What Is an Unquoted Public Company?
An unquoted public company, also known as an unlisted public company, is a firm that has issued equity shares that are no longer traded on a stock exchange.
Key Takeaways
- An unquoted public company or an unlisted public company is a firm that has issued equity shares that are no longer traded on a stock exchange.
- Companies might be unquoted because they are too small to qualify for a stock market listing, have too few shareholders for a listing, or have been delisted.
- Shares in unquoted public companies are bought and sold in over-the-counter markets. OTC markets that trade unquoted public companies typically have less transparency than public exchanges.
Understanding Unquoted Public Companies
A public company is a company that has issued stock shares through an initial public offering (IPO) while its stock trades on a stock exchange or an over-the-counter market that is a market of private brokers and dealers. Publicly-quoted stocks might trade on exchanges like the New York Stock Exchange, which is the largest equities-based exchange in the world. However, unquoted public companies are unlisted and trade over-the-counter.
Reasons for an Unquoted Public Company
Companies might be unquoted because they are too small to qualify for a stock market listing. Major exchanges have listing requirements for stocks that include annual earnings thresholds, a minimum number of outstanding shares, and listing fees. An unquoted company might have too few shareholders for a listing, or the company’s management might want to avoid ownership disclosure requirements under certain listing exchanges. Another reason for remaining unquoted is simply cost savings. A struggling company may not want to incur the multimillion dollar expenses of listing.
Companies that have been delisted or removed from major exchanges might result in their stock becoming an unquoted public company. Delisting can be voluntary or can be due to a failure to meet the listing requirements of an exchange.
By remaining unquoted, the firm’s owners can operate the business more like a private company and avoid some of the exchange regulations. However, although unquoted public companies are less heavily regulated than listed public companies, they are more regulated than private ones. As public companies, they still have to comply with financial reporting requirements and may be subject to the same takeover codes as listed companies. Unquoted public companies may also be banned from marketing themselves to investors.
Trading and Valuation
As unlisted securities, shares in unquoted public companies are bought and sold in over-the-counter markets (OTC). In an OTC market, broker-dealers quote stock prices at which they will buy and sell a stock. However, two investors (a buyer and seller) can execute a trade on an OTC market without other investors being aware of the price at which the transaction was completed. As a result, OTC markets that trade unquoted public companies typically have less transparency than public exchanges.
Also, stocks of unquoted public companies are rarely traded, or are illiquid, leading to difficulty in pricing the stock. Unquoted public companies are valued using various financial models, including the comparables approach. The comparables approach analyzes companies or divisions that are of similar makeup and industry. By comparing market transactions such as investments or buyouts into similar companies, investors can get a sense of the value of the unquoted company. The approach also includes an analysis of the competition to estimate the equity share value of the unquoted company.
Example of an Unquoted Public Company
Let’s consider an example where executives at a popular tech giant decide to remove the company’s stock from listed exchanges and opt for becoming an unquoted public company. The company would be primarily owned by the founders and a few private investors.
As opposed to investors trading the tech giant’s stock on an exchange, the unquoted company would not be readily available to trade, and any transactions would need to be processed through the OTC market. As a result, investors wouldn’t be able to buy and sell the stock quickly or easily.
Also, valuing the company’s stock price would be a challenge since the financial information might not be available to potential investors and brokers. Any valuation would be done by analyzing proxy companies such as the competition in the tech sector. However, the company would have fewer regulatory requirements freeing up resources that were used to meet those requirements.
Related Terms: private company, stock exchange, OTC Market, listing requirements.
