Legal Definitions - pink sheet

A "pink sheet" refers to a daily publication that provides essential trading information for stocks that are bought and sold "over-the-counter" (OTC) rather than on major stock exchanges like the New York Stock Exchange or NASDAQ. Historically printed on pink paper, this publication lists the names of companies, their current stock prices, and the market makers (brokers who facilitate trading) for these often smaller, less liquid, or more speculative securities. It serves as a vital resource for investors and brokers seeking to trade stocks that do not meet the listing requirements of larger exchanges.

Here are some examples to illustrate the concept of a pink sheet:

• Scenario: An individual investor, Maria, is interested in a small, innovative biotechnology startup that has not yet grown large enough to be listed on a major stock exchange. She believes the company has strong potential but needs to find out if its shares are publicly traded and at what price.

  Application: Maria would consult the "pink sheets" to search for the biotechnology company. The publication would provide her with details such as the company's stock symbol, the latest bid and ask prices, and the names of market makers who are actively trading its shares. This information allows Maria to understand the current market valuation and identify brokers through whom she could potentially buy or sell the stock, even though it's not on a traditional exchange.

• Scenario: A stockbroker, John, has a client who inherited shares in a small, regional manufacturing company. This company has a limited number of publicly available shares but does not meet the financial or reporting requirements to be listed on a major exchange. The client wants to sell their shares.

  Application: John would refer to the "pink sheets" to locate the manufacturing company's stock. The pink sheets would list the market makers who specialize in trading that particular stock, along with their current quoted prices. This enables John to contact the relevant market makers to facilitate the sale of his client's shares, providing a mechanism for liquidity for securities not traded on formal exchanges.

• Scenario: A private equity firm is considering investing in a small, emerging technology company that has already issued some shares to early investors and employees. While the company is not yet ready for an Initial Public Offering (IPO) on a major exchange, the firm wants to gauge the existing public market's valuation of its shares.

  Application: The private equity firm would review the "pink sheets" to see if the technology company's shares are being quoted. If so, the pink sheets would display any recent trading activity, quoted prices, and the market makers involved. This provides the firm with an independent, publicly available reference point for the company's valuation, helping them in their due diligence process even before the company reaches a major exchange listing.