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 $0.01 at any time for five consecutive trading days, the company will be removed from OTCQX effective immediately; (iv) aligning the definition of a U.S. company such that it would more closely match a company that would not be defined as a “foreign private issuer” (FPI); (v) allowing for an exemption from the requirement to have a OTCQX sponsor for international companies moving from the OTCQB to the OTCQX; and (vi) requiring an FPI to file a semi-annual balance sheet on Form 6-K.
Minimum Public Float
Effective May 2, 2019, the OTCQX has added a requirement that a listed company must 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 exemption must be applied for in writing and will be granted at OTC Markets Group’s sole and absolute discretion. The OTCQB has had this requirement since May 2018 (see HERE). The new OTCQX requirement has a phase-in for compliance by companies already traded on the OTCQX until May 2, 2021.
SPAC Rule
OTC Markets has the discretionary authority to allow quotation to substantially capitalized special purpose acquisition entities that are analogous to SPAC’s. In addition to satisfying all of the OTCQX eligibility requirements (other than not being a blank check or shell company), a SPAC has the following additional requirements: (i) have at least $20 million in public float; (ii) have a minimum bid price of $5.00 per share as of the close of business on each of the 30 consecutive calendar days immediately preceding the company’s application for OTCQX; and (iii) be an SEC reporting company.
Removal from the OTCQX
The May 2, 2019 amendments provide that a company will be immediately removed from the OTCQX if the company’s closing bid price falls below $0.01 at any time for five consecutive trading days. This rule applies to all OTCQX companies whether U.S.-based, international or a bank.
In addition, a company may be removed from the OTCQX if, at any time, it fails to meet the eligibility and continued quotation requirements subject to a 30-day notice and opportunity to address them. Furthermore, OTC Markets Group may remove the company’s securities from trading on OTCQX immediately and at any time, without notice, if OTC Markets Group, at its sole and absolute discretion, believes the continued inclusion of the company’s securities would impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors. OTC Markets can also temporarily suspend trading on the OTCQX pending investigation or further due-diligence review.
A company may voluntarily withdraw from the OTCQX with 24 hours’ notice.
Definition of U.S. Company
Prior to the May 2019 amendment, a U.S. company was defined simply as a company that is incorporated in the U.S. The new definition is more robust and in particular, a U.S. company is now defined as a company that (i) is incorporated in the U.S., or (ii) incorporated outside of the U.S. and meets the criteria (a) not listed on a non-U.S. exchange, (b) no more than 45 percent of its securities’ trading volume takes place outside of the U.S. markets, (c) a majority of its outstanding voting securities are held directly or indirectly by U.S. residents, (d) a majority of its executive officers or directors are U.S. citizens or residents, (e) a majority of its assets are located in the U.S., and (f) its business is administered principally in the U.S.
OTCQX Sponsor
Generally, in order to apply for the OTCQX a company must have an OTC Markets approved sponsor and submit a letter of introduction from such sponsor. This firm is a qualified OTCQX sponsor. OTC Markets may exempt a company from this requirement, upon a written application, if that company is moving from a national securities exchange onto the OTCQX or has a separate class of securities trading on a national exchange. Moreover, the new amendment provides for an exemption, again upon written application, for an international company moving from the OTCQB to the OTCQX.
Foreign Private Issuer Semi-annual Reporting
The May 2019 amendment requires foreign private issuers (FPI) that file “F” reports with the SEC (20-F or 40-F) to also file a semi-annual Form 6-K with an interim balance sheet and income statement. For more information on FPI’s reporting requirements with the SEC, see HERE
OTCQB Amendments
The April 2019 OTCQB amendments: (i) modify the definition of “change of control” to include more detailed events that are considered a change of control of an entity and thus require OTC Markets notification and a new OTCQB application; (ii) add a failure to timely respond to OTC Markets’ request for information as a reason for removal from the OTCQB market; and (iii) update the rules to reflect the OTC Markets’ new address in New York City.
Change of Control Rule
Effective July 31, 2017, OTC Markets amended the OTCQB rules to set standards related to the processing and reporting of change in control events (see HERE). At that time Section 2.4 of the OTCQB rules defined a “change in control event” to mean a transaction resulting in: (i) a change in the majority ownership or effective control of a company; (ii) material changes to the company’s management team or board of directors; or (iii) in conjunction with either of the above, a material change in the nature of the company’s business operations.
Effective April 16, 2019, a “change of control” is defined as any events resulting in:
(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becoming the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the company representing fifty percent (50%) or more of the total voting power represented by the company’s then outstanding voting securities;
(ii) The consummation of the sale or disposition by the company of all or substantially all of the company’s assets;
(iii) A change in the composition of the board occurring within a two (2)-year period, as a result of which fewer than a majority of the directors are directors immediately prior to such change; or
(iv) The consummation of a merger or consolidation of the company with any other corporation, other than a merger or consolidation which would result in the voting securities of the company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the company or such surviving entity or its parent outstanding immediately after such merger or consolidation.
Under the change of control rule, a company is responsible for notifying OTC Markets upon the completion of a transaction resulting in a change of control and must submit a new OTCQB application and application fee ($2,500) within 20 calendar days. OTC Markets will review the notice and application and may request additional information. The failure to respond or fully comply with such requests may result in removal from the OTCQB. Furthermore, immediately following a change in control event, a company is required to file a new OTCQB certification and updated company profile page. Regardless of notification, OTC Markets may also make a discretionary determination that a change of control event has occurred.
Failure to Respond to OTC Markets’ Request for Information in a Timely Manner
Effective April 16, 2019, the failure to respond to an OTC Markets request for information in a timely manner has been added as a cause for removal from the OTCQB. Generally, the OTC Markets may remove a company from the OTCQB if, at any time, it fails to meet the eligibility and continued quotation requirements subject to a notice and opportunity to cure. However, removal for the failure to respond to a request for information, within the time period specified in the request, is cause for removal without a corresponding cure period.
Companies that are delinquent in filing and reporting requirements are subject to a 45-day cure period. Companies with a bid price deficiency shall have a 90-day cure period. However, in the event the company’s bid price falls below $0.001 at any time for five consecutive trading days, the company will be immediately removed from the OTCQB. OTC Markets may provide additional cure periods, but in no event may audited financial statements be older than 18 months.
Companies are granted a cure period of 30 calendar days for failure to maintain the minimum ongoing beneficial shareholder amount and public float requirements. A company may apply in writing to OTC Markets Group for an extension of the 30-day cure period by submitting a plan to cure the deficiency, which extension may be granted by OTC Markets Group in its sole and absolute discretion. All other deficiencies are subject to a 30-day cure period.
Furthermore, regardless of the specified cure period, if a company regains compliance following its removal from the OTCQB, OTC Markets may, in its sole and absolute discretion, allow it to resume trading on the OTCQB under the following circumstances: (i) the company regains compliance within 30 days of removal and has not completed or announced a corporate action during that time; (ii) the company regains compliance within 30 days of removal and has completed or announced a corporate action during that time and submits a new OTCQB certification; (iii) if the company regains compliance more than 30 days and less than six months after removal, the company must submit a new OTCQB Certification for review and approval by OTC Markets Group; and (iv) if the company regains compliance more than six months after removal, the company must submit a new OTCQB application, fee and agreement.
In addition, OTC Markets Group may remove the company’s securities from trading on OTCQB immediately and at any time, without notice, if OTC Markets Group, upon its sole and absolute discretion, believes the continued inclusion of the company’s securities would impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.
OTC Markets can also temporarily suspend trading on the OTCQB pending investigation or further due diligence review.
A company may voluntarily withdraw from the OTCQB with 24 hours’ notice.
The Author
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC 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, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with 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; 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 American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA 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 small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including sitting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
Contact Anthony L.G., PLLC. Inquiries of a technical nature are always encouraged.
Follow Anthony L.G., PLLC on Facebook, LinkedIn, YouTube, Pinterest and Twitter.
Listen to our podcast on iTunes Podcast channel.
law·cast
Noun
Lawcast is derived from the term podcast and specifically refers to a series of news segments that explain the technical aspects of corporate finance and securities law. The accepted interpretation of lawcast is most commonly used when referring to LawCast.com, the securities law network. Example: “LawCast expounds on NASDAQ listing requirements.”
Anthony L.G., PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
This information is not intended to be advertising, and Anthony L.G., PLLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.
© Anthony L.G., PLLC
