Defunct Company, Stock Continues to Trade

You may have noticed ongoing trading in the stock of a company that is no longer in business. Often, information about trades and quotations in these stocks are widely available. Companies that are no longer operating may still have outstanding registered stock. A stock can be traded until the company has the shares deregistered or the stock's registration is revoked. The SEC does not have a rule that prohibits the trading of stock once a company becomes defunct.

Trading stocks v. publishing quotations in stocks. Rule 15c2-11 of the Securities Exchange Act of 1934 prohibits broker-dealers from publishing a quotation for a security (an offer to buy or sell) unless they have reviewed specified information about the company. Specifically, the Rule regulates when broker-dealers may publish a quotation in a stock in quotation mediums, such as the Over-the-Counter Bulletin Board and the Pink Sheets. The Rule does not, however, address when a stock can be traded between two broker-dealers. As a result, you may see that trading has occurred in a stock even though the company is no longer in business and quotations in the stock are not actively published.

Under an exception to Rule 15c2-11, a broker-dealer may publish quotations for a stock without reviewing information about the company if there are regular and continuous quotations published for a specified period of time by broker-dealers that did have the appropriate information. Although a company has become defunct, its stock may still be quoted under this exception-often called the "piggy-back" exception-to the Rule. In addition, if a company becomes defunct after quotations in the stock are published for the specified time period, the broker-dealer is not obligated to acquire current information on the company.

The SEC may invoke a trading suspension. In some cases, the SEC will suspend trading (or the Nasdaq or NYSE may halt trading) in the stock of an issuer that is a defunct company if, for example, the SEC believes that public information about the issuer is materially false or misleading or the stock price appears to be manipulated. During a trading suspension, no broker-dealer may trade the security. When the trading suspension terminates, a broker-dealer wishing to publish quotations must comply with Rule 15c2-11, which may be impossible to do in the case of a defunct company.

The SEC may revoke the registration of stocks. In some circumstances, the SEC may revoke the registration of a defunct company's stock pursuant to Section 12(j) of the Exchange Act. Under Section 12(j), the SEC is authorized to revoke the registration of a security if it fails to comply with the federal securities laws. No broker-dealer may execute any trades in stocks whose registration has been revoked pursuant to Section 12(j).

A defunct company may not have a transfer agent. In some situations, the defunct company does not have a transfer agent. Although the federal securities laws do not require a company to have a transfer agent, if a company does not have a transfer agent, investors are unable to receive or transfer their stock certificates. Sometimes the SEC has considered a company's lack of a transfer agent as a factor in whether to revoke the registration of stock pursuant to Section 12(j) for the protection of investors.