If a company has failed to meet the conditions that triggered a deficiency notice resulting in the company’s shares being delisted, the company shall understand the effects on financial reporting, issued financial instruments, and the impact on future audits.

Reporting requirements

A company that has been delisted can choose to remain registered with the SEC and be listed on the over-the-counter (OTC) markets. If the company is still registered with the SEC, it must continue to file periodic reports such as quarterly and annual statements. They must continue to adhere to filing deadlines, financial statement disclosures, and accounting standards similar to those required for listed companies. Additionally, delisted companies are required to disclose any significant business or operational changes that could materially affect the company’s finances.

Alternatively, companies that have been delisted may choose to deregister their securities with the SEC to suspend or end their reporting obligations.

Review of financial instruments

Management should review any shareholder agreements and the terms of any outstanding financial instruments as soon as a company receives a deficiency notice or delisting becomes imminent. Certain debt instruments might include covenants requiring the company to maintain a listing, and failing to do so could result in the event of default. For financial instruments measured at fair value, such as options, warrants, or derivatives, the valuation of these instruments becomes more complex, requiring specialists. Pricing models typically rely on stock prices, which can become costly and time-consuming post-delisting and deregistration.

Delisting due to deficiency notices are indicators of financial difficulties, thus indicating that the company’s assets, including intangibles, and goodwill may be impaired. This process involves reassessing the value of goodwill and other assets based on the new status and outlook. This process can takes significant time to complete and should not be an afterthought, as it can lead to missing filing deadlines.

Auditor impact

Keep your auditors informed of the company’s decision on how to move forward. Auditors may maintain a low-risk client profile that does not allow for the acceptance and continuation of companies listed on the OTC. A new auditor may need to be engaged in order to adhere to SEC registration requirements.

Please Note: This article is not an attempt to provide investment advice. The content is purely the author’s personal opinions and should not be considered advice of any kind. Investors are advised to conduct their own research or seek the advice of a registered investment professional.

This article, authored by Brian Zucker and Stephen McSweeney, was originally written for and published by Planet MicroCap Review Magazine.