Profiting From Delisted Penny Stocks
A stock is said to have been delisted when it is prohibited from trading in a major stock exchange. Delisted stocks become penny stocks relegated to over-the-counter markets. Delisting occurs when a company fails to comply with the listing requirements of the exchange, including meeting minimum share prices, market capitalization, and sales levels.
Stock exchanges have stringent requirements. To get on the Nasdaq, for example, companies need to have at least $8 million worth of outstanding public shares outstanding, with the stock price of at least $5 per share. Companies should expect to pay up to $100,000 in fees if they want to get their stock listed on the Nasdaq. Penny stocks trading on the OTCBB and the pink sheets do not have to fulfill such requirements.
Delisting can be voluntary or involuntary, therefore earning the penny stocks label does not necessarily mean a company is going down the drain. In fact, many delisted companies continue its operations and trade as profitable penny stocks over the counter.
The key to profiting from delisted penny stocks is finding good companies that have voluntarily removed themselves from the big-boys club to cash out their shareholders. A company may do this to save substantial money by operating as a private enterprise. This move can yield significant returns to investors willing to do a little research.
The SEC requires companies with less than 300 shareholders to submit privatization filings. Some companies will try to avoid the paperwork by issuing large reverse stock splits to reduce their number of shareholders and pay off the remaining shareholders with cash compensation. Common shareholders can net a handsome profit from this strategy.
Shareholders may also find profitable opportunities in bankruptcy proceedings that reward shareholders with the sale of assets or domain names. Penny stocks companies may offer rights offerings, warrants, bonds, convertible securities or preferred stock in order to entice shareholders to tender their shares.
Investors can quickly find delisting opportunities in SEC filings that are publicly available on the SEC website. How to find them? Check these three types of SEC filings:
8-K Current Events
8-K filings include the initial announcements of stock splits, which may be a prelude to privatization. These filings tell investors when and why the company is delisting.
Schedule 14A Proxy Statements
If a company has signified its intent to voluntary delist, proxy statements enable shareholders to vote on whether to go through with delisting. This usually occurs if a company is delisting its stock to go private.
S-1/F-1 Registration Statements
These filings include any new securities being issued as a result of delisting, such as preferred stock, bonds, warrants or securities in the private company being formed.
Penny stocks that are a result of delisting can provide profitable investment opportunities or lose major money for shareholders. Everything depends on the reasons behind the privatization and the terms of the offer. Investors willing to invest the time and effort to find some opportunities may uncover some gems for their portfolios that can perform extremely well in the short term.
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