With the failure and delisting of Silicon Valley Bank (SIVB) and Signature Bank Corp. (SBNY), we thought it was a good time to revisit the topic of company failures and what that means for stockholders.

But before we learn what happens when a company fails, we first must examine how companies get to a place from which to fall from grace.

Private vs. Public Company

A private company is typically owned by its founders, management, or a group of small investors. A private company can sell its shares to up to 500 investors without complying with the reporting requirements of the U.S. Securities and Exchange Commission ("SEC"), but is unable to sell stocks or bonds on the public market to raise cash to fund its growth. The main advantage of a private company is that management does not have to answer to stockholders and is not required to file financial disclosures with the ("SEC").

A public company can access financial markets, i.e., stock exchanges, by selling stock (equity) or bonds (debt) to raise capital to run the company. However, stockholders have rights, so a public company is required to file quarterly and annual earnings reports and other disclosures with the SEC.

Going Public

Not all private companies want to "go public." However, if a private company decides it wants to access the financial markets for an infusion of assets, it can go public by filing a registration statement with the SEC and issuing shares of stock to the general public.

Alternatively, a public company can "go private" by enlisting the help of a private equity firm to purchase a major portion of the company's outstanding shares. The company then requests the SEC to delist its stock from the stock exchange.

Regulations and Reporting

Once a company goes public, it will be subject to the Exchange Act reporting requirements, which include:

• annual and quarterly reports
• reporting on specific events
• beneficial ownership reports
• transaction reporting by officers, directors, and 10% shareholders

A public company must also hold annual shareholder meetings and comply with the SEC's proxy rules.  

These regulations and reporting requirements are designed to ensure the company is on solid footing and signals to shareholders that the company has met threshold financial requirements.

Listing Requirements

In addition to meeting the SEC's requirements, a company must meet certain minimum financial requirements to earn a spot trading on an exchange. In addition, it must comply with certain non-financial "initial listing standards." These can include bid price, shares outstanding, and total shareholders. By way of example, a company must have at least 1.1 million public shares outstanding worth a total of $8 million, and a share price of at least $4 per share before it can be considered for listing on the NASDAQ.

Once listed, the company must maintain certain standards, which are designed to reassure investors that the company is a credible business with a stable corporate structure. Listing requirements also ensure the exchanges maintain their reputations for supporting viable businesses.

When companies fail to meet the listing standards, they become susceptible to delisting.

Delisting

Stocks are listed and delisted on a daily basis. Delisting can happen voluntarily or involuntarily. As noted above, when a company wants to go private, engages in a merger with another company, or is interested in liquidating its assets, it can delist itself from the stock exchange.

Involuntary delisting occurs when the company does not want to go private, but is forced to delist due to its failure to meet certain rules or regulations. Each exchange has its own specific procedures for delisting that typically involves sending notice to the company and giving the company an opportunity to address the problem. NASDAQ, for example, will begin the delisting process when a company's stock falls below $1.00 for 30 consecutive days of trading. If a company is unable to cure the noted defect, it will be delisted. It can then trade on the over-the-counter bulletin board (OTCBB) or the pink sheets. However, both these trading platforms are riskier than an official exchange.

Back to the Banks

There's a lot of speculation surrounding the banks' failures. It remains to be seen whether the failures were caused by the simple negligence of management or actual malfeasance. Regardless, these are just two recent examples of companies losing their way, losing their assets, and failing shareholders and consumers. These failures are a reminder that investing in the stock market is speculative and comes with risk. Be cautious, monitor your investments, and seek advice from an attorney when necessary.