OTCQX

SEC Solicits Input To Improve Markets For Thinly Traded Securities

On October 17, 2019, the SEC made a statement inviting stock exchanges and market participants to submit “innovative proposals designed to improve the secondary market structure for exchange listed equity securities that trade in lower volumes, commonly referred to as ‘thinly traded securities.’” On the same day the SEC issued a staff background paper on the subject. The SEC is not asking for input on how a company can better promote its stock and gain investor awareness, but rather how the capital market system, including trading rules and regulations, can be amended or improved to benefit thinly traded securities.

The staff background paper cites many statistics on the number of thinly traded securities, which they define as trading less than 100,000 shares daily. It also refers to the U.S. Department of the Treasury report entitled “A Financial System That Creates Economic Opportunities; Capital Markets” – see HERE for a summary of the report. As a result of

November 12, 2019

SEC Proposes Amendments To 15c2-11

As anticipated, on September 26, 2019, the SEC published proposed amendments to Securities Exchange Act (“Exchange Act”) Rule 15c2-11. The purpose of the rule amendment is to enhance retail protection where there is little or no current and publicly available information about a company and as such, it is difficult for an investor or other market participant to evaluate the company and the risks involved in purchasing or selling its securities. The SEC release also includes a concept release regarding information repositories and a possible regulatory structure for such entities. The SEC believes the proposed amendments will preserve the integrity of the OTC market, and promote capital formation for issuers that provide current and publicly available information to investors.

The proposed rules entail a complete overhaul of the rule and its exceptions are complicated and, if enacted, will require the development of a new infrastructure, compliance procedures and written supervisory procedures at OTC Markets, new compliance procedures and

October 8, 2019

Rule Changes For OTCQB And OTCQX

Effective April 16, 2019, the OTC Markets has implemented rule changes for companies listed on the OTCQB. Effective May 2, 2019, OTC Markets has implemented changes to the initial and continued quotation requirements for companies listed on the OTCQX. This is the second set of amendments implemented this year. Effective January 19, 2019, OTC Markets amended its rules to require all U.S.-incorporated OTCQB and OTCQX companies to provide verified share data through a transfer agent that participates in its Transfer Agent Verified Shares Program. See my blog HERE, which includes an as of then up to date summary of the OTCQX initial and ongoing listing requirements.

OTCQX Amendments

The May 2019 OTCQX amendments: (i) add a 10% freely tradeable public float requirement; (ii) amend the SPAC qualifications to require a $20 million public float replacement the former $25 million net tangible asset requirement; (iii) adding that in the event that the company’s closing bid price falls below

June 4, 2019

Rule Changes for OTCQB and OTCQX

Effective January 19, 2019, OTC Markets will require that all U.S.-incorporated OTCQB and OTCQX companies provide verified share data through a transfer agent that participates in its Transfer Agent Verified Shares Program. The Transfer Agent Verified Shares Program allows transfer agents to provide regular updated information on the number of authorized and outstanding shares to OTC Markets via a secure electronic file transfer.

The share data is used to ensure compliance with the OTCQB and OTCQX listing requirements, by broker-dealers and clearing firms and by investors in making investment decisions, keeping track of dilution, and ensuring compliance with Sections 13 and 16 of the Securities Exchange Act (see HERE). For a complete review of the OTCQB listing standards, see HERE. For a complete review of the OTCQX listing standards, see below.

Share data provided by participating transfer agents appears alongside a “Transfer Agent Verified” logo on the OTC Markets website. The authorized and outstanding share amounts

November 20, 2018

The OTCQB Has Added Additional Quantitative Listing Standards

On May 20, 2018, the OTC Markets Group published the OTCQB Standards version 3.0 incorporating amendments to the OTCQB initial and ongoing listing standards to add further quantitative shareholder and public float requirements. The new standards went into effect on May 20, 2018 for new listing applications. Existing OTCQB traded companies have until May 20, 2020 to comply with the new requirements.

The amended listing standards now require that an applicant company:

Have at least 50 beneficial shareholders holding at least one round lot (100 shares) each;
Have a freely tradeable public float of at least 10% of the total issued and outstanding shares of the tradeable class of securities. OTC Markets may allow an exemption from this requirement for companies with a public float above 5% of total issued and outstanding and whose market value of public float is above $2 million or for a company that has a separate class of securities trading on a national exchange. Any

August 14, 2018

Proposed SPAC Rule Changes

With the growing popularity of special purpose acquisition companies (SPACs), both the Nasdaq and NYSE have proposed rule changes that would make listings easier, although on June 1, 2018, the Nasdaq withdrew its proposal. SPACs raised more money last year than any year since the financial crisis. The SEC has been delaying action on the proposed rule changes, now pushing off a decision until at least August 2018.

A company that registers securities as a blank check company and whose securities are deemed a “penny stock” must comply with Rule 419 and thus are not eligible to trade. A brief discussion of Rule 419 is below. A “penny stock” is defined in Rule 3a51-1 of the Exchange Act and like many definitions in the securities laws, is inclusive of all securities other than those that satisfy certain delineated exceptions. The most common exceptions, and those that would be applicable to penny stocks for purpose of the SPAC, include: (i)

July 24, 2018

OTC Markets Makes Several Regulatory Recommendations

On March 8, 2018, Cromwell Coulson, CEO of OTC Markets Group, made a presentation to the SEC’s Investor Advisory Committee (“IAC”) as part of a panel on “Discussion of Regulatory Approaches to Combat Retail Investor Fraud.” During the meeting, Mr. Coulson discussed the most serious market risks and presented a list of 14 OTC Market’s regulatory recommendations to improve disclosure and combat these market risks.

A review of OTC Markets website on April 24, 2018 shows 10,469 traded securities, $1.1 billion volume, 7.2 billion share volume and 174,268 trades. In his remarks to the IAC, Mr. Coulson points out that 98% of the traded dollar volume of companies on OTC Markets make current information available. Echoing the SEC’s “Main Street investor” focus, he states that “[W]e have many stocks on our markets that are completely appropriate to be part of a diversified, long term, investment portfolio, of a main street investor; we also have speculative securities that are only

May 15, 2018

Going Public Without An IPO

On April 3, 2018, Spotify made a big board splash by debuting on the NYSE without an IPO. Instead, Spotify filed a resale registration statement registering the securities already held by its existing shareholders. The process is referred to as a direct listing. As most of those shareholders had invested in Spotify in private offerings, they were rewarded with a true exit strategy and liquidity by becoming the company’s initial public float.

In order to complete the direct listing process, NYSE had to implement a rule change. NASDAQ already allows for direct listings, although it has historically been rarely used. To the contrary, a direct listing has often been used as a going public method on the OTC Markets and in the wake of Spotify, may gain in popularity on national exchanges as well.

As I will discuss below, there are some fundamental differences between the process for OTC Markets and for an exchange. In particular, when completing a direct

May 8, 2018

OTC Markets Group Establishes A Stock Promotion Policy

As OTC Markets Group continues to position itself as a respected venture trading platform, it has adopted a new stock promotion policy and best practices guidelines to improve investor transparency and address concerns over fraudulent or improper stock promotion campaigns. The stock promotion policy and best practices guidelines are designed to assist companies with responsible investor relations and to address problematic issues. Recognizing that fraudulent stock promotion is a systemic problem requiring an all-fronts effort by industry participants and regulators, the new policy focuses on transparency and disclosure of current information, and the correction of false statements or materially misleading information issued by third parties.

For several years, OTC Markets Group has been delineating companies with a skull-and-crossbones sign where they have raised concerns such as improper or misleading disclosures, spam campaigns, questionable stock promotion, investigation of fraudulent or other criminal activity, regulatory suspensions or disruptive corporate actions. While labeled with a skull and crossbones, a company that does not

December 5, 2017

OTCQB Sets New Requirements For Change Of Control Events

On June 30, 2017, the OTC Markets Group published amendments to the OTCQB standards related to the processing and reporting of change in control events. The new rules went into effect on July 31, 2017.

OTC Markets has been initiating a series of changes related to the OTCQB including amending the qualification requirements to allow quotation by companies that follow its alternative reporting standard (“Alternative Reporting Standard”) which went effective on May 18, 2017. For a review of the new qualification changes, see my blog HERE.

Highlights of Changes

The OTCQB has added a new Section 2.4 to the OTCQB Standards published by OTC Markets. The OTCQB Standards include a comprehensive summary of admission and eligibility requirements, application processes, initial and ongoing disclosure requirements, continued eligibility requirements, fees and removal processes.

Section 2 of the OTCQB Standards set forth the continued OTCQB Eligibility requirements, and includes the new Section 2.4 related to change in control events.

A “change in

September 5, 2017

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OTCQX

SEC Solicits Input To Improve Markets For Thinly Traded Securities

SEC Proposes Amendments To 15c2-11

Rule Changes for OTCQB and OTCQX

The OTCQB Has Added Additional Quantitative Listing Standards

Proposed SPAC Rule Changes

Going Public Without An IPO

OTC Markets Group Establishes A Stock Promotion Policy

OTCQB Sets New Requirements For Change Of Control Events

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