"Pink sheets" is an outdated term used to describe stocks that trade over-the-counter (OTC) rather than on a major U.S. stock exchange.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 cannot or do not want to meet the requirements for listing on a major U.S. stock exchange like the New York Stock Exchange (NYSE). They could be too small, foreign, or choose not to file the necessary paperwork with the Securities and Exchange Commission (SEC) and avoid all the extra costs that entails.
The term "pink sheet" arose as price quotes for these unlisted stocks used to appear on pink-colored sheets of paper. These securities, the majority of which are viewed as highly speculative, are now subject to more regulation. They also go by a different name. The pink sheets were officially renamed Pink OTC Markets in 2008 and then OTC Markets Groupin 2011. However, the colloquial term is still widely used.
Key Takeaways
- Pink sheets is an old, outdated term used to describe stocks that trade over-the-counter (OTC).
- These companies are not listed on a major U.S. stock exchange and face less regulatory oversight, making them risky investments.
- They were renamed Pink OTC Markets in 2008 and then OTC Markets Groupin 2011, but the term is still widely used.
- OTC Markets has three regulated main marketplaces for trading OTC stocks: OTCQX, OTCQB, and the Pink market.
- The Pink market is the most speculative and loosely regulated, although the rules have tightened in recent years.
Understanding the Pink Open Market
The "Pink" marker was named for the color of the paper on which quotes of share prices were published. Today's trades are electronic, but whenever OTC stocks were mentioned in conversation, the name lived on as "pink."
The OTC market is a decentralized market where securities, not listed on major exchanges, are traded directly by a network ofdealers, who carry inventories of securities to facilitate orders. OTC securities generally trade on Alternative Trading Systems (ATSs). There are two interdealer quotation systems for trading OTC securities: Global OTC ATS, which is part of the NYSE Group, and OTC Link ATS, which is operated by OTC Markets.
OTC Market Group has three regulated main marketplaces for trading OTC stocks: OTCQX, OTCQB, and the Pink market. Each of these markets has varying levels of financial standards and regulatory oversight.The Pink market is considered the most speculative and loosely regulated tier for trading OTC stocks. It is an open market with very little in the way of financial standards.
Depending on the quantity and promptness of information they share with investors, these companies can be further divided into categories, such as current or limited.
There used to be another OTC exchange called the OTC Bulletin Board (OTCBB), but it was closed in 2021.
The Pink Market vs. OTCQX vs. OTCQB vs. Expert
Unlisted securities either qualify for OTC Market's OTCQX or OTCQB or by default trade on Pink.The OTCQX has the most stringent requirements, followed by the OTCQB, the Pink Open Market, and then finally the Expert Market. Companies in the Expert Market provide the lowest level of disclosure, with trading in this market, as a result, limited to quotation on an unsolicited basis.
Being easy to get into means companies generally don't need to jump over many hurdles to get into the Pink market. This market is made up of all sorts of companies, including foreign ones, penny stocks, and some shell companies.
Because they face very few listing requirements, Pink market constituents can be extremely volatile and risky to invest in. Securities in this category are not required to register with the SEC and keep the public informed of everything they are up to. That makes it harder for investors to determine who is legit and who might not be.
Companies in the Pink market are now required to disclose their financials.
Pink Market Regulation
The terminology around pink sheets and OTC stock trading has changed along with regulations. This part of the market has attracted a lot of controversy over the years, leading to calls for greater transparency.
A few requirements have steadily been introduced. One change was to remove so-called "dark securities" from the market entirely. Another was to restrict broker-dealers and other market makers from publishing quotations for OTC stocks that do not provide publically available information about their financials. That was part of an amendment made to Rule 15c2-11.
Companies can create their own disclosure document or fill out a form. Once completed and verified, they must post the information on the OTC Markets website for everybody to see. Not any old information can be published. The disclosures must follow the guidelines. One guideline is that financial statements, while not required to be audited, must be prepared according to U.S. GAAP or International Financial Reporting Standards (IFRS).
For regular domestic companies, the following information must be published:
- Most recent annual report with two-year comparative financial statements and any subsequent quarterly reports.
- A disclosure statement.
- An attorney letter that follows the guidelines for unaudited companies.
Requirements for international companies and banks vary slightly.
Pink Market Tiers: Current and Limited
Within the Pink market exist tiers. Companies that fully abide by the disclosure rules are dubbed "current," whereas those who do the bare minimum under Rule 15c2-11 and are perhaps late with filings are downgraded to the “Pink Limited” market tier.
Pink Limited is essentially a demotion from the Pink current status for those who don't fully abide by Rule 15c2-11. That demotion can lead to restrictions and is generally less favorable.When a company no longer meets the requirements for limited information, it will be moved to the Expert Market, where there are no public broker-dealer quotations.
Pros and Cons of the Pink Market
Pink market listings offer small companies a chance to raise capital through the sale of shares to the public and make it easy for an investor to take a stake in the market with transaction costs often low.
However, these securities are prone to fraud and price manipulation due to the lack of financial information required to list and lack of regulation. There is less public information and transparency surrounding the companies, and shares often trade infrequently, making it hard to buy or sell when the investor wants.
Pros
Pink market listings provide small companies access to capital funding.
Low share prices leave room for fast gains if the company succeeds.
Transaction costs are lower since companies do not pay expensive exchange listing fees.
Cons
Fewer regulations and requirements can lead to outdated or incorrect information given to the investor.
Pink market stocks trade thinly making it hard for an investor to buy or sell shares at will.
Pink market listings are prone to fraud.
Examples of Pink Securities
OTC Markets Grouplists the most actively traded companies on the Pink market. They include:
- Luckin Coffee Inc. (LKNCY), the Chinese coffee chain
- Tencent Holdings LTD (TCEHY), the Chinese multimedia company
- DiDi Global Inc. (DIDIY), the Chinese mobility technology platform
- SAP SE (SAPGF), the German software company
Some large, very reputable international companies trade on the Pink market. They list on their home country exchanges but may find the duplication of regulatory paperwork for a large U.S. exchange too onerous.
What Is OTC Link?
OTC Link LLC is owned by OTC Markets Group Inc., which operates OTC Link ATS, an Alternative Trading System (ATS) and electronic inter-dealer quotation system that displays quotes from broker-dealers for many over-the-counter (OTC) securities.Broker-dealers who buy and sell OTC securities can use OTC Link ATS to publish theirbidandaskquotation prices.
Where Can I Find Information on OTC Bitcoin Investing?
The SEC provides information on OTC offerings and states that digital assets and technology bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.
What Was One of the Most Successful Penny Stock Offerings?
True Religion Jeans traded under a dollar per share in the early to mid-2000s and in 2013 the company was acquired by Towerbrook Capital Partners for $32 per share, netting investors a 5,000% increase.
The Bottom Line
For many years, people used the term "Pink market" to refer to any over-the-counter (OTC) security, meaning any investment not listed and tradable on a major U.S. stock exchange. Now there is more transparency about OTC investments.
OTC Markets Group offers a range of different markets for trading OTC securities. Each of them has varying levels of financial standards and regulatory oversight. The Pink market is the one with the fewest requirements, making it fairly easy for companies to get into and risky for investors.
That said, there are legitimate companies in this market, including some of the world’s biggest. Moreover, disclosure requirements are becoming more stringent, which has helped to boost transparency and weed out some of the shadier companies.
