• Delisting from a stock exchange can occur for a number of reasons. Common reasons for delisting include when a company buys out another company, the company decides to switch exchanges on which it trades its stock or the exchange forces the delisting. When a stock exchange forces a company to delist, it is a good indicator the company is in serious financial trouble. After delisting, the stock begins trading in the pink sheets.
  
  

Risk

• When a stock begins trading in the pink sheets after delisting from a stock exchange, it no longer has to follow the financial reporting and accountability requirements of an exchange. This lack of transparency into corporate finances causes investors to look at the stock as increasingly speculative and risky. The investment risk for trading in the pink sheets due to a lack of available financial information about the company induces many investors to dump the stock completely, further driving down the price of the stock.
  
  

Regulation

• The main job of the U.S. Securities and Exchange Commission is to regulate companies that publicly trade securities. However, the SEC only regulates companies that have at least $10 million in assets and over 500 shareholders. The problem with delisting from a stock exchange and trading in the pink sheets is that these companies rarely fall under SEC regulation because they do not meet the asset or shareholder requirements.
  
  

Fraud

• Not having any type of formal regulation or oversight by a governing body like the SEC can lead to fraud. It is not a legal requirement for these companies to file public financial statements making it difficult for investors to hold the companies financially responsible when it comes to unethical behavior by executives or employees. Additionally, another problem of trading in the pink sheets is unscrupulous brokers who make false claims to unwitting investors regarding the potential return or profitability of low-priced pink sheets stocks.