The Pros and Cons of Uplisting

Written by Addam Stone, Director

By Neil Reithinger

No matter where your company is currently listed or exploring to list, the ultimate goal of entering the public markets is to gain the exposure of your company’s shares to the broadest investor audience; this is typically achieved through a listing on a national exchange such as the New York Stock Exchange (NYSE) or The Nasdaq Stock Market (NASDAQ). Smaller and less actively traded securities of firms having gone public and trading over-the-counter (OTC), a platform that leverages a network of broker-dealers as opposed to trading via a centralized exchange, are able to build liquidity while they execute their business objectives until such time that they qualify for a national exchange listing. For companies that find themselves delisted to the OTC from a national exchange based on any number of reasons, the goal should be to return to a national listing – if such reasons can be corrected and the business can prove that it is viable again. With that in mind, there are pros and cons to consider regarding moving from the OTC to a national exchange, aka “uplisting”.

The Pros

  • Visibility and Credibility – Listing on a national exchange provides the exposure to and the ability for institutional analysts to potentially cover the company with research which may broaden the visibility of the company to new investors. Furthermore, a national exchange listing creates higher levels of perceived credibility for companies that meet the exchanges’ more stringent requirements.
  • Valuation – Companies can see an increase in valuation via a listing on a national exchange due to the increased visibility. Though any increase may sometimes be short-term due to any number of market dynamics, uplisting is an opportunity for a company to demonstrate that it merits a higher valuation through performance.
  • Liquidity – Through the increased exposure, the national exchanges are the most active of the exchange platforms with hundreds of millions of shares traded daily by every kind of investor – hedge funds, mutual funds, ETFs, endowments, accredited individual investors, and even smaller retail investors. This range of access enhances liquidity which can be a key factor in an institutional fund’s decision to take a position in a stock.
  • Capital Opportunities – Raising capital can prove difficult, but with uplisting, opportunities in the capital markets can expand significantly. Many institutional investors have mandates that may preclude them from investing in non-exchange traded companies or even those with a lower level of liquidity; this limits visibility and access to capital. In addition, there are certain offerings, such as those via shelf registrations, that are available to exchange-listed companies that facilitate their ability to raise capital, giving the company greater capital flexibility and opportunity.
  • Greater Compliance Value – The OTC has reporting requirements for its top tier companies including GAAP and SEC compliant financial statements, as well as audit and review requirements by an independent accounting firm. In addition to other national exchange requirements, this reporting obligation remains the same as many OTC companies report with the SEC. So, if a company is already dealing with the rigor and expenses of compliance, it makes sense to get the most out of those efforts by being on a national exchange.

The Cons

  • Greater Scrutiny – The exposure gained by joining a national exchange means the company has a greater responsibility to maintain compliance requirements and meet the business performance metrics expected by investors. The market is watching. Everything your company does will go under the spotlight. So, if the company is not ready for “primetime,” uplisting is not path for the company.
  • Increased Emphasis on Performance – With the greater responsibility to maintain compliance requirements and meet business performance metrics expected by investors, a company will be under consistent pressure to communicate its progress to the investment community. From quarterly earnings calls to participation in investor conferences, the company will be under constant scrutiny so that the market can evaluate these metrics.
  • Additional Compliance and Costs – There are additional compliance requirements and costs with a national exchange listing including adding independent board members, establishing board committees, internal controls, and exchange-specific rules, such as minimum share-price or ESG reporting. These requirements and independent board members create increased compliance and insurance costs.
  • Liability – Securities litigation has been on the rise as well as the costs of liability insurance for directors and officers of public companies. Any precipitous drop in share price or market capitalization can trigger inquiries and potential shareholder litigation. Matt Levine, a Bloomberg financial reporter, likes to say (in jest) – “Everything is securities fraud.” So be prepared – the interest in your nationally listed company goes beyond just investors eager to profit from your stock.

The Long and Short of Uplisting

The changing dynamics of the public markets has made it such that NASDAQ and NYSE access for smaller reporting companies is not only possible, but also preferable. However, as with anything, there are caveats, and your company needs to be prepared. There are two concluding thoughts to consider beyond the pros and cons listed above.

Is your business right for uplisting? Sometimes the industry your firm operates in already receives greater scrutiny. The SEC will not weigh in on your decision to uplist, but the market certainly will. Crypto businesses, firms with significant ties to certain foreign markets, or those with ESG (environmental, social and governance) issues may find staying on the OTC markets more to their liking.

Are you ready to uplist? Beyond the compliance and regulatory requirements, investors expect trusted public companies and their executives to behave like trusted entities. Your firm needs to earn the trust of the market and continually demonstrate it in your words, actions, and results. The goal is to achieve long-term prominence on a national exchange, not to fall back to the OTC several quarters later. Leadership is critical component to uplisting success.

Eventus Can Help

If you do not have the leadership you need, but think uplisting is the right path, get the right leaders anyway you can, including fractional financial leadership. Eventus Advisory Group regularly helps OTC listed companies prepare and execute on uplisting strategies. When you work with a team that knows what to do and when to do it, the uplisting will be planned and executed properly and your likelihood of success can increase greatly.

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