In December 2019 the OTC Markets updated its Pink Disclosure Guidelines and Attorney Letter Agreement and Guidelines. The Pink disclosure guidelines and attorney letter apply to companies that elect to report directly to OTC Markets pursuant to its Alternative Reporting Standard. Furthermore, in January 2020 OTC Markets amended the OTCQB standards related to the disclosure of convertible debt and notification procedures for companies undergoing a change in control. The OTCQB also updated its criteria for determining independence of directors, and added additional transfer agent requirements for Canadian Companies.
The OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink Open Market. The OTC Pink Open Market, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. Companies trading on the OTCQX, OTCQB and OTC Pink Current Information tiers of OTC Markets have the option of reporting directly to OTC Markets under its Alternative Reporting Standards. The Alternative Reporting Standards are somewhat more robust for the OTCQB and OTCQX in that they require audited financial statements prepared in accordance with U.S. GAAP and audited by a PCAOB qualified auditor in the same format as would be included in SEC registration statements and reports.
As an aside, companies that report to the SEC under Regulation A and foreign companies that qualify for the SEC reporting exemption under Exchange Act Rule 12g3-2(b) may also qualify for the OTCQX, OTCQB and OTC Pink Current Information tiers of OTC Markets if they otherwise meet the listing qualifications. For more information on OTCQB and OTCQX listing requirements, see HERE and HERE.
OTCQB Amendments
Effective February 22, 2020, the OTCQB Standards, Version 8, will go into effect. Some of the rule changes were previously adopted and others have been added to or modified. In particular, the new Version 8 includes:
Debt Securities, Including Promissory and Convertible Notes – Companies will be required to provide prompt disclosure of the issuance of any promissory notes, convertible notes, convertible debentures, or any other debt instruments that may be converted into a class of the company’s equity securities. Such disclosure must include copies of the securities purchase agreement(s) or similar agreement(s) setting forth the terms of such arrangement, any related promissory notes or similar evidence of indebtedness, and any irrevocable transfer agent instructions. Companies must make such disclosure either through the SEC’s EDGAR system or the OTC Disclosure & News Service, as applicable. Effective December 12, 2019, OTC Markets made a similar rule change for OTCQX listed companies.
OTCQB Certifications – Companies will be required to list and describe any outstanding promissory notes, convertible notes, convertible debentures, or any other debt instruments that may be converted into a class of the issuer’s equity securities when completing OTCQB certifications. OTC Market has been vocal about concerns with convertible instruments and, in particular, the potential for extreme dilution to existing shareholders and stock promotion campaigns by certain convertible investors. For more on OTC Markets stock promotion guidelines and policies, see HERE. As I have written about many times, there are quality investors and others that are not quality in the micro-cap space. The use of convertible instruments as a method to invest in public companies is perfectly legal and acceptable. However, like any other aspect of the securities marketplace, it can be abused. The requirement to disclose these investments, and the investment documents, is a smart change for OTC Markets, adding a level of transparency to the marketplace as a whole.
Change of Control – The new rule release reiterates the requirements related to a change of control. In particular, 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). Subsequently, effective April 16, 2019, OTC Markets updated the definition of a “change of control” to include 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.
The newest rule release clarifies that the failure to submit the new application and documentation within the 20 days is grounds for the suspension or removal from the OTCQB at OTC Markets’ sole and absolute discretion.
Independent Directors – The new rules amend the definition of an independent director to conform to the earlier amendment in the OTCQX rules. The definition of an independent director has been updated 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.”
Canadian Companies – Canadian companies must retain a transfer agent that participates in the Transfer Agent Verified Shares Program as of April 1, 2020 (rule change was adopted December 12, 2019).
Pink Disclosure Guidelines Amendments
OTC Markets updated the Pink Disclosure Guidelines in anticipation of changes to the SEC’s Rule 15c2-11 (see HERE). The Pink Disclosure Guidelines are designed to track the information requirements in Rule 15c2-11. The amended rules have updated the Pink Disclosure Guidelines to require:
(i) Corporate History – the name of the company and predecessors since inception (previously a company only had to provide prior names for the last five years);
(ii) Debt Securities, Including Promissory and Convertible Notes – a company must now disclose all outstanding convertible, promissory or similar debt instruments as of the period end date of the report (previously only had to disclose such obligations issued in the previous two fiscal years);
(iii) Financial Statements – must now include a statement of changes in shareholders’ equity. In addition, all financial statements for a particular period must be uploaded in one document.
(iv) Officers, Directors, and Control Persons – the rules have been amended to clarify that all 5%-or-greater shareholders of any class of outstanding securities must be disclosed; and
(v) Verified Profile – a company must verify the company profile through OTCIQ to qualify for Pink Current or Limited Information.
Attorney letters are required for a company to qualify for OTC Pink Current Information if that company does not submit audited financial statements prepared in accordance with U.S. GAAP and audited by a PCAOB qualified auditor. In order to submit an attorney letter on behalf of a company, the attorney must submit an Attorney Letter Agreement to OTC Markets and be approved by OTC Markets. The rules related to an attorney letter agreement have been updated to allow for submittal of the agreement through Docusign.
Furthermore, the attorney letter agreement has updated required disclosures that must be included in a company’s attorney letter related to regulatory proceedings. In particular, an attorney letter submitted on behalf of a company must state that the attorney is permitted to practice before the SEC (i.e., has not been prohibited from such practice) and whether the attorney is currently or has in the past five years been the subject of any investigation, hearing or proceeding by the SEC, CFTC, FINRA or any federal, state or foreign regulatory agency, including a description of any investigation, hearing or proceeding.
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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