IPOs | Enrichments Archives - Hexcellence Consulting

“Uplisting” is a global practice where companies, whether foreign or domestic, move their stocks from being quoted on alternative trading platforms like the OTC Markets, TSX, or ASX to major stock exchanges like the NASDAQ or NYSE. This transition is sought after by micro or small cap companies as it provides several advantages such as increased market visibility, improved credibility, and the ability to attract institutional investors.

However, company leaders should be cautious of potential pitfalls that could come with uplisting. While the excitement of surging stock prices may be enticing, it is important to note that being listed on a major exchange also exposes companies to increased scrutiny and higher regulatory requirements. Failure to meet these requirements can lead to delisting, which could have severe consequences for the company’s reputation and financial stability.

The Basics of Uplisting

Uplisting refers to the process where a company’s stock uplist from trading on an alternative stock exchange to a major one, such as moving from OTC Markets or a small international exchange to the Nasdaq or NYSE. This event is sometimes likened to a second initial public offering (“IPO”) because it opens up the company to a larger pool of potential investors and can lead to increased trading volume.

Uplisting to a higher-tier exchange is generally seen as a positive development for businesses as it provides opportunities for growth and expansion. A total of 9 companies which operate in 4 different sectors made up the 2023 Q1 class of uplisted companies.

However, the uplisting process does come with its challenges. Companies may face increased regulatory scrutiny and must meet strict listing rules set by the exchanges, such as the Nasdaq uplisting requirements and the Securities & Exchange Commission (“SEC”) guidelines. These rules often encompass criteria like minimum share price thresholds, financial performance standards, and corporate governance requirements.

The Reasons Why Companies Uplist

Companies have various motivations for uplisting their stocks to larger, official exchanges. Two real-life examples illustrate these reasons.

▲ Fubotv Inc. (NYSE: FUBO)

1. Fubotv Inc.
At the beginning of 2020, FuboTV’s shares were trading at $9.58. However, during the COVID-19 outbreak and the subsequent market crash, the company’s stock price dropped. As the market started to rebound, FuboTV’s stock gradually recovered, reaching $22 per share in May. To further enhance the company’s visibility and capitalize on the momentum of the broader market, FuboTV decided to uplist from the OTC to the NYSE in October 2020. The uplisting contributed to a significant increase in the stock price, aligning with FuboTV’s growth strategy and ambitions to differentiate itself from competitors and improve liquidity.

▲ Hertz Global Holdings Inc. (NASDAQ: HTZ)

2. Hertz Global Holdings Inc.
In the summer of 2021, Hertz officially emerged from bankruptcy, benefiting from increased demand for rental vehicles during the summer holidays and the return to domestic travel. The company’s stock on the OTC market surged nearly 600% in a year as investors hoped for an uplisting. Responding to its rapid success and to perpetuate further growth, Hertz uplisted its stock to the Nasdaq by summer 2021. By doing so, Hertz aimed to access a larger pool of investors, as it had outgrown the limitations of the OTC markets.

Risk Considerations for Uplisting Companies

Not all public companies are able to successfully uplist, and some may be forced to move to a different exchange involuntarily if they fail to meet financial or regulatory requirements. For major exchanges like the NYSE and Nasdaq, there is a minimum stock price that companies must maintain, and a business may face delisting if any of its stocks fall below $1 for 30 consecutive days. An example of this is Long Blockchain Corp., which had its shares delisted by US regulators after failing to file financial reports for an extended period.

The uplisting process can present challenges for businesses, including meeting new requirements such as minimum share prices, financial reporting deadlines, robust reporting practices, and governance standards. Failure to comply with these obligations can lead to delisting or legal disputes. Companies may also face pressure to consistently deliver positive results, meet growth targets, and satisfy the demands of investors. Like other public companies, those undergoing uplisting also face management liability, new exposures, and heightened public scrutiny.

To mitigate these risks, OTC Markets-listed companies considering uplisting should have directors and officers (D&O) insurance. This insurance is crucial as directors and officers can be sued by shareholders, competitors, or investors, putting their personal assets at risk. D&O insurance protects the company’s leadership from personal financial loss and lawsuits alleging wrongful acts or mismanagement of corporate assets.

Uplisting from OTC Markets to major exchanges like Nasdaq can offer numerous benefits, but the process can be complex and challenging. While some companies manage to uplist without external assistance, it can be costly and time-consuming. Thorough research and careful planning are essential before making the move to ensure the company is adequately prepared and aware of the coverage needed to navigate potential risks successfully.

Our Previous Successful Uplisting Case

Addentax Group Corp. (NASDAQ: ATXG)

We have been receiving numerous inquiries from individuals interested in understanding the process of listing on NASDAQ exchange and obtaining a listing code, as well as the associated costs and significance of such a move.

The NASDAQ main board is known for its stringent regulatory oversight by the U.S. Securities and Exchange Commission (“SEC”), the exchange itself, and the Public Company Accounting Oversight Board (“PCAOB”). Among the critical stages of listing is the financial audit, which goes beyond mere financials to encompass rigorous due diligence on legal and operational aspects. Listing in the U.S. requires adherence to International Financial Reporting Standards (“IFRS”), setting it apart from the accounting practices of many smaller businesses.

Obtaining a NASDAQ listing code may not be overly complex, but navigating the SEC and NASDAQ inquiry process can be intricate. The listing journey involves transforming a company’s equity assets into tradable securities, and as such, it requires rigorous due diligence to safeguard investor interests and build market trust. A successful listing opens up new opportunities for trading, financing, and expansion, potentially leading to increased valuation and the possibility of mergers and acquisitions.

However, it is essential to clarify that acquiring a NASDAQ listing code does not equate to a successful listing; rather, it is just one step in the overall process. True success is achieved when a company successfully navigates SEC and NASDAQ inquiries, gains listing approval, and commences trading.

Key Steps in the NASDAQ Listing Process

To achieve legal compliance, stable operations, and fulfil listing requirements, it is imperative for the company, especially newer ones, to undertake a comprehensive financial “clean-up” process. This involves standardizing financial reporting and engaging a team of seasoned professionals, including U.S. lawyers, Cayman lawyers, U.S. auditors, brokers, and broker lawyers, to meticulously draft the prospectus.

The prospectus should encompass essential aspects, starting with a well-crafted introduction, followed by a comprehensive business overview, including a detailed explanation of the business model. The financial section must include audited financial data for at least two periods, accompanied by audit reports.

Apart from financials, the prospectus should also encompass a thorough explanation of the company’s structure and legal considerations, including compliance with both Malaysian and U.S. laws, ensuring transparent and detailed disclosures throughout. Professional guidance firms play a crucial role in coordinating various intermediaries to successfully submit the initial version of the prospectus to the SEC.

Companies have the option to choose between confidential and public submission methods. Confidential submission restricts access to the disclosed information solely to the SEC, while public submission makes the information accessible to anyone with internet access via the SEC’s official website.

However, it is essential to emphasize that the prospectus should adhere strictly to all regulatory requirements. Mere disclosure of information does not guarantee listing; the company must be prepared to undergo rigorous SEC and NASDAQ inquiries, secure listing approval, and successfully complete the initial public offering (IPO) financing for a successful listing.

Potential Pitfalls with Non-Standard Listing Approaches

Opting for a NASDAQ code before focusing on standard prospectus disclosure may cause delays and increased communication, time, and cost in subsequent steps.
Even with public transparency, insufficient information disclosure and poor response to SEC inquiries can hinder the listing process, prolonging time and increasing costs.
Regardless of where the listing takes place, drafting the prospectus with great care is crucial because listing is a significant undertaking.
The SEC requires timely and comprehensive responses to inquiries. Failure to provide complete information may lead to multiple queries, potentially hindering the listing process.

Hence, it is crucial for companies seeking to list on NASDAQ to ensure a high level of standardization when submitting their initial documents to the SEC. Opting for public transparency should not compromise the meticulousness and regulatory compliance of the disclosed information, as adherence to standardization forms the bedrock of a successful listing process!

Indeed, the entire process of going public requires careful planning and seeking assistance from professional teams to ensure adherence to standard procedures The significance of well-structured prospectuses and transparent disclosure cannot be overstated, and our experience with multiple successful cases empowers us to facilitate a smoother listing journey. Let us always bear in mind that going public is a serious endeavour, and it is only through rigorous processes and thorough evaluations that a company can achieve success in listing on NASDAQ.

Learn More about Nasdaq Listing:

We have received inquiry from clients regarding the method and procedure to deposit their physical share certificates. Numerous OTC Market listed companies and their shareholders approach us and share their experience dealing with broker-dealers, most of them are unable to deposit their stock.

Based on our experience, if a broker-dealers reject the physical share certificate deposit, it is often due to one or all three major factors:

The company is not current reporting i.e., not being fully transparent
The shareholder failed to provide information and documentation that tracks the physical share certificate back to their original issuance by the company
The physical share certificate is not free traded a.k.a restricted share or legended

To elaborate further below:

1. The Company Is Not Current Reporting

OTC Markets organized listed companies into three tiers, namely OTCPINK, OTCQB, and OTCQX, based on the quality of disclosure they provide. All companies subject to periodic disclosure or reporting requirements for broker-dealers and clearing firms to price and assess the risk before deposit the physical share certificate.

Failure to file periodic disclosure may result in “Caveat Emptor” or “STOP” designations that display a public interest concern (promotion, regulatory investigation, suspension, etc.). Due to the regulations by FINRA and SEC, broker-dealers are reluctant to deposit a company’s physical share certificate with “Caveat Emptor” or “STOP” status.

The company must clear the status by maintaining a current reporting status to have their physical share certificate deposit-able.

2. The Shareholder Fails To Provide Information & Documentation

Broker-dealers and clearing firms are responsible for performing KYC (Know Your Customer) and Anti-Money Laundering (AML) compliance checks before they can help to deposit the physical share certificate.

This is to trace “how” the company’s shares were obtained and know “who” the investor is looking to complete the transaction to combat illegal distributions of securities.

Surprisingly, many clients that came to us are unable to provide the information and documents required.

3. The physical share certificate is not free traded

In most cases, the physical share certificate is not free traded. This means that the shares acquired from the listed company or an affiliate of the listed company in an unregistered transaction such as private placement or private share purchase.

Unregistered shares will have a restrictive legend stating that the shares cannot be resold without an effective registration statement or qualifying for an exemption from registration (Rule 144).

If a holder meets the requirements of Rule 144, they can work with the listed company’s transfer agent to remove the restrictive legend.

However, some investors acquired the shares from the companies in significant amounts in the private market at significantly discounted prices. Broker-dealers or clearing firm hardly accept these transactions unless with a solid reason.

Should you face difficulties and problems to deposit your physical share certificate, feel free to contact us !

US Stock Market Listing Seen As Growth Opportunity For ASEAN Firms

In February 2023, Bob McCooey, the Vice Chairman of Nasdaq, has expressed that ASEAN companies have the potential to flourish in 2023 by listing on the US stock market. He highlights that the region’s companies have seen substantial growth and have now achieved the necessary size and scale for US exchanges.

Challenges Encountered By ASEAN Corporations In Listing On The US Capital Market

However, there are challenges to listing on the US capital market, as outlined below:

1. Compliance With US Regulations

One of the biggest difficulties that ASEAN companies face when trying to get listed on the US stock market is that US authorities require them to follow strict rules and regulations. These include adhering to accounting standards that may differ from their home country, providing detailed financial disclosures, and following various corporate governance regulations.

2. Time And Cost

The process of getting listed on US stock market can be complicated and time-consuming that often requires the assistance of legal and financial experts. Small companies with limited resources may face even greater challenges in meeting the compliance of US stock exchanges and regulators. In addition, the listing process can take several months or years, which may distract management from their daily operations, resulting in added expenses to hire professional help.

3. Time Zone Differences And Communication Barriers With US Service Provider

Time zone differences between ASEAN and the US may cause communication delays, slow response times, and limited availability of support from US service providers, which may ultimately cause listing process delays. Furthermore, language and cultural differences between ASEAN and the US could create communication barriers, increasing the complexity of the listing process. Ultimately, misunderstandings and errors may occur due to ineffective communication.

4. Limited Brand Recognition

It can be challenging for ASEAN-based corporations in attracting US investors as they may not be familiar with them. Furthermore, there may be a lack of understanding about the ASEAN region and its business practices, leading to mistrust and reluctance to invest. Therefore, additional marketing and advertising efforts may be required to build brand awareness and establish a positive reputation among US investors.

US Stock Markets Welcome ASEAN Companies For Listings

Despite the difficulties that may come with listing on the US capital market, US exchanges have been actively promoting themselves as destinations for ASEAN companies seeking to go public, as outlined below:

1. Streamlining The IPO Process Using Technology

US stock exchanges are leveraging technology to simplify the IPO process for foreign companies, with NYSE Connect being a prime example. This digital platform provides a range of resources and tools to simplify the IPO process. The platform offers market data, educational materials, and access to service providers, as well as a virtual roadshow tool that facilitates remote meetings with investors, making the process more efficient and cost-effective.

2. Cross-listings Partnership

Nasdaq has established an office in Singapore and collaborated with the Singapore Exchange (SGX) to promote cross-listings and attract ASEAN firms. This partnership allowing businesses to simultaneously list on both platforms, resulting in a larger investor base. In addition, ASEAN companies can also enjoy numerous benefits from this collaboration, such as improved access to capital, greater visibility, and increased liquidity.

3. Offering Regulatory Relief

To attract more foreign companies to list on US stock exchanges, the US government has offered some regulatory relief. As a part of this relief, some reporting requirements that are obligatory for US companies have been waived. This action simplify and reduce the cost of foreign companies’ entry to US capital markets, and therefore allow them to expand their global presence.

4. Provide Listing Programs

US exchanges have introduced programs to attract international listings, including ASEAN companies. The NYSE International Listings program provides dedicated support and guidance to companies navigating the listing process, while the Nasdaq International Designation program offers access to market intelligence and trading data. These initiatives can help companies overcome regulatory challenges and increase their visibility and investor base in the US.

Nasdaq Rolls Out Welcome Mat For Malaysian Companies

In October 2022, McCooey intends to encourage more Malaysian companies to list on Nasdaq, recognizing their potential to outperform in its extensive and diverse market. He emphasized that the combined value of all firms listed on American markets is more than 12 times that of the Hong Kong Stock Exchange, the biggest market in the area. This implies that Nasdaq has higher company valuations than other stock exchanges, which could potentially offer promising growth opportunities for Malaysian companies that aim to be listed on Nasdaq.

Highlight To Addentax Group Corporation (NASDAQ : ATXG)

In August 2022, our client, Addentax Group Corporation (NASDAQ: ATXG) has achieved a successful up-listing from OTCQB to Nasdaq Capital Market, with $25 million IPO raised. The company secured another $15 million in funding through a private issuance of senior with specific accredited investors within four months of its up-listing.

About Addentax Group Corporation (NASDAQ : ATXG)

Addentax Group Corp., founded in 2014 and based in Shenzhen, is a consulting firm that specializes in managing international supply chains for the textile and garment industry. It operates in two key areas: Garment Manufacturing, catering to wholesalers within China, and Logistics Services, offering delivery and courier services in specific provinces.

How Our Team Help Addentax Group During IPO Listing Process

1. Appointing US-based Auditor & Independent Director

Before Addentax Group was approved for listing on the US stock exchange, they were required to comply with certain regulations, including appointing an independent director based in the US and a US-based auditor with more experience and a larger team size to prevent mistrust issues. Our team helped the client by identifying a suitable audit firm and finding two trustworthy individuals who could serve as qualified independent directors, ensuring that they met all US regulatory requirements. This helped Addentax Group achieve compliance and gain approval for listing on the US stock exchange.

2. Providing Detailed Listing Timeline

The management of Addentax Group became distracted by the listing process, which prevented them from focusing on their daily operations and expanding their business. Besides, they overspent by engaging multiple service providers at the wrong timing. Our team provided a solution by creating a detailed listing timeline for the company. We advised them to engage suitable service providers at each specific timeline to ensure that they fulfill their responsibilities and avoid unnecessary costs. This approach allowed the company to manage their time and resources more effectively during the listing process.

3. Seamless Support Across Time Zones

Addentax Group, being an Asian company, faced various communication barriers such as language differences, diverse accounting standards, and limited knowledge of the listing process. Furthermore, the different time zones added complexity to the process, which had slowed down the listing process. Our team’s extensive experience in dealing with various service providers allowed us to overcome the communication barriers and streamline the listing process. Our expertise and professionalism assisted ATXG in promptly addressing important matters even under different time zones. Our efforts in this regard helped ATXG to avoid any potential regulatory issues, and ensured that all necessary disclosures were made in a timely and accurate manner.

4. Investor Relations Establishment

As Asian companies often struggle with limited brand recognition and reputation among US and global investors, it can be challenging for investors to identify the brand and IPO news of Addentax Group. We recommended that ATXG establish a suitable investor relations team and assisted them with matters related to IPO roadshows. This helped to increase the visibility and appeal of the company to potential investors, ultimately leading to increased investment in their business. Our efforts enabled ATXG to overcome the challenges of limited brand recognition and reputation, and successfully navigate the IPO process.

Addentax Group Corporation’s successful up-listing to the Nasdaq Capital Market and subsequent fundraising is a testament to their potential as a company, and our team’s ability to provide comprehensive solutions for clients facing common obstacles during the IPO listing process. By ensuring compliance with US regulations, managing time and cost, overcoming communication barriers, and enhancing brand recognition, we were able to support Addentax Group Corporation in achieving a successful IPO. We look forward to continuing to assist our clients in navigating the complex world of capital market regulations and IPO listing requirements.

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