out on an exchange that’s designed for your needs, like the AmEx or NASDAQ Capital Market. You won’t have access to all possible investors, but they at least give you the opportunity for a fairly active trading environment.
As you get bigger, and you want access to more investors, switch upmarket to the NASDAQ Global Market or the New York Stock Exchange. It’ll cost you more, but there’s likely to be significantly more trading in your stock.