A reverse stock split is a FINRA corporate action which, once approved, reduces the number of shares and causes a temporary proportionate increase in the per share price.
In theory, a reverse stock split is supposed to have no effect on the value of a shareholder’s stock in the Company. However, following a reverse stock split, many Issuers do not maintain their post-reverse share price, since eventually the market will determine where it lands.
A reverse stock split would follow these steps:
- Shareholders vote to reverse split the stock in order to increase share price in the hopes of attracting institutional investors who might otherwise shy away from the Company based on its sub penny stock price. SEC filers will use the Form 14 at this stage.
- Board of Directors approves a reverse stock split and authorizes management to file the appropriate documents with the State and FINRA.
- CEO files a Certificate of Change/Amendment (in Nevada, for instance) which details the amount of the reverse split and the proposed effective date, which is usually at least ten days hence.
- Issuer counsel files for a new CUSIP.
- Issuer counsel files for a new Corporate Action with FINRA and provides all of the supporting shareholder and Board documentation to show approval.
- Company announces the proposed reverse split in a news release, 8-K, etc.
- FINRA reviews and approves the reverse stock split if all of the necessary corporate formalities have been followed.
- DTC requires a legal opinion from outside securities counsel on the new, post-reverse-split shares.
OTC Markets companies considering a reverse stock split, name change, forward split or other FINRA corporate action can contact securities lawyer Matt Stout at (410) 429-7076 or via firstname.lastname@example.org.