OTCQX Listing and Quotation Eligibility and Requirements for U.S. Companies

On February 13, 2014, OTC Markets Group, Inc., published its OTCQX Rules For U.S. Companies version 6.5.  This blog summarizes those rules.  A complete copy of the rules are available on the OTC Link website, otcmarkets.com.

Background

The www.otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and OTC Pink.

The OTCQX has two tiers of quotation for U.S. companies: (i) OTCQX U.S. Premier (also eligible to quote on a national exchange); and (ii) OTCQX U.S. issuers on the OTCQX must meet specified eligibility requirements, which interestingly do not include a requirement as to being subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) for OTCQX U.S.  Moreover, OTC Markets has the discretionary authority to allow quotation to substantially capitalized acquisition entities that are analogous to SPAC’s.

Issuers on the OTCQB must be fully reporting and current in their SEC reporting obligations, meet minimum price standards, file annual reports and pay annual fees, but do not undergo additional quality review.

Issuers on the pinksheets are not required to be reporting with the SEC.  However, such issuers are then further qualified based on the level of voluntary information provided to the www.otcmarkets.com.  Issuers with no information are denoted by a skull and crossbones, issuers with limited financial and business information are classified as “limited information,” and issuers which provide information as set forth in the OTC Markets Pink Alternative Reporting Standard are denoted with a “current information” symbol.

OTCQX Rules for U.S. Companies – Requirements for Admission

A.   To be eligible to be quoted on the OTCQX U.S., companies must:

• Have $2 million in total assets as of the most recent annual or quarter end;
• As of the most recent fiscal year end have at least one of the following: (i) $2 million in revenues; (ii) $1 million in net tangible assets; (iii) $500,000 in net income; or (iv) $5 million in market value of publicly traded securities;
• Meet one of the following penny stock exemptions under Rule 3a51-1 of the Exchange Act: (i) have a bid price of $5 or more; or (ii) have net tangible assets of $2 million if the if the Company has been in continuous operation for at least three years, or $5,000,000 if the Company has been in continuous operation for less than three years; or (iii) have average revenue of at least $6,000,000 for the last three years;
• Not be a blank check or shell company as defined by the Securities Act of 1933 (“Securities Act”);
• Not be in bankruptcy or reorganization proceedings;
• Be in good standing in its state of incorporation and in each state in which it conducts business;
• Have a minimum of 50 beneficial shareholders owning at least one round lot (100 shares) each;
• Be quoted by a market maker on the OTC Link;
• Have a minimum bid price of $0.10 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX. If (i) there has been no prior public market for the Company’s securities in the U.S. and (ii) FINRA has approved a Form 211, then the Company may apply to OTC Markets for an exemption from the minimum bid price requirements, which exemption is at the sole discretion of OTC Markets. In the event that the Company is a Seasoned Public Issuer (i.e., has been in operations and quoted on either OTC Link, the OTCBB or an exchange for at least one year) that completed a reverse stock split within 6 months prior to applying for admission to OTCQX U.S., the Company must have a minimum bid price of $0.10 per share for its common stock as of the close of business on each of the 5 consecutive trading days immediately preceding the Company’s application for OTCQX, after the reverse split;
• Have GAAP compliant (i) audited balance sheets as of the end of each of the two most recent fiscal years, or as of a date within 135 days if the Company has been in existence for less than two fiscal years, and audited statements of income, cash flows and changes in stockholders’ equity for each of the fiscal years immediately preceding the date of each such audited balance sheet (or such shorter period as the Company has been in existence), and must include all going concern disclosures including, plans for mitigation; and GAAP compliant (ii) unaudited interim financial reports, including a balance sheet as of the end of the Company’s most recent fiscal quarter, and income statements, statements of changes in stockholders’ equity and statements of cash flows for the interim period up to the date of such balance sheet and the comparable period of the preceding fiscal year; and
• Be included in a Recognized Securities Manual or be subject to the reporting requirements of the Exchange Act.

B.  To be eligible to be quoted on the OTCQX U.S. Premier, companies must:

• Satisfy all of the eligibility requirements for OTCQX U.S. set forth above;
• Have (i) At least (a) 500,000 publicly held shares; and (b) $1 million in market value of publicly held shares; and (ii) at least (a) $500,000 in net income (in the latest fiscal year or in two of the last three fiscal years); or (b) $2.5 million in stockholders’ equity; or (c) $35 million in market value of listed securities;
• Have a minimum of 100 beneficial shareholders owning at least one round lot (100 shares) each;
• Have a minimum bid price of $1.00 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX. If (i) there has been no prior public market for the Company’s securities in the U.S. and (ii) FINRA has approved a Form 211 and (iii) the bid price is equal to or greater than $1.00, then the Company may apply to OTC Markets for an exemption from the 30-day minimum bid price requirements, which exemption is at the sole discretion of OTC Markets. In the event that the Company is a Seasoned Public Issuer (i.e., has been in operations and quoted on either OTC Link, the OTCBB or an exchange for at least one year) that completed a reverse stock split within 6 months prior to applying for admission to OTCQX U.S., the Company must have a minimum bid price of $1.00 per share for its common stock as of the close of business on each of the 5 consecutive trading days immediately preceding the Company’s application for OTCQX, after the reverse split;
• Conduct annual shareholders’ meetings and submit annual financial reports to its shareholders at least 15 calendar days prior to such meetings.

C.   To be eligible to be quoted as an OTCQX U.S. Acquisition Company, companies must:

•  Satisfy all of the eligibility requirements for OTCQX U.S. set forth above;
• Have $25 million in net tangible assets as of the most recent annual or quarterly year end;
• Have $10 million in market value of publicly traded securities as of the most recent fiscal year end;
• Have a minimum bid price of $5.00 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX; and
• Be subject to the reporting requirements of the Exchange Act.

Designated Advisors for Disclosure

All U.S. companies that are quoted on the OTCQX must have either an Attorney Designated Advisor for Disclosure (“DAD”) or an Investment Bank DAD.  All DAD’s must be approved by OTCQX after submitting an application.  OTC Markets publishes a list of pre-approved DADs.  A Company may appoint a new DAD at any time, provided that the Company retains an approved DAD at all times.

A DAD’s primary role is to provide advice and guidance to a Company in meeting its OTCQX obligations.  The OTCQX puts a great deal of onus on the DAD to be responsible for the Company in which it sponsors, emphasizing the negative impact on the DAD’s reputation for sponsoring Companies that are not of acceptable quality.  In addition to providing advice and counsel to a Company, a DAD is required to conduct investigations to confirm disclosures.  A DAD must submit a Letter of Introduction and subsequent annual letters confirming their duties and the attesting to the disclosures made by the Company.

Application to the OTCQX for U.S. Companies

All U.S. companies that are quoted on the OTCQX must submit an application and pay an application fee.  The application consists of (i) the contractual agreement with OTCQX for quotation; (ii) personal information for each executive officer, director and beneficial owner of 10% or more of the securities, except for companies already traded on a foreign exchange or moving from a recognized U.S. exchange; (iii) designation of the DAD/PAL or application for same; (iv) appointment form for the DAD/PAL; (v) a letter from the Company’s independent auditor affirming their role and qualifications; and (vi) a digital Company logo.

Applications are reviewed and subject to a comment process.  An application may be denied if the Company’s quotation would “likely impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.”

Initial Disclosure Obligations

A Company must post its initial disclosure documents on the OTC Markets website within 90 days of submission of its application to quote on the OTCQX and such posting must be confirmed with a notice by the Company DAD/PAL.  The filing of the initial disclosure is a precondition to acceptance of an application for quotation.  Initial disclosure documents include: (i) SEC reports if the Company is subject to the Exchange Act reporting requirements; and (ii) current information in accordance with OTC Markets disclosure guidelines including financial statements.

A Company must supplement and update any changes to the initial disclosure within 30 days of acceptance of its application for quotation.

Requirements for Ongoing Qualification for Quotation on the OTCQX

The following is a summary of the ongoing responsibilities for U.S. OTCQX quoted securities:

• Compliance with Rules – OTCQX quoted companies must maintain compliance with the OTCQX rules including disclosure requirements.  The Company’s DAD/PAL is responsible for reporting their/its potential conflicts of interest;
• Compliance with Laws – OTCQX quoted companies must maintain compliance with state and federal securities laws and must cooperate with any securities regulators, including self-regulatory organizations;
• Blue Sky Manual Exemption – Companies must either properly qualify for a blue sky manual exemption or be subject to and current in its Exchange Act reporting requirements;
• Retention and Advice of DAD – Companies must have a DAD at all times and are required to seek the advice of such DAD as to their OTCQX obligations;
• Duty to Inform DAD – As part of its duty to seek advice from its DAD, a Company has an obligation to provide disclosure and information to the DAD, including “complete access to information regarding the Company, including confidential and propriety information” and access to personnel;
• Notification of Resignation or Dismissal of DAD – A Company must immediately notify OTC Markets in writing of the resignation or dismissal of the DAD for any reason;
• Payment of Fees – a Company must pay its annual fees to OTC Markets;
• Sales of Company Securities by Affiliates – Prior to transacting in the Company’s securities through a broker-dealer, each officer, director or other affiliate of the Company shall make its status as an affiliate of the Company known to the broker-dealer;
• Distribution and Publication of Proxy Statements – An OTCQX U.S. Premier company shall solicit proxies for all meetings of shareholders. Companies not subject to the Exchange Act reporting requirements must publish, on the OTC Markets website, copies of all proxies, proxy statements and all other material mailed by the Company to its shareholders within 15 days of such mailing;
• Redemption Requirements – All redemptions must be either by lot or pro rata and require 15 days’ notice;
• Changes in Form or Nature of Securities – All changes in form, nature or rights associated with securities quoted on the OTCQX require 20 days advance notice to OTC Markets;
• Transfer Agent – Companies are required to use the services of a registered transfer agent and authorize such transfer agent to share information with OTC Markets;
• Accounting Methods – Any change in accounting methods requires advance notice of such change and its impact, to OTC Markets;
• Change in Auditors – All changes in auditor requires prompt notification and a letter from such auditor analogous to Form 8-K requirements;
• Responding to OTC Markets Group Requests – OTCQX quoted companies are required to respond to OTC Markets comments and amend filings as necessary in response thereto;
• Ongoing Disclosure Obligations – (i) Companies subject to the Exchange Act reporting requirements must remain current in such reports; (ii) Companies not subject to the Exchange Act reporting requirements must remain current with the annual, quarterly and current reporting requirements of OTC Markets, including posting annual audited financial statements prepared in accordance with GAAP and audited by a PCAOB auditor; (iii) file a notification of late filing when necessary; (iv) quickly release disclosure of material news and recent developments, whether positive or negative, through a press release on the OTC Markets website; (v) an OTCQX Company should also act promptly to dispel unfounded rumors which result in unusual market activity or price variations;
• General requirements regarding integrity – OTCQX quoted Companies are expected to act professionally and uphold the OTC Markets standards for “high quality”; and to release news and reports that are prepared factually and accurately with neither excessive puffery or conservatism; companies must not report or act in a way that could be misleading; and not inundate with non-material releases; must not make misleading premature announcements;
• Maintain Company Updated Profile – OTCQX quoted companies are required to maintain updated accurate information on its profile page and to verify same every six months;
• DAD Letter – Within 120 days of each fiscal year end and after the posting of the Company’s annual report, every Company must submit an annual DAD letter;
• To remain eligible for trading on the OTCQX U.S. tier, the Company’s common stock must have a minimum bid price of $0.10 per share as of the close of business for at least one of every thirty consecutive calendar days.  In the event that the minimum bid price for the Company’s common stock falls below $0.10 per share at the close of business for thirty consecutive calendar days, a grace period of 180 calendar days to regain compliance shall begin, during which the minimum bid price for the Company’s common stock at the close of business must be $0.10 for ten consecutive trading days;
• To remain eligible for trading on the OTCQX U.S. Premier tier, the Company’s common stock must have a minimum bid price of $1.00 per share as of the close of business for at least one of every thirty consecutive calendar days. In the event that the minimum bid price for the Company’s common stock falls below $1.00 per share at the close of business for thirty consecutive calendar days, a grace period of 180 calendar days to regain compliance shall begin, during which the minimum bid price for the Company’s common stock at the close of business must be $1.00 for ten consecutive trading days. In the event that the Company’s common stock does not regain compliance during the grace period, the Company shall have a fast-track option to have its securities traded on the OTCQX U.S. tier.

Fees

Upon application for quotation on the OTCQX, Companies must pay an initial non-refundable fee of $5,000.  In addition, Companies must pay an annual non-refundable fee of $15,000.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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