Introduction

A decision that has to be made early in the process as to the market in which the securities will trade the moment the public offering is completed. The company will have to take the initial steps to qualify for listing before it files the registration statement. In addition, to selecting a trading market that gives the company the right public image, there are some very practical considerations. At one end of the spectrum, if possible, a company going public would like to avoid registration under state securities laws. This brings into play the National Securities Markets Improvement Act of 1996 (NSMIA), which “preempts” certain aspects of state securities law, meaning that Congress has used its power under the supremacy clause of the U.S. Constitution to supplant state law. The Capital Markets Efficiency Act of 1996 (CMEA), which is Title 1 of NSMIA, amends the Securities Act to provide that no state law “requiring, or with respect to” registration of securities or registration of securities transactions “shall directly or indirectly apply to a” covered security,[1] limit or impose conditions on described offering documents and disclosure documents relating to covered securities,[2] or impose conditions based on the merits of the issuer or the offering with respect to the offer or sale of covered securities.[3] Covered securities relevant for our purpose include the following: Nationally Traded Securities. Securities listed or authorized for listing on the NYSE or Amex or included or qualified for inclusion in Nasdaq National Market securities (NNM) (now the Nasdaq Global Securities) or securities of the same issuer that are equal or senior to the listed securities. The Commission has authority to add to the list of exchanges other national securities exchanges that have listing standards comparable to the NYSE, Amex or Nasdaq NNM.[4] Pursuant to this authority, the Commission has designated the following exchanges (by adding them to Rule 146) as having listing standards that are substantially similar to those of the NYSE, Amex and Nasdaq NNM: Tier I of NYSE ACRA (formerly the Pacific Exchange); Tier 1 of the Philadelphia Stock Exchange, The Chicago Board Options Exchange, Incorporated, Options listed on the International Securities Exchange, and Nasdaq Capital Market Security.[5] Preemption also applies in the case of securities of the same issuer that are equal in seniority or senior to a security as to which preemption applies pursuant to the foregoing.[6] Thus, for example, state securities registration requirements would not apply in the case of a registered public offering of debt securities by an issuer with common stock listed on Nasdaq even if the bonds that are the subject of the offering are not listed.

Since NSMIA was adopted, there have been some changes in our capital markets and national securities exchange.  The Nasdaq Stock Market, which was an over the counter market became a national securities exchange. In the process the Nasdaq National Market Securities became the Global Market Securities and the Commission ignores the change in terminology for purposes of determining securities preempted from registration under the state blue sky laws. What were SmallCap securities became Nasdaq Capital Market (NCM) securities. More significantly, Nasdaq changed the requirements for listing as a Capital Market security and the Commission subsequently added NCM securities to the securities that are preempted from the state blue sky law registration requirements. Accordingly, a company going public wants to assure that on completion of the public offering the company's securities will be approved for listing as a NCM security or alternatively on the American Stock Exchange and thus avoid registration under the state blue sky laws. We pursue what is required in that regard below.

The other end of the spectrum is to avoid at all cost being a penny stock as defined by the Penny Stock Reform Act and the Commission rules implementing the Act. A penny stock is not one that sells for less than $1.00 but rather includes with some qualification a stock that trades at less than $5.00 a share unless it is listed, or approved for listing upon notice of issuance, on a national securities exchange. [7] The stock exchange has to meet certain minimum listing standards under Exchange Act Rule 3a51-1(a)(2) in order for the stocks to be listed to avoid classification as a penny stock, but all of them do. Securities that are listed on a national securities exchange  are not penny stocks, but it is important that it remain listed as once delisted, usually on the basis of its market price falling below the SROs maintenance standard, it is likely to become a penny stock unless it meets the criteria of a "substantial issuer" for lack of a better term. For this purpose the stock of a company is not a penny stock if it has net tangible assets in excess of $2,000,000, if the issuer has been in continuous operation for at least three years, or $5,000,000, if the issuer has been in continuous operation for less than three years; or average revenue of at least $6,000,000 for the last three years. Rule 3a51-1(g)

 . Penny stock to the extent traded are usually traded on the OTC Bulletin Boards or the pink sheets and are confined to a trading purgatory. We are not going to explore in detail why being a penny stock is where a company doesn’t want to be other than to let you take a look at the required Risk Disclosure document that must be sent by broker-dealers to customers (see Rule 15g-2) before selling them a penny stock and an excerpt from the RISK FACTOR section of the Prospectus of a penny stock company traded on the OTCBB . We assume that the decision is made to qualify the company for listing on the Nasdaq Stock Market as a Capital Market (NCM) security or American Stock Exchange (AMEX) as that will permit the company to avoid registering the offering under any state securities law.

This is not a course in the Sarbanes-Oxley Act. One aspect of Sarbanes-Oxley is that it unquestionably increases the cost of being a public company and some companies that might otherwise have gone public may choose to remain private to avoid such costs or to go public outside of the United States (e.g. to go public in the UK and be traded on the Alternative Investment Market (AIM) of the London Stock Exchange). We are not headed in that direction, but rather assume companies contemplating going public that are not deterred by the cost of compliance with SOX provided the time to go public is opportune. There are some aspects of the Act, however, that must be taken into account well before the company goes public. Listing on Nasdaq or other national securities exchange is going to trigger a number of Sarbanes-Oxley corporate governance provision that, among other things, relates to the composition of the board of directors and various committees of the board. We focused our attention on them in Part 2.

Listed securities

Securities traded on the national securities exchanges must first be listed on the exchange for trading or be listed on another ex­change and be authorized for unlisted trading. Securities listed on an exchange must meet the listing standards of the exchange and be admitted to listing by the exchange. There are ten registered national securities exchanges ¾ the Nasdaq Stock Market, the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), Boston Stock Exchange (BSE), Philadelphia Stock Exchange (PHLX), the NYSE ARCA (formerly the Pacific Stock Exchange), Chicago Stock Exchange (CHX), the Chicago Board of Options Exchange (CBOE), International Stock Exchange, and the National Stock Exchange (formerly Cincinnati Stock Exchange). The dominance of the New York Stock Exchange vis-à-vis other exchanges is apparent. Of the $26.3 trillion in market value of equity sales on the  exchanges  for the year ended December 31, 2006, $16.3 trillion were traded on the NYSE, $6 trillion on the NYSE ACRA, $2.4 trillion on Nasdaq, and $542 billion on AMEX [10]

OTC Bulletin Board

The OTC Bulletin Board is an electronic inter-dealer quotation system operated by FINRA (formerly the NASD) for securities not quoted on Nasdaq. Initiated by the NASD in 1992, the Commission finally gave permanent approval to the Bulletin Board Service on March 21, 1997.[11] The Bulletin Board maintains a website (www.otcbb.com) that includes considerable quotation and trading information. In Novermber of 2007 there were 230 market makers that traded 3,300 securities. During the month of October, 2007,  the share volume and dollar volume for the month were as follows:

 Probably the most informative statistic is of the approximately thirty securities that were most active in average daily trading volume as of November 18, 2007 the lowest trading price was $0.0001 and the highest $0.085 (8.5 cents) a share and only three were priced at 1 cent or more .  Of the 100 highest in trading volume in July, 2007, only five had a closing price of over a $1.00 a share ($1.25,  $1.83, $2.09, $3.08, $3.10). As discussed above, all of the stocks that trade below $5.00 a share are penny stocks and subject to the penny stock trading rules unless they meet the substantial issuer criteria. Under the FINRA (formerly NASD) Rules generally the following securities are eligible to trade on the OTC Bulletin Board, U.S. issuers must be reporting companies under the Exchange Act  and subject to a 30-day grace period current in all of their filings.[13] The securities of a foreign private issuer to be eligible for quotation generally must be registered under Section 12 of the Exchange Act.[14]. Public companies that can not meet the  listing criteria of a stock exchange and are quoted on OTC Bulletin Board can "grow out" of the penny stock classification by meeting the substantial issuer criteria or by developing to the point that they can meet the listing standards of a stock exchange. The OTC Bulletin Board includes on its website a Graduation List of companies that have moved on by listing on a national securities exchange. At November 23, 2007, since the beginning of the year 51 had become listed on Nasdaq as Capital Market securities, and 26 as Nasdaq Global securities. Two had listed on the New York Stock Exchange.

THE PINK SHEETS

Actively traded over-the-counter securities that are not quoted on  the OTCBB — primarily because the securities are not registered under the Exchange Act— quotations are likely to appear in the privately published National Daily Quotation Sheets, often referred to as the “pink sheets.” Prior to Nasdaq, the pink sheets were the principal means by which over-the-counter broker-dealers could determine who were market makers in particular securities and access wholesale quotations for over-the-counter securities. Market makers who subscribed to the National Daily Quotation Service paid to have their wholesale quotations reflected in the pink sheets. The pink sheets were rapidly transmitted, but nonetheless on a non-current basis, to other dealers who utilized the sheets to determine the market in a quoted security. The Pink Sheets have morphed into an electronic version available on the Internet (http://www.pinksheets.com), permitting  quotes access electronically. The Electronic Pink Sheets have “benefited” from the requirement, as discussed above, that companies to be quoted on the OTCBB have to be '34 Act reporting companies. The Pink Sheets has its share of penny stocks and probably as many as the OTCBB, but it also has some securities that were delisted by Nasdaq and securities of foreign private issuers that are not registered under the Exchange Act that trade at prices well above that of most OTCBB securities.

Of the 20 highest stocks in dollar volume traded on the Pink Sheets on November 30, 2007 the lowest traded at $16. a share and the highest at $287 a share. These are not comparable with the OTCBB statistics referred to above, which are based on the highest share volume. In penny stock country, the highest in share volume are likely to be low priced stocks. On the other hand, statistics based on dollar volume are likely to be higher priced stocks. The OTCBB reports volume by number of shares and the Pink Sheets reports volume in dollars. Of the six highest on the Pink Sheets in dollar trading volume on November 30, 2007, three traded on foreign stock exchanges (two on Russian and one on Frankfurt) and two had been delisted for failure to file ’34 Act reports; one by the Nasdaq Stock Exchange and the other by the Chicago Stock Exchange. This tells you a lot, but not everything, about the Pink Sheets.

The bulk of the shares traded on the OTCBB are penny stocks (trade below $5.00 a share) and the Pink Sheets have its share of penny stocks that also are subject to the penny stock trading rules. The principal requirement for quotation on the Electronic Pink Sheets is that information be available relating to the company in accordance with the requirements of Rule 15c2-11 and that there be a broker-dealer prepared to maintain that information and become a market maker for the security on the Pink Sheets.. The over 8,000 securities trade on the OTC Bulletin Board and the Electronic Pink Sheets, poses a huge surveillance problem for the SEC and other regulatory authorities. According to statistics on the Pink Sheets on November 30, 2007 the relevant totals were as follows:

Securities Quoted Exclusively on Pink Sheets 5,079 Securities Dually Quoted on Pink Sheets and OTCBB 3,477 Securities Quoted Exclusively on OTCBB 130   Total 8,686

On March 7, 2007, the Pink Sheets launched a new tier styled OTCQX designed to attract foreign private issuers (particularly those listed on a foreign stock exchange) relying on Rule 12g3-2(b) to avoid registration under the Exchange Act and U.S. operating companies with significant operations that are not listed on an exchange. The pink sheets also established effective August 1, 2007 a new system of categories for all securities traded on the pink sheets with the OTCQX tier being the highest category.. The categories beginning with OTCOX are briefly described along with the symbol that accompanies its quotation. Each category has a symbol (icon) that attempts to identify the category in terms of the quality of the security and the degree of information available concerning the company. The Pink Sheets also is attempting to make available on its website information concerning companies quoted on the Pink Sheets including in the case of some the lack of information. Click HERE for the symbols representing the Pink Sheet categories and a description of each.

Quantitative standards for listing as a Nasdaq  Capital Market Security

We focus on listing on the Nasdaq Stock Market as listing as a Nasdaq Capital Market Security  except for mega IPOs is the most likely to be the realistic alternative. We also we reference AMEX and the NYSE ACRA tier as other alternatives. The latter was formerly the Pacific Stock Exchange and is a fully electronic stock exchange owned by the parent of the NYSE and it may be an alternative for a larger IPO. We also discuss other Nasdaq Stock Market tiers as they also are alternatives for larger IPOs. On August 28, 2006, the Commission published notice that Nasdaq had applied to the Commission for approval of a number of rule changes that significantly increased the standards for listing as a Nasdaw Capital Market (NCM) security and the counterpart requirements for foreign securities and ADRs.[1] On April 18, 2007, the Commission approved the proposed standards.[2] These NCM standards are of particular significance to a company going public as they represent the minimum standards for listing on Nasdaq. The Commission, on the same day it approval the new standards, amended Rule 146 to include securities listed on the Nasdaq  Capital Market as covered securities for purposes of Section 18 of the Securities Act.[3] As a result, state blue sky law registration requirements are preempted and the securities can be publicly offered without being registered under state blue sky laws..  We attempt in the following Table to summarize the listing standards as they apply to domestic and Canadian foreign issuers.

Nasdaq Capital Market Initial and Continued Listing Requirements[4]

Under the NCM listing standard there are three different alternative combinations of the standards.. Under Alternative Standard 1, the issuer must have $5 million in equity AND market value of publicly held shares (float) of $15 million, AND an operating history of at least two years Under Alternative Standard 2, the issuer must have $4 million in equity AND market value of publicly held shares (float) of $15 million AND market value of listed securities of $50 million (market capitalization). Under Alternative Standard 3, the issuer must have $4 million in equity AND a market value of publicly held shares (float) of $ 5 million AND net income in the most recent or in last 2 of 3 fiscal years of $750,000. The remaining requirements as set forth above are the same for all three alternatives. We note that there essentially are only two standards for issuers that do not have an operating history of at least two years as required by standard 1 and if the company does not have an operating history of at least two years and did not have net income of $750,000 in the most current fiscal year or 2 out of three of the last fiscal years there is only 1 standard (Standard 2) as standard 3 requires such net income.  In reality that means meeting the net income requirement in the most recent fiscal since if the company had an operating history of two years it could rely on standard No. 1. This means for many start-ups that they will have to meet standard 2, requiring equity of $4 million, market value of publicly held shares of $15 million and market value of listed shares of $50 million. In those instances an IPO of not less than $15 million will be required to meet the $15 million market value of publicly held securities at the close of the offering. An issuer with a two year operating history and without earnings could meet standard 1 by having an equity of $5 million and a market value of publicly held shares of $!5 million. An issuer with net income in last fiscal year or 2 of 3 of the most recent fiscal years of $750,000, could rely on standard 3 and have an equity of $4 million and a market value of publicly held shares of only $5 million. Each issuer contemplating listing, has to fit itself into one of the three basic standards or will not be able to list on Nasdaq. The remaining requirements of minimum bid price ($4.00) a share; market makers (at least 3); publicly held shares (1 million), and round lot shareholders (300) are common to all three..

It may be helpful to approach the listing standards from the perspective of a company about to do an initial firmly written public offering, since the determination will be made upon completion of the public offering. We also assume that ordinarily there will be no publicly held shares prior to the offering. Accordingly, under alternative 1 and 2 that will require a public offering of $15 million in order to meet the listing standard of $15 million market value of publicly held shares. The third alternative would require that the IPO be for only $5 million to meet the market value of publicly held shares but would require the company to meet the $750,000 net income in the most recent fiscal year or two out of the last three fiscal years. We assume that our company going public has no earnings; hence, must rely on Alternative 1 or 2. To rely on alternative 1 the company must have a two year operating history. Assuming that the company going public cannot meet the earnings criteria for Alternative 3 or the two year operating history of Alternative 1, that leaves only Alternate 2. Alternative 2 requires market value of listed shares of $50 million. If we assume an IPO of 1 million shares at $15 a share or an aggregate of $15 million and at the conclusion of the offering the total shares outstanding will number 3.5 million, the market value of the outstanding shares will be $52.5 million. This will depend of course on the number of shares held by insiders at the time of the public offering, which in turn will depend on the percentage of shares held by the public at the conclusion of the offering. We made arbitrary assumptions, but in real life the percentage of shares that the insiders are able to retain in relationship to those to be owned at the conclusion of the offering will depend on how receptive the market is to the offering.. All these calculations will have to be taken into account as a larger public offering may be necessary depending upon the number of shares that will be outstanding on completion of the offering We have ignored the equity requirements as assuming a successful $15 million IPO the company will meet the equity requirements of any of the three alternatives unless it has had substantial operating losses prior to the IPO. Although we made convenient assumptions, these are the factors that must be taken into account if the company expects to be listed on the Nasdaq stock market as a Capital Market security, which represents the minimum listing standards.

For a more in depth view click HERE.

The class of securities must be registered under the Exchange Act and the registration of securities is part of the listing process as described at Part 12.