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The 211 Rules And Shell Companies

In September 2020, the SEC adopted a complete overhaul of the 15c2-11 rules, the new rules of which went into effect on September 28, 2021.  From a very high level, the new 211 rules: (i) require that information about the company and the security be current and publicly available in order to initiate or continue to quote a security; (ii) limit certain exceptions to the rule including the piggyback exception where a company’s information becomes unavailable to the public or is no longer current; (iii) limit certain exceptions to the rule including the piggyback exception where a company becomes and remains a shell company for a period of 18 months; (iv) reduce regulatory burdens to quote securities that may be less susceptible to potential fraud and manipulation; (v) allow OTC Markets itself to evaluate and confirm eligibility to rely on the rule; and (vi) streamline the rule and eliminate obsolete provisions.  For an in-depth discussion on the 15c2-11 rules, see HERE and HERE.

Importantly, the 211 rules contain special provisions regarding shell companies.  The rule allows for broker-dealers to rely on the piggyback exception to publish quotations for shell companies for a period of 18 months following the initial priced quotation on OTC Markets beginning as of the effective date of the amended rules – i.e., beginning on September 28, 2021.  In essence, a shell company is granted 18 months to complete a reverse merger with an operating business, or in the alternative, to organically begin operations itself.  The 18-month period begins when a company falls into shell status.  For companies that were a shell company on September 28, 2021, and remain a shell today, the time limit to retain 211 eligibility will expire on March 28, 2023 – one month from now.

There is a level of panic sweeping OTC Markets shell companies at the moment, thus prompting this blog, and hopefully a calming of the panic.

What is a Shell Company?

Rule 15c2-11 adopted a definition of shell company that tracks Securities Act Rules 405 and 144 and Exchange Act Rule 12b-2, but also added a “reasonable basis” qualifier to help broker-dealers and OTC Markets make determinations.  In particular, a shell company is defined as any issuer, other than a business combination related shell company as defined in Rule 405 or an asset backed issuer, that has: (i) no or nominal operations; and (ii) either no or nominal assets or assets consisting solely of cash or cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.  A company will not be considered a shell simply because it is a start-up or has limited operating history.  In order to have a reasonable basis for its determination, a broker-dealer or OTC Markets can review public filings, financial statements, business descriptions, etc.

In anticipation of this first 18-month deadline, OTC Markets has included FAQs for shell companies on its 15c2-11 resource center page.  OTC Markets has also designated a surveillance team to review for shell status.  In general, OTC markets will determine a company is a shell when the company has identified itself as such in its SEC periodic reports or reports filed with OTC Markets via the alternative disclosure system.

This is different than the ongoing “shell risk” designation that a company may periodically see on its quote page.  As part of its ongoing review of companies, OTC Markets may designate a company with a shell risk flag, where it believes, in its sole and absolute discretion that a company displays characteristics common to shell companies.  The designation does not indicate that a company has labeled itself as a shell (that would instead be a firm shell flag not a “shell risk”).  The shell risk review includes evaluating asset composition, operational expenditures, and income related metrics.  When a company receives a shell risk flag, it has the opportunity to provide evidence, including material changes in financial condition in publicly reported financial statements, to OTC Markets to request the removal of the flag.

What will Happen to a Shell Company That Has Remained a Shell for 18 Months?

A company that is and remains a shell company for 18 months will lose Rule 15c2-11 piggyback eligibility.  A shell company will not lose the unsolicited quotation exception.  If the company also does not have current information as required under Rule 15c2-11, it will be moved to the expert market (“Expert Market”) on OTC Markets.  I’ve included a refresher on the current information requirements at the end of this blog as well as additional information on the Expert Market.

Piggyback Exception

Rule 15c2-11 governs when a broker-dealer can initiate or continue to quote a security.  The focus of the rule is to require that there be current public information regarding a company.  Under the rules, a broker-dealer must conduct a review of such current public information and have a reasonable basis under the circumstances to believe that the information is accurate in all material respects and from a reliable source.  The amended 211 rules provide certain exceptions from when a broker-dealer must conduct that information review, including allowing a broker dealer to rely on an information review that is completed by OTC Markets itself or by another broker-dealer. This exception is referred to as the piggyback exception.

To rely on the piggyback exception, the rule requires: (i) that information be current and publicly available; (ii) that there be at least a one-way priced quotation (either bid or ask) from another broker-dealer; (iii) that no more than 4 days in succession can elapse without a quotation; (iv) that there has not been an SEC trading suspension under Section 12(k) of the Exchange Act that was terminated during the prior 60 calendar days; (v) that the company not have been a shell company for 18 months.  The rule also provides a conditional 15-day grace period to continue quotations when current information is no longer available.  In other words, a company that has been a shell company for 18 months will no longer be eligible for a broker-dealer to initiate or continue to quote a security under the piggyback exception.

Unsolicited Quotation Exception

Although the piggyback exception is the most widely used exception for broker-dealers to quote a security, and the only exception to allow them to make markets (i.e., proprietary quotations) in a security, it is not the only exception that allows a quotation.  Another exception is the unsolicited quotation exception. A shell company will not lose the ability to be quoted in reliance on the unsolicited quote exception.

Unlike the Expert Market, the public will still be able to view the company’s quotation on its OTC Markets quotation page after losing piggyback eligibility.  On that company’s page, the following message will appear:

Warning!  This security is eligible for Unsolicited Quotes Only

This stock is not eligible for proprietary broker-dealer quotations. All quotes in this stock reflect unsolicited customer orders. Unsolicited-Only stocks have a higher risk of wider spreads, increased volatility, and price dislocations. Investors may have difficulty selling this stock. An initial review by a broker-dealer under SEC Rule 15c2-11 is required for brokers to publish competing quotes and provide continuous market making.

Under the rules, a broker-dealer may publish a quotation of a security, without conducting a current public information review and submitting a Form 211 to FINRA, where the quotations represent unsolicited customer orders.  When presented with a request to publish an unsolicited quote, a broker-dealer would need to determine whether there is current publicly available information.  If no current available information exists, the unsolicited quotation exception is not available for company insiders or affiliates including officers, directors and 10%-or-greater shareholders.  Also, in practice, that company would likely only be quoted on the Expert Market.

Where there is current information, that broker-dealer will be able to quote the security when it is presented with an unsolicited customer order.  Although I don’t believe that a shell company should have active trading prior to announcing a pending business combination transaction or other change in shell status, the fact is that the majority of OTC Markets trading is conducted on an unsolicited customer order basis.  One of my operating company clients lost piggyback eligibility over a month ago and traded 38 million shares the day before writing this blog and has a 30-day average trading of 21 million shares.

Certainly, there are some market makers that actively trade OTC Markets on a proprietary basis, but the majority of customer trading is on an unsolicited basis.  When was the last time your broker at Merrill Lynch called and said, “You should buy OTC: ABCD”?  The answer is never.  This is because the vast majority of OTC Markets securities are penny stocks or otherwise considered low-priced, high-risk securities.

Penny stocks are governed by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) which prohibits broker-dealers from effecting transactions in penny stocks unless they comply with certain stringent rules, including providing a Schedule 15G risk disclosure document.  Since enactment of the Penny Stock Act, broker-dealers do not recommend or solicit transactions in penny stocks.  For more on penny stocks, their definition and exceptions, the broker dealer requirements, etc., see HERE.  Add to that Regulation Best Interest passed in 2019, and again, your broker is not calling and recommending a trade in an OTC Markets security.

When Will Shell Company Status Be Determined?

The initial shell company status review will be made on March 28, 2023, the day following the end of the first 18 month period since enactment of the amended 15c2-11 rules.  Shell company status will continue thereafter on a rolling basis for any company that has become or does become a shell and remains so for a period of 18 months.

OTC Markets has already begun reaching out to shell companies to allow such companies to provide information supporting that the company is not a shell company, such as where a company is development stage but pre-revenue.  However, any company that has received notice from OTC Markets that it is being considered a shell company for a loss of piggyback eligibility on March 28, and that believes it is not a shell company for purposes of the rule, should be putting together a thorough discussion and submitting it to OTC Markets now.  Waiting until March 27 or 28 will not work, as OTC Markets will not have time to review the submission.

What Can a Shell Company do Today – and What it Should Not Do

Shell companies have a few options.  First, they can do nothing different than they are doing right now.  That is, they can continue to look for an appropriate business combination target and when they close such a transaction, go through the process to retain piggyback eligibility (see below).  Also, to be clear, announcing a transaction, or even signing definitive documents, does not make a difference.  A transaction must be closed for a determination of a change in shell status.  If a shell company does have a pending transaction, speeding up the closing process to be sure to close prior to the deadline, and to give OTC Markets enough lead time to see the closing Super 8-K or supplemental filing through the alternative reporting system is also an option.  For more on reverse mergers involving shell companies, see HERE.

A shell company that was contemplating beginning organic operations (i.e., not through a business combination) can do so immediately, but any such operations must be bona fide and information must be provided to OTC Markets, with enough time to review prior to the March 28 deadline.

A shell company should not begin operations or close a business transaction which is intended to be a temporary placeholder, to avoid shell status, without fully disclosing that is exactly what they are doing.  The failure to fully disclose that an operating business is a temporary placeholder to avoid shell status, and that a company is really continuing to look for business combination targets, is securities fraud.  Many companies are considering temporary business transactions to avoid shell status, but I caution, in the strongest way possible, that any that do so, must fully and completely disclose their intentions.

I am reminded of the shell creation craze when newly public companies were being offered for sale shortly after filing an S-1 and receiving a ticker symbol.  The failure to disclose in the S-1 and subsequent periodic reports, that the business being brought public was a placeholder and that the true intention was to continue to seek a new buyer and business for the newly created public company, was securities fraud and resulted in a slew of enforcement actions, and multiple prison sentences for the participants(for more on this, see HERE.

Even though OTC Markets securities that suddenly have a temporary change in shell status would not be immediately filing an S-1, any untrue statement would violate Exchange Act Rule 10n-5.  Rule 10b-5 makes it unlawful for any person, in connection with the purchase or sale of any security, to: (i) employ any device, scheme, or artifice to defraud; (ii) make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (iii) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

What Can a Company Do to Re-Obtain Piggyback Eligibility?

If a shell company loses piggyback eligibility, it will need a new 15c2-11 review to be completed by either a broker-dealer or OTC Markets under the initial quotation standards, when it ceases to be a shell company.  See my blog links in the opening paragraph of this blog for information on the process.

OTC Markets will only conduct a 211 current information review for a company that is applying to the OTCQB or OTCQX tier of trading on OTC Markets.  See here for more on OTCQB and OTCQX: HERE.  Although there are many decent companies that trade on the Pink Open Market, in today’s regulatory environment, including the need to comply with ever increasing disclosure requirements, a target company should really only consider going public via reverse merger with a public shell company, if it meets the requirements for trading on the OTCQB or OTCQX tiers of OTC Markets, including obtaining audited financial statements.

Refresher on Current Information Requirements

The core principle behind Rule 15c2-11 is that adequate current information be available when a security enters the marketplace.  The specific information required to be maintained by the broker-dealer when it initiates a quotation is delineated in Exchange Act Rule 15c2-11.  The information required by the Rule includes either: (i) a prospectus filed under the Securities Act of 1933, such as a Form S-1, which went effective less than 90 days prior; (ii) a qualified Regulation A offering circular that was qualified less than 40 days prior; (iii) the company’s most recent annual reported filed under Section 13 or 15(d) of the Exchange Act or Regulation A under wand quarterly reports to date; (iv) information published pursuant to Rule 12g3-2(b) for foreign issuers (see HERE); or (v) specified information that is similar to what would be included in items (i) through (iv).

In addition, a broker-dealer must have a reasonable basis under the circumstances to believe that the information is accurate in all material respects and from a reliable source.

Under the 211 rules, current publicly available information must be timely filed or filed within 180 calendar days from a specified date, depending on the category of company.  The chart below summarizes the filing requirements.  The 180-day period begins on the date that a reporting period ends.  Accordingly, for example, if a SEC reporting issuer has a December 31 year-end and filed a report for that period, quotations for the period January 1 – June 29 inclusive, would be covered by the piggyback exception.  If the same issuer filed its quarterly reports for March 31, June 30 and September 30, the 180-day period would extend from each of those dates (until April 30 of the following year).  However, if the same issuer failed to file its September 30 10Q, it would no longer be able to rely on the piggyback exception beginning December 28 (180 days following June 30) because following that date, the company would not have current and publicly available information with respect to any reporting period that ended 180 calendar days before the publication or submission of the quotation.

In making the calculation for an alternative reporting (catch-all) company, a broker-dealer must ensure that current information is dated within 12 months of the publication of the quotation and that the balance sheet is less than 16 months old.  Accordingly, for example, if the alternative reporting company has a December 31 year-end, and filed its annual report for December 31, 2020 including all the required information (with a balance sheet dated after September 1, 2019 and a profit and loss for the 12 months preceding that period), a broker-dealer could continue to rely on the piggyback exception until December 31, 2021.

Of course, maintaining current information requires more than just financial statements.  As further discussed below, where SEC or other regulatory requirements prescribe the information that must be reported (such as for a foreign private issuer), Rule 15c2-11 does not require different information.  The Rule, however, does prescribe the information required by a catch-all company.  The OTC Markets has updated its current information reporting requirements to encompass all of the information and requirements in the new Rule.

The rule provides for a 15-day conditional grace period from the date of a publicly available determination that a company no longer has current information within the 180-day specified period as set forth in the chart below, for a broker-dealer to continue to quote the particular security. The purpose of the grace period is to give the markets notice that the company is in danger of no longer being quoted and provide investors with an opportunity to liquidate positions.  In order to use the grace period, three conditions must be met: (i) OTC Markets or FINRA must make a public determination that current public information is no longer available within 4 business days of the information no longer being available (i.e., expiration of the time periods in the chart); this could be by, for example, a tag on the quote page or added letter to the ticker symbol; (ii) all other conditions for reliance on the piggyback exception must be effective (such as a one way quote); and (iii) the grace period ended on the earliest of the company once again making current information publicly available or the 14th calendar day after OTC Markets or FINRA makes the public determination in (i) above.

The SEC does not include a delinquent reporting issuer in the “catch-all” category for purposes of qualification for the piggyback exception; rather, the amended rule provides for a grace period for Exchange Act reporting companies that are delinquent in their reporting obligations.  A broker-dealer can continue to rely on the piggyback exception for quotations for a period of 180 days following the end of the reporting period.  Since most OTC Markets companies are not accelerated filers, the due date for an annual Form 10-K is 90 days from fiscal year end and for a quarterly Form 10-Q it is 45 days from quarter-end.  Accordingly, a company can be delinquent up to 90 days on the filing of its Form 10-K or 135 days on its Form 10-Q before losing piggyback eligibility.  Regulation A and Regulation Crowdfunding reporting companies are not provided with a grace period, but rather must timely file their reports to maintain piggyback eligibility.

The following chart summarizes the time frames for which 15c2-11 information must be current and publicly available, timely filed, or filed within 180 calendar days from the specified period:

Category of Company 15c2-11 Current Information
Exchange Act reporting company Filed within 180 days following end of a reporting period.
Regulation A reporting company Filed within 120 days of fiscal year-end and 90 days of semi-annual period end.
Regulation Crowdfunding filer Filed within 120 days of fiscal year-end.
Foreign Private Issuer Since first day of most recent completed fiscal year, has filed information required to be filed by the laws of home country or principal exchange traded on.
Catch-all company Current and publicly available annually, except the most recent balance sheet must be dated less than 16 months before submission of a quote and profit and loss and retained earnings statements for the 12 months preceding the date of the balance sheet.


Note that compliance with the requirement to include financial information for the 2 preceding years does not take effect until 2 years after the effective date (i.e., approximately 2 years and 2 months).  A catch-all company would still need to provide all other current information set forth in the rule, to qualify for the piggyback exception, beginning on the compliance date.

As mentioned, a company that fails to meet the current information requirements will be moved to the Expert Market.  Quotations in the Expert Market are restricted from public viewing.  Only broker-dealers and professional or sophisticated investors are permitted to view quotations in Expert Market securities. Despite the restrictions on who can view quotations, the Expert Market does not impose restrictions on who can trade securities. Rule 15c2-11 governs a broker’s ability to submit, publish or distribute quotations (i.e., bids and offers) in OTC securities. The Rule does not apply to the underlying transactions or the ability of an investor to buy or sell a security.

A company that is on the expert market will still have a quote page on the OTC Markets website, but no quotes will be visible to the public.  The quote page will contain 2 black diamonds and contain the following message:

Warning!  This security is traded on the Expert Market

The Expert MarketSM serves broker-dealer pricing and investor best execution needs. Quotations in Expert Market securities are restricted from public viewing. OTC Markets Group may designate securities for quoting on the Expert Market when it is not able to confirm that the company is making current information publicly available under SEC Rule 15c2-11, or when the security is otherwise restricted from public quoting. See additional information about the Expert Market here.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

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 siting 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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