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How an Uplisting Works

The potential uplisting of Biostar has created some misconceptions about how a stock makes its way to a major exchange.

Questions I've received about the timing of the potential uplisting of Biostar Pharmaceuticals (BSPM) , one of my two favorite potential uplisting plays, makes it clear to me that many people hold a number of misconceptions about uplistings.

So let me post a few facts in response to specific questions people have had. Some of the questions have related to


specifically and some to uplistings in general.

The complete rules for listing on the Nasdaq can be found



Fact No. 1

. Uplisting isn't automatic. After a company meets all of the requirements for an uplisting, including financial requirements, corporate governance requirements and share price, it is still up to


or Amex to give final approval. Sometimes, as in the case of




), this happens almost immediately. Other times, as in the case of


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, it can take a number of weeks. The conclusions are that timing on uplistings is uncertain, timing depends entirely on Nasdaq approval, and it pays to be patient. Because I missed out on the massive Sinocoking run and a few others, I typically try to get in early and then be patient rather than waiting until it is too late.

Fact No. 2

. The required share price to uplist to Nasdaq is $4. The price is determined by the bid price, not the closing price, of the stock. In April 2009, Nasdaq lowered its share price threshold to $4 from $5. This was presumably due to the impact that the financial crisis had on share prices, but could also be seen as a move to take some business from the Amex exchange. Both the Amex and the Nasdaq charge substantial listing fees to companies for listing on their exchanges and both are eager to maximize revenue. Amex has a lower required share price of $2 to $3 for an uplisting.

The requirements for an Amex listing can be found


The reason that the bid is used instead of the closing price is that the bid more accurately reflects demand for the stock and is hard to manipulate, unlike the closing price, which can be influenced by a single trade. However, if the closing share price of a company is right at $4, then chances are that its closing bid was below $4. So looking at share-price histories alone can be misleading.

Fact No. 3

. It doesn't take 90 trading days with a bid above $4 to uplist to Nasdaq.

The 90-day misconception comes from the fact that some companies that are not yet profitable and that lack an adequate operating history can still list on Nasdaq, but only if their bid price is above $4 for 90 consecutive trading days and if they meet other criteria.

This doesn't apply to profitable companies such as Biostar. Again, a good example of a much faster uplist is Sinocoking, which took only seven consecutive trading days after the time it traded at $3.50 on Feb 9 to the time it announced its uplisting on Feb. 19. However, as always, Nasdaq reserves the right to take longer than this based on its own criteria.

A separate misconception is 30 days. The 30-day misconception comes from people getting confused with the delisting requirements of Nasdaq. The 30-day trigger is the delisting trigger, not the uplisting trigger. When a company trades below $1, such as

Sirius XM

(SIRI) - Get Sirius XM Holdings, Inc. Report

recently did, it gets a letter from Nasdaq that says something like this:

"On September 15, 2009, Staff notified the Company that the bid price of its common stock had closed at less than $1.00 per share over the previous 30 consecutive business days, and, as a result, did not comply with Listing Rule 5450(a)(1) (the "Rule"). In accordance with Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until March 15, 2010, to regain compliance with the Rule."

(Note: Given that SIRI has a market cap of nearly $4 billion, it is unlikely that it will be delisted and more likely that Sirius will do a reverse split and remain listed).

Fact No. 4

. Reverse splits are a sign of good things for companies on the way up, but a sign of bad things for companies on the way down.

In order to meet the minimum share price requirements for Nasdaq, many companies will conduct a reverse split. This is perfectly acceptable to the exchange, and the post-split share price will be evaluated accordingly.

Using a reverse split to raise the share price and obtain an uplisting is a very positive sign for a company and is much different than companies that use a reverse split to prevent being delisted. Once again, the confusion relates to delisting as opposed to uplisting. Many people who don't focus on uplistings only encounter reverse splits in the context of companies that are trying to stave off a delisting, so in many people's eyes a reverse split is a sign of a troubled company.

For the relative few of us focused on uplistings, a reverse split is typically the first catalyst that attracts attention to the potential uplisting and is considered a very good event.

As for the timing on the uplisting for Biostar, that is solely up to Nasdaq. However, according to the company's chief financial officer, the company already meets all of the corporate governance requirements and has already applied to Nasdaq for an uplisting.

On Tuesday, Biostar's last aftermarket price was $4.35 and the closing bid was $4.30.

At the time of publication, Pearson was long Biostar.

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.