Pink Market: Listings for Stocks That Trade Over-the-Counter

"Pink sheets" is an outdated term for stocks that trade over-the-counter (OTC) rather than on a public stock exchange in the U.S. These companies either cannot meet the requirements for listing on an exchange like the New York Stock Exchange (NYSE) or prefer to trade over the counter.

Some pink sheet companies are too small to qualify for an exchange while others prefer to avoid the costs and complications of the required filings with the Securities and Exchange Commission (SEC). Some foreign companies list on their home exchanges but opt to sell OTC in the U.S.

Most pink sheet stocks are highly speculative, although their notorious lack of regulation has been corrected to some extent in recent years. They also go by different names. Pink sheets were officially renamed Pink OTC Markets in 2008 and then OTC Markets Group in 2011. The colloquial term is still widely used and is still referenced in one of the three OTC markets, which is called the Pink market.

Understanding the Pink Open Market

The pink market got its name from the color of the paper on which quotes of share prices were originally published. Today's trades are electronic, but OTC stocks to this day are often referred to as pink.

The OTC market is a decentralized market where securities not listed on major exchanges are traded directly by a network of dealers, who carry inventories of securities to facilitate orders. OTC securities generally trade on alternative trading systems (ATSs), although many are also available through online brokerages.

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.

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.

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 very risky to invest in. Securities in this category are not required to register with the SEC and therefore are not required to disclose their full financial details. That makes it harder for investors to determine which companies are legit and which aren't.

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 removed so-called "dark securities", which did not publish the prices of buy and sell orders. Another restricted 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 documents or fill out a form. Once completed and verified, they must post the information on the OTC Markets website.

Financial statements, while not required to be audited, must be prepared according to U.S. GAAP or International Financial Reporting Standards (IFRS).

For most 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

There are tiers within the Pink market. 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, as transaction costs are often low.

However, these securities are prone to fraud and price manipulation due to the lack of required financial disclosure. Shares often trade infrequently, making it hard to buy or sell when the investor wants.

Examples of Pink Stocks

OTC Markets Group lists the most actively traded companies on the Pink market. As of mid-June 2024 they include:

• Greyscale Ethereum Trust (ETHE), a fund based on the price of Ethereum cryptocurrency
  
• Roche Holding Ltd (RHHBY), the Swiss pharmaceutical company
• Nestle S.A. (NSRGY), the Swiss food conglomerate
• Tencent Holding Ltd (TCEHY), the Chinese technology company

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 traded on a major U.S. stock exchange. These days there is more transparency about most OTC offerings.

OTC Markets Group offers a range of markets for trading OTC securities, each with its own level 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 foreign companies. Moreover, disclosure requirements are becoming more stringent, which has helped to boost transparency and weed out some of the shadier operators.