“Pink sheets” is an outdated term used to describe stocks that trade over-the-counter (OTC) rather than on a major U.S. stock exchange. These companies may be too small, foreign, or choose not to meet the requirements for listing on major exchanges like the New York Stock Exchange (NYSE). They can avoid the costs and regulations associated with these larger exchanges.
The term “pink sheet” originated from the pink-colored paper on which price quotes for these unlisted stocks were published. Despite evolving towards more regulation and being renamed Pink OTC Markets in 2008 and later OTC Markets Group in 2011, the term is still widely used.
Key Takeaways
- Pink sheets refer to stocks trading over-the-counter (OTC) rather than on major U.S. stock exchanges.
- Companies here face less regulatory oversight, making them higher-risk investments.
- Known today as the Pink market, part of OTC Markets Group.
- OTC Markets Group consists of three main marketplaces for trading OTC stocks: OTCQX, OTCQB, and the Pink market, with the Pink market being the most speculative.
Understanding the Pink Open Market
Originally named for the pink paper on which quotes were printed, today these OTC stocks are traded electronically. The OTC market is a decentralized network where securities not listed on major exchanges are directly traded by dealers, facilitating orders through their securities inventories.
OTC Markets Group has three key marketplaces: OTCQX, OTCQB, and the Pink market. Each has varying levels of financial standards and regulatory oversight, with the Pink market being the least regulated and most speculative.
The Pink Market vs. OTCQX vs. OTCQB vs. Expert
Unlisted securities either qualify for OTCQX or OTCQB or fall to the Pink Open Market by default. OTCQX has the strictest requirements followed by OTCQB, the Pink Open Market, and the Expert Market, which offers the lowest disclosure, with trading limited to unsolicited quotations.
This low barrier to entry means a wide array of companies, including foreign entities and penny stocks, find their way into the Pink market, presenting high risk and volatility for investors.
Pink Market Regulation
Regulations have evolved to boost transparency. One notable change was removing non-disclosed “dark securities” from the market. The amendment to Rule 15c2-11 restricts market makers from publishing quotes for OTC stocks that lack public financial information. Companies must now disclose financial information, sometimes via a designated form, prepared according to U.S. GAAP or IFRS.
Pink Market Tiers: Current and Limited
The Pink market has categories based on disclosure rules compliance. “Current” companies follow disclosure rules, while “Pink Limited” companies do the bare minimum and risk downgrading. A failure to meet minimum requirements leads to relegation to the Expert Market, which features no public broker-dealer quotations.
Pros and Cons of the Pink Market
Pros:
- Access to capital funding for small companies.
- Potential for high returns if successful.
- Lower transaction costs.
Cons:
- Limited regulation can yield outdated information.
- Thin trading creates liquidity issues.
- Susceptible to fraud and manipulation.
Examples of Pink Securities
Some notable examples of companies on the Pink market include:
- Luckin Coffee Inc. (LKNCY): Chinese coffee chain.
- Tencent Holdings LTD (TCEHY): Multimedia conglomerate.
- DiDi Global Inc. (DIDIY): Mobility platform.
- SAP SE (SAPGF): Software corporation.
Many reputable international companies choose this market for cost efficiency while maintaining primary listings on their home exchanges.
What Is OTC Link?
Owned by OTC Markets Group Inc., OTC Link LLC operates Alternative Trading System (ATS) called OTC Link ATS, an electronic inter-dealer quotation platform displaying broker-dealers’ quotes for a variety of OTC securities.
Investing Wisdom: Notable Successes and Advice
A known instance of a successful penny stock is True Religion Jeans, trading under a dollar per share in 2000s and acquired in 2013 at $32 per share, delivering a 5,000% return to early investors.
Conclusion
The term “Pink market” has shifted from referring broadly to OTC securities to highlight a tier within the OTC Markets Group. Despite risks, it includes legitimate businesses including some of the largest global companies. Increasing disclosure requirements continue to promote transparency, offering better protection to investors.
Related Terms: Alternative Trading System, GAAP, OTC Market Group, NYSE, SEC.
References
- OTC Markets. “Pink Sheets LLC Announces Name Change to Pink OTC Markets Inc”.
- OTC Markets. “2010 Annual Report – Issuer’s Equity Securities: Common Stock”, Page 3.
- OTC Markets. “About”.
- The U.S. Securities and Exchange Commission. “Over-The-Counter (OTC) Securities”.
- OTC Markets. “15c2-11 Resource Center”.
- Financial Industry Regulatory Authority. “FINRA Announces Closure of the OTC Bulletin Board”.
- OTC Markets. “An Investor’s Guide: Common Issues With Company Disclosure”.
- OTC Markets. “Pink Current and Limited Information Disclosure Requirements”.
- OTC Markets. “OTC Markets: Rule 15c2-11 Amendments FAQs”.
- OTC Market. “Current Market”.
- U.S. Securities and Exchange Commission. “OTC Link LLC”.
- Timothy Sykes. “The 10 Most Successful Penny Stocks In History”.
