Effective December 12, 2019, the OTC Markets has implemented changes to the initial and continued quotation requirements for companies listed on the OTCQX. The amendments (i) allow certain qualifying companies to use their regular securities counsel for a letter of introduction in place of an OTCQX sponsor; (ii) establish procedures for a company effecting a change of control; (iii) enhance corporate governance requirements, refine the definition of an “independent director,” and provide for a phase in for compliance with these new provisions; (iv) require Canadian companies to utilize a transfer agent participating in the Transfer Agent Verified Shares Program by April 1, 2020, and (iv) require U.S. companies to disclose all convertible debt. The last rule changes were implemented in May, 2019 – see HERE.
Amended Rules for U.S. Companies
OTC Sponsor
An SEC reporting company with a class of securities that has been publicly traded for at least one year may submit a written application to be exempted from the requirement to select an OTCQX sponsor. A company granted this exemption must submit a letter of introduction from their outside securities counsel in lieu of such a letter from an OTC Sponsor. Prior to adopting this rule amendment, only U.S. companies moving from a national exchange or with a separate class of securities trading on a national exchange qualified for the exemption.
A letter of introduction by outside securities counsel must state: (i) the securities counsel is licensed to practice law and in good standing in the U.S. and is not subject to any disciplinary actions within the last five years; (ii) the attorney is not currently subject to any sanctions resulting from disciplinary actions; (iii) the attorney is engaged by the company as its primary disclosure counsel and has assisted in the preparation of its most recent disclosure; (iv) other areas of engagement; (v) when engaged; (vi) that the attorney has reviewed information and made inquiries to satisfy itself that the company is in compliance with Exchange Act 12g3-2(b); (vii) the company is operating and is not a shell company; (viii) company is in good standing in each jurisdiction it conducts business; (ix) all of the company’s outstanding securities have been authorized and issued in accordance with the federal and state securities laws and are fully paid and non-assessable; (x) whether the company has been delisted, removed or suspended from a Qualifying Foreign Stock Exchange; and (xi) if the company is SEC or Regulation A reporting whether it is current in its reporting obligations.
Where outside securities counsel is used as a sponsor, the duties related to a sponsor and for the company to provide information to and seek input from such sponsor extend to the outside securities counsel.
Clarification of Penny Stock Exemption Eligibility Criteria
One of the qualifications to trade on the OTCQX is that a company must be exempt from the penny stock definition under Rule 3a51-1 of the Exchange Act by meeting one of the following criteria: (i) have a bid price of $5 or more as of the close of business on each of the 30 consecutive calendar days immediately preceding the company’s application and, as of the most recent fiscal year-end, have at least one of the following: (a) net income of $500,000; (b) net tangible assets of $1,000,000; (c) revenues of $2,000,000; or (d) total assets of $5,000,000; or (ii) have net tangible assets of $2 million 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, which qualification can be satisfied as of the end of a fiscal period or as a result of an interim capital raise; or (iii) have average revenue of at least $6,000,000 for the last three years. The amended rules clarify that the financial thresholds necessary to qualify for exemption must be based on audited financial reported dated within 15 months prior to the company’s application to the OTCQX.
Convertible Debt Disclosure
All OTCQX companies must now disclose all of their convertible debt arrangements and provide copies of all securities purchase or similar agreements, promissory notes, irrevocable transfer agent instruction letters and related deal documents. Generally, an SEC-reporting company files these documents as exhibits to a Form 8-K when completing the transaction, or with the subsequent Form 10-Q following the deal closure.
Change of Control
An OTCQX company must now promptly notify OTC Markets of a change of control of the company. Within 20 calendar days of the completion of the change of control, the company must submit a new OTCQX application and associated application fee. The OTCQB enacted a similar rule back in July 2017. In addition, OTC Markets may independently determine that a change of control has taken place and, in such case, will notify the company who must then complete the new application. The failure to submit the new application and fee is grounds for removal from the OTCQX.
Like the OTCQB rules, the OTCQX defines a change of control 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.
Independent Director
The new rules have amended the definition of an independent director to mean: “a Person other than an executive officer or employee of the Company or any other Person having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following Persons shall not be considered independent: (A) a director who is, or at any time during the past three years was, employed by the Company; (B) a director who accepted or has a Family Member who accepted any compensation from the Company in excess of $120,000 during any fiscal year within the three years preceding the determination of independence, other than compensation for board or board committee service; compensation paid to a Family Member who is an employee (other than an executive officer) of the Company; or benefits under a tax-qualified retirement plan, or non-discretionary compensation; or (C) A director who is the Family Member of a Person who is, or at any time during the past three years was, employed by the Company as an executive officer.” (for Nasdaq independence standards, see HERE).
Amended Rules for International Companies
OTC Sponsor
A company with a class of securities that has been publicly traded on a Qualified Foreign Exchange, or that has been SEC reporting for at least one year, may submit a written application to be exempted from the requirement to select an OTCQX sponsor. A company granted this exemption must submit a letter of introduction from their outside securities counsel in lieu of such a letter from an OTC sponsor. Prior to adopting this rule amendment, only international companies moving from the OTCQB to the OTCQX qualified for the exemption. Where outside securities counsel is used as a sponsor, the duties related to a sponsor and for the company to provide information to and seek input from such sponsor extend to the outside securities counsel.
The outside securities counsel sponsor letter is in substantially the same form as required for U.S. companies.
Change of Control
The same provisions as discussed above for U.S. companies also apply for international companies.
Transfer Agent Verified Shares Program
The new rules require Canadian companies to utilize a transfer agent participating in the Transfer Agent Verified Shares Program by April 1, 2020.
Clarification of Penny Stock Exemption Eligibility Criteria
The same provisions as discussed above for U.S. companies also apply for international companies.
Corporate Governance Standards
International companies that are not listed on a Qualified Foreign Stock Exchange must meet additional corporate governance standards including: (i) have at least two independent directors on its board of directors (companies listed prior to the rule change will have until January 1, 2021 to comply); (ii) have an audit committee comprised of a majority of independent directors; (iii) conduct an annual shareholders’ meeting and make annual financial reports available to its shareholders at least 15 calendar days prior to the meeting. Trusts, funds and similar entities may apply for an exemption to these new corporate governance requirements.
A company that fails to meet the requirements must notify OTC Markets immediately upon learning of the event or circumstance that cause the non-compliance and must regain compliance by the earlier of its next annual meeting or one year from the date of the non-compliance.
Application Package
The amended rules add the requirement that a company provide a current shareholder list from its transfer agent as part of its application package. In addition, OTC Markets will now require a background check authorization form as part of its application process.
Initial Disclosure
The amended rules have increased the period for which a company, that is not SEC reporting or Regulation A reporting, must post information on the OTC Website from 24 months to three years, as part of its initial disclosure obligations. All information must be posted in English.
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.
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