OTC Markets Archives - Securities Law Blog

SEC Officials Talk Tokenization

On May 12, 2025, SEC Chair Paul S. Atkins and Commissioner Mark T. Uyeda gave speeches at the crypto task force roundtable on tokenization.

Chair Atkins Speech

Techology is advancing such that securities are increasingly being moved from traditional databases (ledgers with the transfer agent, etc..) to blockchain based ledger systems. Atkins likens this change to the historical music industry which morphed from analog vinyl records to cassettes to digital software. The change in the music industry allowed streaming and an entirely new system of developing and listening to music.

Atkins notes that just as digitization revolutionized the music industry, the digitization (i.e. tokenization) of securities has the potential to “remodel aspects of the securities market by enabling entirely new methods of issuing, trading, owning, and using securities.” For example, the new technology will make the issuance of dividends (especially recurring dividends) automatic, allow for the trading of previously illiquid assets, and allow for the creation of new

July 8, 2025

NASDAQ Finalizes Amendments To Accelerate Delisting Process

On January 17, 2025 the SEC approved Nasdaq’s rule change to accelerate the delisting process for companies that fail to regain compliance with the minimum bid price requirements following a second compliance period and for securities that have had a reverse stock split over the prior one-year period. The final rule was passed as last submitted by Nasdaq, though in between the SEC required substantial additional analysis delaying the process on 3 occassions.

These rule changes follow other recent rule changes meant to reduce the number of ultra micro-cap companies trading on the national exchange and tighten up compliance for those that do meet the standards. In October 2024, Nasdaq amended Rule 5810(c)(3)(A) to allow for an accelerated delisting process where a listed company uses a reverse split to regain compliance with the bid price requirement for continued listing, but that as a result of the reverse split, the company falls below other listing standards, such as the minimum

February 11, 2025

NASDAQ Proposes Amendment To Liquidity Listing Standard

On December 12, 2024, Nasdaq proposed an amendment to its liquidity listing standards for the Nasdaq Capital Market and Nasdaq Global Market such that the market value of unrestricted publicly held shares requirement could only be satisfied from the proceeds of the initial public offering. That is, Nasdaq would no longer count shares registered for re-sale by existing shareholders towards satisfying this listing standard. Nasdaq is also proposing to make similar changes affecting companies the uplist onto the Nasdaq from OTC Markets.

To list its securities on Nasdaq Capital Market or Nasdaq Global Market, a company is required to meet: (a) certain initial quantitative and qualitative requirements and (b) certain continuing quantitative and qualitative requirements. The quantitative listing thresholds for initial listing are generally higher than for continued listing, thus helping to ensure that companies have reached a sufficient level of maturity prior to listing. NASDAQ also requires listed companies to meet stringent corporate governance standards.

Listing

January 14, 2025

Introducing The OTCID

OTC Markets has announced the launch of a new market tier. Effective July 2025, Pink Current will become the OTCID, a basic reporting market requiring companies to meet minimal current information disclosures and provide management certifications. OTC Markets will still maintain the Pink Limited and Expert Market tiers for companies that do not qualify for the OTCID. OTC Markets has not yet published all of the requirements for the OTCID, but I suspect they will be similar to the existing Pink Current, with the addition of the management certifications.

I support the change and new branding opportunity. OTC Markets have struggled in recent years, primarily as a result of an inability for OTC Markets traded companies to obtain institutional financing or underwriter/placement agent banker support. Forever the optimist, the change could be just what is needed to revitalize the OTC Markets as a venture market place for U.S. micro-cap companies.

OTCID

Currently, the OTC Markets divides issuers into

November 26, 2024

Nasdaq Amends Bid Price Compliance Rules to Accelerate Delisting Process

On October 7, 2024 the SEC approved amendments to Nasdaq Rule 5810(c)(3)(A) to allow for an accelerated delisting process where a listed company uses a reverse split to regain compliance with the bid price requirement for continued listing, but that as a result of the reverse split, the company falls below other listing standards, such as the minimum number of round lot holders, or minimum number of shares in the publicly held float. This new rule is separate from another pending rule change that would accelerate the delisting process for companies that fail to regain compliance with the minimum bid price requirements following a second compliance period and for securities that have had a reverse stock split over the prior one-year period.

November 19, 2024

Foreign Private Issuers – SEC Registration And Reporting And Nasdaq Corporate Governance – Part 1

Although many years ago I wrote a high-level review of foreign private issuer (FPI) registration and ongoing disclosure obligations, I have not drilled down on the subject until now. While I’m at it, in the multi part blog series, I will cover the Nasdaq corporate governance requirements for listed FPIs.

Definition of a Foreign Private Issuer

Both the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”) contain definitions of a “foreign private issuer” (“FPI). Generally, if a company does not meet the definition of an FPI, it is subject to the same registration and reporting requirements as any U.S. company.

The determination of FPI status is not just dependent on the country of domicile, though a U.S. company can never qualify regardless of the location of its operations, assets, management and subsidiaries. There are generally two tests of qualification as a foreign private issuer, as follows:

October 8, 2024

Commissioner Uyeda’s Statement On Dealer Litigation

On August 19, 2024, SEC Commissioner Mark T. Uyeda published a statement regarding one of the numerous defendants in SEC initiated enforcement proceedings claiming unlicensed dealer activity. The statement resonates with the sentiments of most of my colleagues, peers and clients.

Background

In November 2017 the SEC shocked the industry when it filed an action against Microcap Equity Group, LLC and its principal alleging that its investing activity required licensing as a dealer under Section 15(a) of the Exchange Act. Since that time, the SEC has filed numerous additional cases with the sole allegation being that the investor acted as an unregistered dealer. In each case, the investor entity purchased convertible promissory notes from micro-cap OTC Markets issuers (or other existing note holders), which, after the applicable Rule 144 holding period, were converted into shares of common stock and sold on the open market. As the securities were generally low priced, the conversions resulted in large quantities of additional

August 27, 2024

FINRA Approves OTC Markets To Trade Digital Securities

As the SEC continues its onslaught against the crypto industry, including the filing of high-profile actions against Binance, which operates the largest crypto asset trading platform in the world, and Coinbase, a multi-billion-dollar crypto trading platform, FINRA has quietly approved OTC Markets to provide trading services for digital asset securities.

OTC Markets announced the approval in early May but don’t expect any activity in the near future. Concurrent with announcing the approval, OTC Markets CEO, R. Cromwell Coulson, stated:

“We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on OTC Link ATS. This approval furthers our mission of operating regulated markets for broker-dealers and issuers of securities. While it will be some time until the regulatory framework and infrastructure develop, we believe our markets are well-positioned to be part of new trading, data, and disclosure solutions for these securities.”

OTC Markets is clearly putting itself in a position to

June 27, 2023

Nasdaq Amends Pricing Limitations Rules In A Direct Listing

The rules related to direct listings continue to evolve, with the latest Nasdaq rule change being approved on December 2, 2022, although their utilization has been slow to gain traction. Despite the Exchange’s efforts to make the process more attractive and viable, based on a few articles on the subject, only 10 companies had gone public via direct listing as of December 31, 2021, and I could not find a single example of any others since that time. Moreover, and certainly due to the elevated listing standards and arduous process, each of the companies have been much more mature such as Spotify, Slack, Palantir and Coinbase.

In any event, both Nasdaq and the NYSE continue with an “if we build it they will come” approach. After multiple iterations with the SEC, both Nasdaq and the NYSE approved rules that allow a company to raise capital concurrently with a direct listing (see HERE). The very handy Nasdaq Initial Listing Guide

May 16, 2023

Changes To FINRA’S Corporate Action Notification Process

Effective June 3, 2023, FINRA will be replacing and updating the system for filing a Company Related Action Notification form, which form begins the process with FINRA to effectuate a corporate action initiated by a company trading on OTC Markets. The new process allows companies to submit forms, get updates and respond to comments through an electronic FINRA gateway.

Background/Rule 6490

Effective September 27, 2010, the SEC approved FINRA Rule 6490 (Processing of Company Related Actions). Rule 6490 requires that corporations whose securities are trading on the OTC Markets notify FINRA in a timely manner of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, symbol changes and name changes. The Rule grants FINRA discretionary power when processing documents related to the announcements.

Rule 6490 works in conjunction with Exchange Act Rule 10b-17. Rule 10b-17 states that “it shall constitute a manipulative or deceptive device or contrivance as used in section 10(b) of

May 9, 2023

SEC Continues It’s Crypto Focus

In the year and a half since Gary Gensler made it clear to the world that he intends to focus on the crypto “wild west” (see HERE) things have gone from bad to worse for the industry. Of course, it is not all the SEC’s extreme crypto scrutiny that is causing problems, but the very real crypto winter including the collapse of the FTX exchange and its FTX Future Fund, and the realization that the metaverse of tomorrow, will actually not be here until… tomorrow have all added to industry problems. Not to mention a slew of bankruptcy filings (FTX, Blockfi, Celsius and Voyager) and several other precarious financial positions (Blockchain.com, Coinbase, Crypto.com and Genesis, to name a few).

However, putting aside the crypto industry financial crisis, the U.S. regulators, including the SEC, FINRA and national exchanges, are scrutinizing any business with even a modicum of crypto focus to the point where it is almost impossible to move

April 18, 2023

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,

February 28, 2023

Compliance Deadlines For Nasdaq Board Diversity Rules

On August 6, 2021, the SEC approved Nasdaq’s board diversity listing standards proposal. Nasdaq Rule 5605(f) requires Nasdaq listed companies, subject to certain exceptions, to: (i) to have at least one director who self-identifies as a female, and (ii) have at least one director who self-identifies as Black or African American, Hispanic or Latino, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (iii) explain why the company does not have at least two directors on its board who self-identify in the categories listed above. The rule changes also made headlines in most major publications. One of the most common themes in the press was the lack of inclusion of people with disabilities in the definition of an “underrepresented minority” for purposes of complying with the new rules.

The original rules had tiered compliance deadlines which Nasdaq (and practitioners) found confusing and unnecessarily complicated. On December 14,

January 3, 2023

Cannabis Trade Association Makes Plea For National Exchange Listings

The American Trade Association for Cannabis and Hemp (ATACH) has published a policy paper urging the Nasdaq and New York Stock Exchange to allow U.S. cannabis operators that “touch the plant” to list on their respective Exchanges. The current prohibition to listing is purely discretionary and not because of any regulatory action by the SEC or any other U.S. regulatory authority. The policy paper, published November 7, 2022, outlines very convincing arguments for allowing U.S. operators to list on the National Exchanges.

The policy paper notes that up until now, the National Exchanges have refused to list these companies while cannabis remains federally illegal out of concerns that they could be charged with aiding and abetting violations of the U.S. Controlled Substances Act (“CSA”) or with money laundering by the receipt of listing fees. As of the time of the publication of the policy paper, cannabis is legal in 37 states, D.C. and U.S. territories. The ATACH rightfully asserts that

November 29, 2022

Public Market Listing Standards

One of the bankers that I work with often once asked me if I had written a blog with a side-by-side comparison of listing on Nasdaq vs. the OTC Markets and I realized I had not, so it went on the list and with the implementation of the new 15c2-11 rules, now seems a very good time to tackle the project. I’ve added NYSE American to the list as well.

Quantitative and Liquidity Listing Standards

Nasdaq Capital Markets

To list its securities on Nasdaq Capital Markets, a company is required to meet: (a) certain initial quantitative and qualitative requirements and (b) certain continuing quantitative and qualitative requirements. The quantitative listing thresholds for initial listing are generally higher than for continued listing, thus helping to ensure that companies have reached a sufficient level of maturity prior to listing. NASDAQ also requires listed companies to meet stringent corporate governance standards.

Requirements

Equity Standard

Market Value of

Listed Securities

Standard

Net

November 9, 2021

OTCQX And OTCQB Rule Changes

In September 2021, the OTCQB and OTCQX tiers of OTC Markets instituted amendments to their rules, to, among other things, align with the market changes resulting from amended Rule 15c2-11.

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 tiers of OTC Markets have the option of reporting directly to OTC Markets under its Alternative Reporting Standards. The Alternative Reporting Standards are 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.

Companies that report to the SEC under Regulation A and foreign companies that

October 19, 2021

FINRA Granted Oversight Of OTC Markets In The 211 Process

Clearly not completely pleased with the power bestowed on OTC Markets as part of the amended Rule 15c2-11, on June 9, 2021, FINRA filed a request for a rule change to increase its regulatory oversight and require OTC Markets to file a Form 211 as part of the new process. The SEC published the proposal on June 15 and sought comments. Only one comment letter was received, and that was from OTC Markets itself. On September 10, 2021, SEC approved the rule change with an effective date of September 28, 2021, the same day as the compliance date for the amended Rule 15c2-11. On that date, any company that does not comply with the current publicly available information requirements in the amended 15c2-11 rules (see HERE and HERE for in-depth discussions on the new rules), will cease to trade and become what the industry refers to as “grey market.”

Amended Rule 6432 will: (i) require OTC Markets to submit a

September 14, 2021

OTC PINK Companies Now Qualify For Equity Line Financing

Without fanfare, the issuance of guidance, or any other formal notice, the SEC quietly changed its policy related to the filing of an at-the-market resale registration statement for an equity line financing by OTC Pink listed companies. To be clear, an OTC Pink listed company may now utilize a re-sale registration statement on Form S-1 for an equity line financing transaction, pursuant to which the securities may be sold by the investor, into the market, at market price. This results in a dramatic shift, for the better, for OTC Pink companies in the world of capital markets.

Background

Rule 415 sets forth the requirements for engaging in a delayed offering or offering on a continuous basis. Under Rule 415 a re-sale offering may be made on a delayed or continuous basis other than at a fixed price (i.e., it may be priced at the market). It is axiomatic that for a security to be sold at market price, there must

August 24, 2021

SEC Denies Expert Market – For Now

As the compliance date for the new 15c2-11 rules looms near, on August 2, 2021, in a very short statement, the SEC shot down any near-term hope for an OTC Markets operated “expert market.” The SEC short statement indicated that a review of the proposed exemptive order that would allow the expert market is not on its agenda in the short term. The SEC continued that “[A]ccordingly, on September 28, 2021, the compliance date for the amendments to Rule 15c2-11, we expect that broker-dealers will no longer be able to publish proprietary quotations for the securities of any issuer for which there is no current and publicly available information, unless an existing exception to Rule 15c2-11 applies.”

The statement acts as a great segue for a review as to just what those exceptions may be. In addition, this blog will discuss the OTC Markets proposed expert market and finish with a broader refresher on the new 211 rules including the

August 17, 2021

OTC Markets; Rule 144; The SPCC

Small public companies are in trouble and they need help now! Once in a while there is a perfect storm forming that can only result in widespread damage and that time is now for small public companies, especially those that trade on the OTC Markets. The trains on track to collide include a combination of (i) the impending amended Rule 15c2-11 compliance deadline (which alone would be and is a clear positive); (ii) the proposed Rule 144 rule changes to eliminate tacking upon the conversion of market adjustable securities; (iii) the SEC onslaught of litigation against micro-cap convertible note investors claiming unlicensed dealer activity; (iv) the OTC Markets new across the board unwillingness to allow companies to move from the Pink to the QB if they have outstanding convertible debt; and (v) the SEC’s unwillingness to recognize the OTC Pink as a trading market and its implications on re-sale registration statements.

Any one of these factors alone would not

June 8, 2021

SEC Proposes Amendments To Rule 144

I’ve been at this for a long time and although some things do not change, the securities industry has been a roller coaster of change from rule amendments to guidance, to interpretation, and nuances big and small that can have tidal wave effects for market participants. On December 22, 2020, the SEC proposed amendments to Rule 144 which would eliminate tacking of a holding period upon the conversion or exchange of a market adjustable security that is not traded on a national securities exchange. The proposed rule also updates the Form 144 filing requirements to mandate electronic filings, eliminate the requirement to file a Form 144 with respect to sales of securities issued by companies that are not subject to Exchange Act reporting, and amend the Form 144 filing deadline to coincide with the Form 4 filing deadline.

The last amendments to Rule 144 were in 2008 reducing the holding periods to six months for reporting issuers and one year

December 29, 2020

OTCQB And OTCQX Rule Changes

Effective October 1, 2020, the OTCQB and OTCQX tiers of OTC Markets have instituted amendments to their rules, including an increase in fees.

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 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

December 15, 2020

The SEC Has Adopted Final Amendments To Rule 15C2-11; Major Change For OTC Markets Companies

Despite an unusual abundance of comments and push-back, on September 16, 2020, one year after issuing proposed rules (see HERE), the SEC has adopted final rules amending Securities Exchange Act (“Exchange Act”) Rule 15c2-11. The primary purpose of the rule amendment is to enhance retail protection where there is little or no current and publicly available information about a company and as such, it is difficult for an investor or other market participant to evaluate the company and the risks involved in purchasing or selling its securities. The SEC believes the final amendments will preserve the integrity of the OTC market, and promote capital formation for issuers that provide current and publicly available information to investors.

From a high level, the amended rule will require that a company have current and publicly available information as a precondition for a broker-dealer to either initiate or continue to quote its securities; will narrow reliance on certain of the rules

September 22, 2020

NYSE Continues To Struggle With Direct Listing Rule Changes

Late last year, around the same time that the SEC approved Nasdaq rule changes related to direct listings on the Nasdaq Global Market and Nasdaq Capital Market (see HERE), the SEC rejected proposed amendments by the NYSE big board which would allow a company to issue new shares and directly raise capital in conjunction with a direct listing process. Nasdaq had previously updated its direct listing rules for listing on the Market Global Select Market (see HERE).

The NYSE did not give up and in August of this year, after two more proposed amendments, the SEC finally approved new NYSE direct listing rules that allow companies to sell newly issued primary shares on its own behalf into the opening trade in a direct listing process. However, after receiving a notice of intent to petition to prevent the rule change, the SEC has stayed the approval until further notice. Still pushing forward, on September 4, the NYSE filed

September 15, 2020

SPAC IPOs A Sign Of Impending M&A Opportunities

The last time I wrote about special purpose acquisition companies (SPACs) in July 2018, I noted that SPACs had been growing in popularity, raising more money in 2017 than in any year since the last financial crisis (see HERE). Not only has the trend continued, but the Covid-19 crisis, while temporarily dampening other aspects of the IPO market, has caused a definite uptick in the SPAC IPO world.

In April, the Wall Street Journal (WSJ) reported that SPACs are booming and that “[S]o far this year, these special-purpose acquisition companies, or SPACs, have raised $6.5 billion, on pace for their biggest year ever, according to Dealogic. In April, 80% of all money raised for U.S. initial public offerings went to blank-check firms, compared with an average of 9% over the past decade.”

I’m not surprised. Within weeks of Covid-19 reaching a global crisis and causing a shutdown of the U.S. economy, instead of my phone

June 9, 2020

NYSE, Nasdaq And OTC Markets Offer Relief For Listed Companies Due To COVID-19

In addition to the SEC, the various trading markets, including the Nasdaq, NYSE and OTC Markets are providing relief to trading companies that are facing unprecedented challenges as a result of the worldwide COVID-19 crisis.

NYSE

The NYSE has taken a more formal approach to relief for listed companies. On March 20, 2020 and again on April 6, 2020 the NYSE filed a notice and immediate effectiveness of proposed rule changes to provide relief from the continued listing market cap requirements and certain shareholder approval requirements.

Recognizing the extremely high level of market volatility as a result of the COVID-19 crisis, the NYSE has temporarily suspended until June 30, 2020 its continued listing requirement that companies must maintain an average global market capitalization over a consecutive 30-trading-day period of at least $15 million. Likewise, the NYSE is suspending the requirement that a listed company maintain a minimum trading price of $1.00 or more over a consecutive 30-trading-day period,

April 21, 2020

OTCQB And OTC Pink Rule Changes

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.

February 18, 2020

Nasdaq Extends Direct Listings

The Nasdaq Stock Market currently has three tiers of listed companies: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. Each tier has increasingly higher listing standards, with the Nasdaq Global Select Market having the highest initial listing standards and the Nasdaq Capital Markets being the entry-level tier for most micro- and small-cap issuers. For a review of the Nasdaq Capital Market listing requirements, see HERE as supplemented and amended HERE.

On December 3, 2019, the SEC approved amendments to the Nasdaq rules related to direct listings on the Nasdaq Global Market and Nasdaq Capital Market. As previously reported, on February 15, 2019, Nasdaq amended its direct listing process rules for listing on the Market Global Select Market (see HERE).

Interestingly, around the same time as the approval of the Nasdaq rule changes, the SEC rejected amendments proposed by the NYSE big board which would have allowed

February 4, 2020

OTCQX Rule Changes

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

December 31, 2019

SEC Solicits Input To Improve Markets For Thinly Traded Securities

On October 17, 2019, the SEC made a statement inviting stock exchanges and market participants to submit “innovative proposals designed to improve the secondary market structure for exchange listed equity securities that trade in lower volumes, commonly referred to as ‘thinly traded securities.’” On the same day the SEC issued a staff background paper on the subject. The SEC is not asking for input on how a company can better promote its stock and gain investor awareness, but rather how the capital market system, including trading rules and regulations, can be amended or improved to benefit thinly traded securities.

The staff background paper cites many statistics on the number of thinly traded securities, which they define as trading less than 100,000 shares daily. It also refers to the U.S. Department of the Treasury report entitled “A Financial System That Creates Economic Opportunities; Capital Markets” – see HERE for a summary of the report. As a result of

November 12, 2019

SEC Proposes Amendments To 15c2-11

As anticipated, on September 26, 2019, the SEC published proposed amendments to Securities Exchange Act (“Exchange Act”) Rule 15c2-11. The purpose of the rule amendment is to enhance retail protection where there is little or no current and publicly available information about a company and as such, it is difficult for an investor or other market participant to evaluate the company and the risks involved in purchasing or selling its securities. The SEC release also includes a concept release regarding information repositories and a possible regulatory structure for such entities. The SEC believes the proposed amendments will preserve the integrity of the OTC market, and promote capital formation for issuers that provide current and publicly available information to investors.

The proposed rules entail a complete overhaul of the rule and its exceptions are complicated and, if enacted, will require the development of a new infrastructure, compliance procedures and written supervisory procedures at OTC Markets, new compliance procedures and

October 8, 2019

Rule Changes For OTCQB And OTCQX

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

June 4, 2019

Regulation A+ Now Available For Publicly Reporting Companies

On December 19, 2018, the SEC adopted final rules allowing reporting companies to Rely on Regulation A to conduct securities offerings. On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) into law requiring the SEC to amend Regulation A to allow for its use by Exchange Act reporting companies. Since that time, the marketplace has been waiting, somewhat impatiently, for the final rule change to be implemented.

Section 508 of the Act directed the SEC to amend Regulation A to remove the provision making companies subject to the SEC Securities Exchange Act reporting requirements ineligible to use the offering exemption and to add a provision such that a company’s Exchange Act reporting obligations will satisfy Regulation A+ reporting requirements.

I have often blogged about this peculiar eligibility standard. Although Regulation A is unavailable to Exchange Act reporting companies, a company that voluntarily files reports under the Exchange Act is not

January 2, 2019

Rule Changes for OTCQB and OTCQX

Effective January 19, 2019, OTC Markets will require that all U.S.-incorporated OTCQB and OTCQX companies provide verified share data through a transfer agent that participates in its Transfer Agent Verified Shares Program. The Transfer Agent Verified Shares Program allows transfer agents to provide regular updated information on the number of authorized and outstanding shares to OTC Markets via a secure electronic file transfer.

The share data is used to ensure compliance with the OTCQB and OTCQX listing requirements, by broker-dealers and clearing firms and by investors in making investment decisions, keeping track of dilution, and ensuring compliance with Sections 13 and 16 of the Securities Exchange Act (see HERE). For a complete review of the OTCQB listing standards, see HERE. For a complete review of the OTCQX listing standards, see below.

Share data provided by participating transfer agents appears alongside a “Transfer Agent Verified” logo on the OTC Markets website. The authorized and outstanding share amounts

November 20, 2018

The OTCQB Has Added Additional Quantitative Listing Standards

On May 20, 2018, the OTC Markets Group published the OTCQB Standards version 3.0 incorporating amendments to the OTCQB initial and ongoing listing standards to add further quantitative shareholder and public float requirements. The new standards went into effect on May 20, 2018 for new listing applications. Existing OTCQB traded companies have until May 20, 2020 to comply with the new requirements.

The amended listing standards now require that an applicant company:

Have at least 50 beneficial shareholders holding at least one round lot (100 shares) each;
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

August 14, 2018

Proposed SPAC Rule Changes

With the growing popularity of special purpose acquisition companies (SPACs), both the Nasdaq and NYSE have proposed rule changes that would make listings easier, although on June 1, 2018, the Nasdaq withdrew its proposal. SPACs raised more money last year than any year since the financial crisis. The SEC has been delaying action on the proposed rule changes, now pushing off a decision until at least August 2018.

A company that registers securities as a blank check company and whose securities are deemed a “penny stock” must comply with Rule 419 and thus are not eligible to trade. A brief discussion of Rule 419 is below. A “penny stock” is defined in Rule 3a51-1 of the Exchange Act and like many definitions in the securities laws, is inclusive of all securities other than those that satisfy certain delineated exceptions. The most common exceptions, and those that would be applicable to penny stocks for purpose of the SPAC, include: (i)

July 24, 2018

OTC Markets Makes Several Regulatory Recommendations

On March 8, 2018, Cromwell Coulson, CEO of OTC Markets Group, made a presentation to the SEC’s Investor Advisory Committee (“IAC”) as part of a panel on “Discussion of Regulatory Approaches to Combat Retail Investor Fraud.” During the meeting, Mr. Coulson discussed the most serious market risks and presented a list of 14 OTC Market’s regulatory recommendations to improve disclosure and combat these market risks.

A review of OTC Markets website on April 24, 2018 shows 10,469 traded securities, $1.1 billion volume, 7.2 billion share volume and 174,268 trades. In his remarks to the IAC, Mr. Coulson points out that 98% of the traded dollar volume of companies on OTC Markets make current information available. Echoing the SEC’s “Main Street investor” focus, he states that “[W]e have many stocks on our markets that are completely appropriate to be part of a diversified, long term, investment portfolio, of a main street investor; we also have speculative securities that are only

May 15, 2018

Going Public Without An IPO

On April 3, 2018, Spotify made a big board splash by debuting on the NYSE without an IPO. Instead, Spotify filed a resale registration statement registering the securities already held by its existing shareholders. The process is referred to as a direct listing. As most of those shareholders had invested in Spotify in private offerings, they were rewarded with a true exit strategy and liquidity by becoming the company’s initial public float.

In order to complete the direct listing process, NYSE had to implement a rule change. NASDAQ already allows for direct listings, although it has historically been rarely used. To the contrary, a direct listing has often been used as a going public method on the OTC Markets and in the wake of Spotify, may gain in popularity on national exchanges as well.

As I will discuss below, there are some fundamental differences between the process for OTC Markets and for an exchange. In particular, when completing a direct

May 8, 2018

OTC Markets Issues Comment Letters On FINRA Rules 6432 And 5250; The 15c2-11 Rules

January 8, 2018, OTC Markets Group, Inc. (“OTC Markets”) submitted a comment letter to FINRA related to FINRA Rule 6432. Rule 6432 requires that a market maker or broker-dealer have the information specified in Securities Exchange Act Rule 15c2-11 before making a quotation in a security on the over-the-counter market. Although I summarize the salient points of the OTC Markets comment letter, I encourage those interested to read the entire letter, which contains an in-depth analysis and comprehensive arguments to support its position. On February 8, 2018, OTC Markets submitted a second comment letter to FINRA, this one related to FINRA Rule 5250. Rule 5250 prohibits companies from compensating market makers in connection with the preparation and filing of a Form 211 application.

Rule 6432 – Compliance with the Information Requirements of SEA Rule 15c2-11

Subject to certain exceptions, including the “piggyback exception” discussed below, Rule 6432 requires that all broker-dealers have and maintain certain information on a

March 20, 2018

OTC Markets Group Establishes A Stock Promotion Policy

As OTC Markets Group continues to position itself as a respected venture trading platform, it has adopted a new stock promotion policy and best practices guidelines to improve investor transparency and address concerns over fraudulent or improper stock promotion campaigns. The stock promotion policy and best practices guidelines are designed to assist companies with responsible investor relations and to address problematic issues. Recognizing that fraudulent stock promotion is a systemic problem requiring an all-fronts effort by industry participants and regulators, the new policy focuses on transparency and disclosure of current information, and the correction of false statements or materially misleading information issued by third parties.

For several years, OTC Markets Group has been delineating companies with a skull-and-crossbones sign where they have raised concerns such as improper or misleading disclosures, spam campaigns, questionable stock promotion, investigation of fraudulent or other criminal activity, regulatory suspensions or disruptive corporate actions. While labeled with a skull and crossbones, a company that does not

December 5, 2017

NASDAQ Issues Report Advocating for The U.S. Public Markets

Before SEC Commissioner Michael Piwowar’s May 16, 2017, speech at the SEC-NYU Dialogue on Securities Market Regulation regarding the U.S. IPO Market (see summary HERE), and SEC Chair Jay Clayton’s July 12, 2017, speech to the Economic Club of New York (see summary HERE), the topic of the U.S. IPO market had already gained significant market attention. Earlier this year, NASDAQ issued a paper titled “The Promise of Market Reform: Reigniting American’s Economic Engine” with its views and position on how to revitalize the U.S. equities and IPO market (the “NASDAQ Paper”). This blog summarizes the NASDAQ Paper.

The NASDAQ Paper begins with a statement by Adena Friedman, President and CEO of NASDAQ. The statement begins with a decidedly positive outlook, noting that “The U.S. equities markets exist to facilitate job creation and wealth creation for millions of people, ultimately driving economic growth for our country.” Ms. Friedman adds that “[E]xceptional market returns in recent years

October 24, 2017

OTCQB Sets New Requirements For Change Of Control Events

On June 30, 2017, the OTC Markets Group published amendments to the OTCQB standards related to the processing and reporting of change in control events. The new rules went into effect on July 31, 2017.

OTC Markets has been initiating a series of changes related to the OTCQB including amending the qualification requirements to allow quotation by companies that follow its alternative reporting standard (“Alternative Reporting Standard”) which went effective on May 18, 2017. For a review of the new qualification changes, see my blog HERE.

Highlights of Changes

The OTCQB has added a new Section 2.4 to the OTCQB Standards published by OTC Markets. The OTCQB Standards include a comprehensive summary of admission and eligibility requirements, application processes, initial and ongoing disclosure requirements, continued eligibility requirements, fees and removal processes.

Section 2 of the OTCQB Standards set forth the continued OTCQB Eligibility requirements, and includes the new Section 2.4 related to change in control events.

A “change in

September 5, 2017

FINRA Proposes Expansion Of The OTCBB

In August 2016, FINRA quietly requested comment on a proposal to expand the now largely dormant OTC Bulletin Board quotation service (“OTCBB”) as a backup inter-dealer quotation system for OTC Equity securities. As part of the proposal, the OTCBB would be renamed and branded as the Over the Counter Display Facility or “ODF.” Previously, on October 7, 2014, the SEC published a release instituting proceedings to determine whether to approve FINRA’s request to delete the rules related to, and the operations of, the OTCBB. My blog on the proposal can be read HERE.

However, on March 12, 2015, FINRA withdrew the proposed rule change and request to delete the OTCBB. Although the March 12, 2015 withdrawal did not cite reasons, in its new request for comment, FINRA indicates it withdrew the proposal in response to SEC staff requests that FINRA continue to operate alternative quotation facility.

Since that time the OTCBB has remained largely relatively dormant. According

August 29, 2017

OTC Markets Amends Listing Standards For OTCQB To Allow Non-Reporting Issuers

Effective May 18, 2017, the OTC Markets has amended its qualification rules for the OTCQB to allow quotation by companies that follow its alternative reporting standard (“Alternative Reporting Standard”). OTC Markets aligned the new requirements with the existing OTCQX Alternative Reporting Standard requirements. In addition, the OTC Markets made clarifying amendments to its rules, amended the rules related to the timing of removal for delinquent filers, and revised the rules for international reporting companies.

Highlights of Changes

To qualify for the OTCQB using the Alternative Reporting Standard, a company must file audited financial statements prepared in accordance with U.S. GAAP by a PCAOB qualified auditor, have a minimum bid price of $0.01, not be subject to bankruptcy or reorganization proceedings, and maintain corporate governance including (i) have a board of directors that includes a minimum of two independent directors, and (ii) have an audit committee comprised of a majority of independent directors.

The cure period for delinquent filings has

June 27, 2017

Recommendations Of SEC Government-Business Forum On Small Business Capital Formation

In early April, the SEC Office of Small Business Policy published the 2016 Final Report on the SEC Government-Business Forum on Small Business Capital Formation, a forum I had the honor of attending and participating in. As required by the Small Business Investment Incentive Act of 1980, each year the SEC holds a forum focused on small business capital formation. The goal of the forum is to develop recommendations for government and private action to eliminate or reduce impediments to small business capital formation.

The forum is taken seriously by the SEC and its participants, including the NASAA, and leading small business and professional organizations. The forum began with short speeches by each of the SEC commissioners and a panel discussion, following which attendees, including myself, worked in breakout sessions to drill down on specific issues and suggest changes to rules and regulations to help support small business capital formation, as well as the related, secondary trading markets. In

May 23, 2017

SEC Adopts The T+2 Trade Settlement Cycle

Introduction and brief summary of the rule

On March 22, 2017, the SEC adopted a rule amendment shortening the standard settlement cycle for broker-initiated trade settlements from three business days from the trade date (T+3) to two business days (T+2). The change is designed to help enhance efficiency and reduce risks, including credit, market and liquidity risks, associated with unsettled transactions in the marketplace.

Acting SEC Chair Michael Piwowar stated, “[A]s technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people.” The SEC originally proposed the rule amendment on September 28, 2016. My blog on the proposal can be read HERE. In addition, for more information on the clearance and settlement process for U.S. capital markets, see HERE.

The change amends Rule 15c6-1(a) prohibiting a broker-dealer from effecting or entering into a contract for the purchase or sale

April 18, 2017

SEC Issues White Paper On Penny Stock Risks

On December 16, 2016, the SEC announced several new settled enforcement proceedings against market participants including issuers, attorneys and a transfer agent, related to penny stock fraud. On the same day the SEC issued a new white paper detailing the risks associated with investing in penny stocks. This blog summarizes the SEC white paper.

As I have written about on numerous occasions, the prevention of micro-cap fraud is and will always be a primary focus of the SEC and other securities regulators. In fact, the SEC will go to great lengths to investigate and ultimately prosecute micro-cap fraud. See my blog HERE regarding the recent somewhat scandalous case involving Guy Gentile.

Introduction

The SEC Division of Economic and Risk Analysis published a white paper on the risks and consequences of investing in stocks quoted in the micro-cap markets versus those listed on a national securities exchange. The paper reviewed 1.8 million trades by more than 200,000 investors and concludes that

February 21, 2017

SEC Proposes Shortening Trade Settlement

On September 28, 2016, the SEC proposed a rule amendment to shorten the standard broker-initiated trade settlement cycle from three business days from the trade date (T+3) to two business days (T+2). The change is designed to help reduce risks, including credit, market and liquidity risks, associated with unsettled transactions in the marketplace. Outgoing SEC Chair, Mary Jo White was quoted as saying that the change “is an important step to the SEC’s ongoing efforts to enhance the resiliency and efficiency of the U.S. clearance and settlement system.” I have previously written about the clearance and settlement process for U.S. capital markets, which can be reviewed HERE.

Background

DTC provides the depository and book entry settlement services for substantially all equity trading in the US. Over $600 billion in transactions are completed at DTC each day. Although all similar, the exact clearance and settlement process depends on the type of security being traded (stock, bond, etc.), the form the

December 27, 2016

Changes In India’s Laws Related To Foreign Direct Investments- A U.S. Opportunity; Brief Overview For Foreign Private Issuers

In June 2016, the Indian government announced new rules allowing for foreign direct investments into Indian owned and domiciled companies. The new rules continue a trend in laws supporting India as an open world economy. A large portion of the U.S. public marketplace is actually the trading of securities of foreign owned or held businesses. Foreign businesses may register and trade directly on U.S. public markets as foreign private issuers, or they may operate as partial or wholly owned subsidiaries of U.S. parent companies that in turn quote and trade on either the OTC Markets or a U.S. exchange.

Brief Overview for Foreign Private Issuers

Definition of Foreign Private Issuer

Both the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”) contain definitions of a “foreign private issuer.” Generally, if a company does not meet the definition of a foreign private issuer, it is subject to the same registration and

November 8, 2016

Florida Broker-Dealer Registration Exemption For M&A Brokers

Following the SEC’s lead, effective July 1, 2016, Florida has passed a statutory exemption from the broker-dealer registration requirements for entities effecting securities transactions in connection with the sale of equity control in private operating businesses (“M&A Broker”). As discussed further below, the new Florida statute, together with the SEC M&A Broker exemption, may have paved the way for Florida residents to act as an M&A broker in reverse or forward merger transactions involving OTCQX-traded public companies without broker-dealer registration.

Florida has historically had stringent broker-dealer registration requirements in connection with the offer and sale of securities. Moreover, Florida does not always mirror the federal registration requirements or exemptions. For example, see my blog HERE detailing some state blue sky concerns when dealing with Florida, including the lack of an issuer exemption from the broker-dealer registration requirements for public offerings.

However, in a move helpful to merger and acquisition (M&A) transactions in the state, Florida has now passed an M&A

October 25, 2016

SEC Continues Efforts To Prevent Microcap Fraud

As I’ve written about numerous times in the past, a primary agenda of the SEC and FINRA is to prevent small- and micro-cap fraud. On March 23, 2016, the SEC charged Guy Gentile with penny stock fraud. The SEC complaint, as well as numerous industry articles and a blog by Mr. Gentile himself, reveal in-depth efforts by the SEC together with FINRA and the FBI and DOJ to remove recidivist and bad actors from the micro-cap system. While the methods used by the regulators have been the subject of heated debates and articles, the message and result remain that the SEC is committed to its efforts to deter securities law violations.

Although small- and micro-cap fraud has always been an important area of concern and enforcement by the SEC since the financial crisis of 2008, it has increasingly been a focus. Regulators have amplified their efforts through regulations and stronger enforcement, including the SEC Broken Windows policy, increased Dodd-Frank whistleblower

August 16, 2016

OTC Markets Petitions The SEC To Expand Regulation A To Include SEC Reporting Companies

On June 6, OTC Markets filed a petition for rulemaking with the SEC requesting that the SEC amend Regulation A to expand the eligibility criteria to include all small issuers, including those that are subject to the Securities Exchange Act of 1934 (“Exchange Act”) reporting requirements and to allow “at-the-market offerings.”

Background

On March 25, 2015, the SEC released final rules amending Regulation A. The new Regulation A creates two tiers of offerings. Tier I of Regulation A, which does not preempt state law, allows offerings of up to $20 million in a twelve-month period. Due to difficult blue sky compliance, Tier 1 is rarely used. Tier 2, which does preempt state law, allows a raise of up to $50 million. Issuers may elect to proceed under either Tier I or Tier 2 for offerings up to $20 million. The new rules went into effect on June 19, 2015 and have been gaining traction ever since. Since that time, the

June 28, 2016

OTC Markets Amends IPO Listing Standards for OTCQX

OTC Markets has unveiled changes to the quotations rule and standards for the OTCQX, which proposed changes are scheduled to become effective on June 13, 2016. The proposed amendments are intended to address and accommodate companies completing an IPO onto the OTCQX and which accordingly have no prior trading history. Such entities either would have a recently cleared Form 211 with FINRA or are completing the 211 application process through a market maker, at the time of their OTCQX application. The initial qualification changes apply to OTCQX Rules for U.S. Companies, U.S. Banks and International Companies.

The OTCQX previously amended its listing standards effective January 1, 2016 to increase the quantitative criteria for listing and to add additional qualitative requirements further aligning the OTCQX with a national stock exchange. To read my blog on the January 1, 2016 amendments see HERE.

The new amendments will (i) allow companies that meet the $5 bid price test to use unaudited, interim

May 31, 2016

OTC Markets Amends Listing Standards For OTCQB To Include Regulation A+ Issuers

OTC Markets has unveiled changes to the quotations rule and standards for the OTCQB, which changes become effective July 10, 2015. The OTC Markets rule amendments will allow a company to use its required Regulation A+ ongoing reporting requirements to satisfy the initial and ongoing OTCQB disclosure requirements.

Concurrently with this substantive amendment, OTCQB has made clarifying general amendments to its listing standards for all listed and prospective OTCQB companies. OTC Markets has invited comments on the proposed changes.

To summarize, the Regulation A related amendment to the OTCQB rules and regulations includes:

The addition of definitions for “Regulation A” and “Regulation A Reporting Company”
Initial Disclosure Obligations – a Regulation A Reporting Company can meet the OTCQB initial disclosure obligations by having filed all required reports on EDGAR, including annual audited financial statements;
OTCQB Certification – clarifying amendment to the OTCQB Certification including that a Regulation A Reporting Company is required to file periodic reports with the SEC under

July 7, 2015

Going Public Transactions For Smaller Companies: Direct Public Offering And Reverse Merger

Introduction

One of the largest areas of my firms practice involves going public transactions. I have written extensively on the various going public methods, including IPO/DPOs and reverse mergers. The topic never loses relevancy, and those considering a transaction always ask about the differences between, and advantages and disadvantages of, both reverse mergers and direct and initial public offerings. This blog is an updated new edition of past articles on the topic.

Over the past decade the small-cap reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly. The decline was a result of both regulatory changes and economic changes. In particular, briefly, those reasons were: (1) the recent Great Recession; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments, including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems

June 30, 2015

SEC Suspends Trading On 128 OTC Markets Companies

On March 2, 2015, the Securities and Exchange Commission (SEC) suspended the trading in 128 dormant shell companies trading on the OTC Link. The SEC suspended the trading in these shell companies because of questions regarding the accuracy and adequacy of publicly disseminated information concerning the companies’ operating status, if any.

The SEC notes in its release that OTC Markets had been unable to contact each of the issuers for more than one year. None of the subject issuers had filed any information or updated with either OTC Markets or the SEC in over a year. The SEC staff then independently attempted to contact the issuers and was able to contact 10 of the 128 companies and confirm from those ten that they had either ceased operations or gone private.

The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group. As part of the initiative, the SEC Enforcement Division’s Office of

March 3, 2015

OTC Markets Quotation Levels, Listing Requirements, and Comprehensive Pubco Criteria

OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink. The OTC Pink, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. This page provides a summary of the listing requirements for each level of quotation on OTC Markets.

OTCQX

The OTCQX divides its listing criteria between U.S. companies and International companies, though they are very similar. 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. and two tiers for International companies: (i) OTCQX International Premier; and (ii) OTCQX International. Quotation is available for American Depository Receipts (ADR’s) or foreign ordinary securities of companies traded on a Qualifying Foreign Stock Exchange, and an expedited application process is available for such companies.

Issuers on the OTCQX must meet specified eligibility requirements. Moreover, OTC Markets have the discretionary

February 10, 2015

FINRA Seeks to Eliminate the OTCBB and Impose Regulations on the OTC Markets

ABA Journal’s 10th Annual Blawg 100

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On October 7, 2014, the SEC published a release instituting proceedings to determine whether to approve FINRA’s request to delete the rules related to, and the operations of, the OTC Bulletin Board quotation service. On June 27, 2014, FINRA quietly filed a proposed rule change with the SEC seeking to adopt rules relating to the quotation requirements for OTC equity services and to delete the rules relating to the OTCBB and thus cease its operations. Although the rule filing was published in the Federal Register, it garnered no attention in the small cap marketplace. Only one comment letter, from OTC Market Group, Inc. (“OTC Markets”) (i.e., the entity that owns and operates the inter-dealer quotation system known by its OTC Pink, OTCQB and OTCQX quotation tiers) was submitted in response to the filing.

The OTCBB has become increasingly irrelevant in the OTC marketplace for years. In October 2010, I wrote a blog titled

October 28, 2014

The ECOS Matter; When Is A Reverse Split Effective?

ABA Journal’s 10th Annual Blawg 100

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In what was presumably an unintended consequence, the application of an SEC- approved FINRA regulation has resulted in a conflict between state and federal corporate law for a small publicly traded company.

On September 16, 2014, Ecolocap Solutions, Inc. (“ECOS”) filed a Form 8-K in which it disclosed that FINRA had refused to process its 1-for-2,000 reverse split. At the time of the FINRA refusal, ECOS had already received board and shareholder approval and had filed the necessary amended articles with the State of Nevada, legally effectuating the reverse split in accordance with state law. Moreover, ECOS is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and had filed a preliminary and then definitive 14C information statement with the SEC, reporting the shareholder approval of the split.

The ECOS 8-K attached a copy of the FINRA denial letter, which can be viewed HERE.

September 30, 2014

OTCQX Listing and Quotation Eligibility and Requirements for International Companies

ABA Journal’s 10th Annual Blawg 100

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On May 23, 2014, OTC Markets Group, Inc., published its updated OTCQX Rules for International Companies version 6.7. This blog summarizes those rules. A complete copy of the rules is 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 International Premier; and (ii) OTCQX International. International issuers on the OTCQX must meet specified eligibility requirements. Quotation is available for American Depository Receipts (ADR’s) or foreign ordinary securities of companies traded on a Qualifying Foreign Stock Exchange.

International issuers on the OTCQB must either be fully reporting and current in their SEC reporting obligations or qualify for the Rule 12g3-2(b) exemption from SEC registration for foreign private issuers. In addition, OTCQB entities must meet minimum price standards, file annual reports and pay annual fees, but do not undergo additional quality

September 8, 2014

Direct Public Offerings by Shell Companies- Tread Carefully

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As I’ve written about previously, recently (albeit not officially) the Securities and Exchange Commission (“SEC”) has materially altered its position on offerings by shell companies that are not blank check companies. In particular, over the past year, numerous shell companies that are not also blank check companies have completed direct public offerings using a S-1 registration statement and successfully obtained market maker support and a ticker symbol from FINRA and are trading.

Rule 419 and Blank Check Companies

The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, as amended, by a blank check company. Rule 419 requires that the

July 29, 2014

Completing A Name Change Without Shareholder Approval

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Generally a name change is completed through an amendment to a company’s articles of incorporation. Moreover, amendments to articles of incorporation generally require shareholder consent, which can be time-consuming and expensive and become even more so if the company is subject to the reporting requirements of the Securities Exchange Act of 1934.

All companies with securities registered under the Securities Exchange Act of 1934, as amended, (i.e., through the filing of a Form 10 or Form 8-A) are subject to the Exchange Act proxy requirements found in Section 14 and the rules promulgated thereunder. The proxy rules govern the disclosure in materials used to solicit shareholders’ votes in annual or special meetings held for the approval of any corporate action requiring shareholder approval. The information contained in proxy materials must be filed with the SEC in advance of any solicitation to ensure compliance with the disclosure

July 22, 2014

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

April 22, 2014

OTC Markets has Modified its OTCQB Eligibility Criteria Effective May 1, 2014

OTC Markets has unveiled changes to be quoted on the OTCQB, which changes become effective May 1, 2014. The OTC Markets changes are designed to attract venture investors to provide more information to investors and to improve such information with Real-Time Level 2 quotes. The OTC Markets press and informational releases related to the change concentrate on the push to create a successful venture-stage marketplace by removing underperforming companies.

Background

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

Issuers on the OTCQX must be fully reporting and current in their reporting obligations with the SEC and also undergo a quality review by industry professionals. Issuers on the OTCQB must be fully reporting and current in their reporting

April 1, 2014

Direct Public Offering or Reverse Merger; Know Your Best Option for Going Public

Introduction

For at least the last twelve months, I have received calls daily from companies wanting to go public. This interest in going public transactions signifies a big change from the few years prior.

Beginning in 2009, the small-cap and reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly. I can identify at least seven main reasons for the downfall of the going public transactions. Briefly, those reasons are: (1) the general state of the economy, plainly stated, was not good; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems clearing penny stock with broker dealers and FINRA’s enforcement of broker-dealer and clearing house due diligence requirements related to penny stocks; (5) DTC scrutiny and difficulty in obtaining clearance following

January 21, 2014

SEC Updates May Benefit Equity Line Financing Providers and Issuers

On May 16, 2013, the SEC updated their Compliance and Disclosure Interpretations addressing the point at which an equity line agreement can be determined to be a completed transaction for purposes of filing a resale registration statement.

Background

Equity line financings are transactions where a company has a long-term contract to put shares to an investor (the equity line provider) at a price, generally determined by a formula based on a discount to market price. That is, the Issuer has the right to tell the investor when to buy securities from the Issuer over a set period of time and the investor has no right to decline to purchase the securities (or a limited right to decline). Generally, the dollar value of the

August 13, 2013

OTC Market Group Has Modified Its Alternative Reporting Standard

Background

Over the past few years, the historical Pink Sheets has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its refurbished website and new URL, otcmarkets.com.Otcmarkets.com divides issuers into three (3) levels: OTCQX, OTCQB and Pink Sheets.

Issuers on the OTCQX must be fully reporting and current in their reporting obligations with the SEC and also undergo a quality review by industry professionals.Issuers on the OTCQB must be fully reporting and current in their reporting obligations with the SEC but do not undergo additional quality review.

Issuers on the Pink Sheets 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 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 that provide information as set forth in the OTC

June 11, 2013

SEC Suspends Trading On 61 Shell Companies

The Securities and Exchange Commission (SEC) today suspended the trading in 61 dormant shell companies. The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group. In May 2012, the SEC suspended the trading on 379 shell companies as part of the initiative. Each of the companies were dormant shells that were not current in public disclosures. Each of the companies failed to have adequate current public information available either through the news service on OTC Markets or filed with the SEC via EDGAR.

The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Once a company is suspended from trading, it cannot be quoted again until it provides updated information including complete disclosure of its business and accurate financial statements. In addition to providing the necessary information, to begin to trade again, a company must enlist a market maker to file a

June 3, 2013

The OTCQX And OTCQB Are Finally Recognized As “Established Public Markets” By The SEC

Back in October 2010 I wrote a blog titled “Has the OTCBB been replaced by the OTCQX and OTCQB”; at the time and up until May 16, 2013, my opinion was “yes” with one big caveat. Prior to May 16, 2013, all three tiers of the OTC Link were considered “pinksheets” by the SEC staff. Prior to May 16, 2013, the OTC Link was not considered a market and therefore: (1) there could be no at-the-market pricing of securities registered for resale by an Issuer on behalf of its selling shareholders; and (2) there could be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market), for OTC Link quoted securities.

On May 16, 2013, the SEC updated their Compliance and Disclosure Interpretations confirming that the OTCQB and OTCQX marketplaces are now considered public marketplaces for purposes of establishing

May 29, 2013

OTC Market Groups Has Modified Its Alternative Reporting Standard Effective January 3, 2013

Background

Over the past few years, the historical “pinksheets” has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its refurbished website and new url “www.otcmarkets.com”. The www.otcmarkets.com divides issuers into three (3) levels: OTCQX; OTCQB and pinksheets.

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

January 4, 2013

An Update On Dealing With The DTC Following The SEC’s Ruling On International Power Group, Ltd.

Background

Back in October and November of 2011, I wrote a series of blogs regarding DTC eligibility for OTC (over-the-counter) Issuers. OTC Issuers include all companies, whose securities trade on the over-the-counter market, including the OTCBB, OTCQB and pinksheets. Many OTC Issuers have faced a “DTC chill” without understanding what it is, let alone how to correct the problem. In technical terms, a DTC chill is the suspension of certain DTC services with respect to an Issuer’s securities. Those services can be book-entry clearing and settlement services, deposit services or withdrawal services. A chill can pertain to one or all of these services. In the case of a chill on all services, the term of art is a “global lock.”

I have previously blogged on how to become DTC-eligible. From the DTC perspective, a chill does not change the eligibility status of an Issuer’s securities, just what services the DTC will offer for those securities. So while

December 6, 2012

The OTCBB – Nearly Extinct, OTCQB is the Micro-Cap Reporting Standard

For the past two years it had appeared that the OTCBB had been replaced by the OTC Link run OTCQB and the OTCQX. For all intents and purposes since the fall of 2010, the industry-wide proliferation of the OTCQB and OTCQX has marginalized the OTCBB to the brink of extinction. It is has now become incredibly apparent that the OTCQB is the new micro-cap reporting standard.

Background

Over the past few years the historical “Pink Sheets” and its online presence has undergone some considerable changes, starting with the creation of several well-defined “tiers” of issuers and culminating in a completely refurbished website and a new URL – www.otcmarkets.com; and new name for the Inter-dealer quotation system – the OTC Link. The OTC Link divides issuers into three levels: OTCQX; OTCQB and Pink Sheets. Quotation on both the OTCQB and OTCQX requires that the Issuer be subject to and current with the reporting requirements of the Securities Exchange Act

August 23, 2012

SEC Grants Accelerated Approval to FINRA Rule Amendment Regarding Minimum Quotation Size Requirements for OTC Equity Securities

On June 15, 2012, the SEC granted accelerated approval to an amendment to FINRA rule 6433 related to the minimum quotation size for OTC equity securities. Rule 6433 applies to all market makers. Rule 6433 sets forth the specific minimum quotation size requirements in tiers that are based on the price of the OTC equity security being quoted by the market maker. In addition, the rule change will require market makers to publish customer limit orders.

The new rule amends and lowers the current 9 tier quotation size requirements to 6 tiers as follows:

$175.00 per share and above, the minimum quotation size would be 1 share;

$1.00 through $174.99 per share, the minimum quotation size would be 100 shares;

$0.51 through $0.9999 per share, the minimum quotation size would be 1,000 shares;

$0.20 through $0.5099 per share, the minimum quotation size would be 2,500 shares;

$0.10 through $0.1999 per share, the minimum quotation size would be 5,000 shares;

June 19, 2012

SEC Suspends Trading for Record Number of Shell Companies

The Securities and Exchange Commission (SEC) today suspended the trading in 379 dormant shell companies. This is the most trading suspensions in a single day in the history of the SEC. The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group. Each of the companies was a dormant shell that was lacking any and all public disclosures. That is, each of the companies failed to have adequate current public information available either through the news service on OTC Markets or filed with the SEC via EDGAR.

May 14, 2012

Private Capital Market Places – A Second Look

Last week I wrote a blog introducing, at least to me, Private Company Market Places (PCMP). A PCMP is a trading platform, such as SharePost or SecondMarket that provides a market place for illiquid restricted securities, such as private company securities, 144 stock, debt instruments, warrants, and the like or alternative assets. It is on a PCMP that Facebook’s shares currently trade and where pre-IPO Groupon and LInkedin received their trading start.

This week I reviewed some of the top PCMP players, including Gate Technologies, SecondMarket, Sharespost and Xpert Financial. I have no affiliation, have never worked with and maintain no accounts with any of these PCMPs.

PCMP’s are Broker Dealers or Affiliated

Each PCMP is a licensed broker dealer or affiliated with a licensed broker dealer, that has either created or licensed an electronic trading board, available at their respective websites, which allows investors to view, buy, and sell otherwise illiquid, restricted or alternative assets. These securities are

December 16, 2011

Private Capital Marketplace – A First Look

As I discussed in a recent blog, the attraction of the small cap and reverse merger market has diminished greatly in the past two years. The Over the Counter market has become an expensive place to conduct business; the antithesis of the very reason small companies sought to list there to begin with. Accessing capital markets for microcap companies is not as simple as it once was.

In addition to the added expensive of complying with the Securities Exchange Act of 1934 disclosure requirements, the marketplace invites speculators who short sell (bet that the price of a stock will go down) and hedge with derivatives, often creating unpredictable volatility and share prices not indicative of the underlying value of the actual business.

No Automatic Liquidity for Issuers

Being public is no guarantee of liquidity either. It’s fantastic for an issuer to state that their stock is being quoted at $5.00 per share, but if there is no volume (the shares

December 9, 2011

DTC Eligibility and the OTC Issuer (Part 3)

This is the third in a series of articles I am writing regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets. All technical information in this article comes from the DTC website.

DTC Eligibility

As detailed in my first two articles in this series, in order to become and remain DTC eligible, and Issuer must have a transfer agent that has completed and has on file with DTC a DTC Operational Arrangements Agent Letter. In addition, all Issuers must meet the requirements set forth in the DTC Operational Arrangements (OA). This article begins to discuss the OA necessary for an Issue to become and remain eligible for DTC service. Moreover, the OA rules relate to and regard all Issuers. This article will only discuss those rules and requirements for OTC Issuers.

The DTC OA states:

“Generally,

November 3, 2011

DTC Eligibility and the OTC Issuer (Part 2)

This is the second in a series of articles regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets. All technical information in this blog comes from the DTC website.

DTC Requirements for Eligibility

As discussed in my first article on this topic, Issuers, a sponsoring DTC Participant Member must make application to become DTC eligible. The DTC Operational Arrangements criteria (available on the DTC website) set forth in-depth requirements for eligibility, which will be discussed in a separate articles in this series on DTC eligibility. In addition to the Operational Arrangements, in order to be DTC eligible, an Issuer’s securities must:

(i) be issued in a transaction registered with the SEC under the Securities Act of 1933, as amended (“Securities Act”);

(ii) be issued in a transaction exempt from registration under the Securities Act and

October 10, 2011

DTC Eligibility and the OTC Issuer

This is the first in a series of articles I am writing regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the Over the Counter market, including the OTCBB, OTCQB and PinkSheets.

DTC eligibility has become a major concern for OTC Issuers in the past year. Obtaining and maintaining eligibility is of utmost importance for the smooth trading of an Issuer’s float in the secondary market. Moreover, DTC eligibility is a prerequisite for OTC Issuers’ shareholders to deposit securities with their brokers and have such securities be placed in street name. Most Issuers and many legal practitioners do not know or understand the eligibility requirements or procedures.

The DTC Application Process

First and foremost, like a Form 211 submittal to FINRA, an Issuer cannot make direct application to DTC for eligibility. An application must be submitted and sponsored by a DTC Participant. A current list of DTC Participants

October 5, 2011

SEC Approves BX Venture Market

The SEC has recently approved the NASDAQ OMX Group, Inc.’s application to form the BX Venture Market (“BX Market”) as an alternative quotation medium to the OTCBB and OTC Markets, Inc. (including PinkSheets, OTCQB and OTCQX). The new BX Market will provide companies that do not otherwise qualify for an exchange listing, an opportunity to list their shares. The BX Market will compete with the OTCBB and the OTC Markets OTCQB and OTCQX (interestingly and as an aside, NASDAQ sold the OTCBB last year to a private buyer). The SEC has issued an in-depth order approving the application.

The OTCBB, OTCQB and OTCQX Alternative

The BX Market is marketing itself as a more transparent, better regulated, listing alternative to both the OTCBB and OTCQB and OTCQX. Presumably this means that companies trading on the BX Market would appear to have greater credibility than those on the OTCBB or OTCQB/QX. The BX Market will be run through joint ventures with NASDAQ

June 17, 2011

Filing Deadlines for Exchange Act Quarterly and Annual Reports

It should be noted that this article focuses specifically on non-accelerated filers.

Companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to file quarterly reports on Form 10-Q and annual reports on Form 10-K. In additional articles, I will discuss in depth the contents and specific disclosure requirements of both forms. However, in summary, the quarterly report on 10-Q contains unaudited reviewed quarterly financial statements together with management discussion and analysis of those statements.

Form 10-K

The annual report on Form 10-K contains audited annual financial statements, together with management discussion and analysis of those statements as well as other disclosures including but not limited to management bios, management compensation, unregistered issuances of stock, generally background on the registrant, internal control reports, litigation matters and more.

Quarterly reports on form 10-Q are due 45 days from the end of the quarter and annual reports on Form 10-K are due

June 1, 2011

Has The OTCBB Been Replaced By The OTCQX And OTCQB?

Over the past few years, the historical “PinkSheets” has undergone some major changes, starting with the creation of certain “tiers” of issuers and culminating in its newly refurbished website and new URL www.otcmarkets.com. Where the term “PinkSheets” used to denote an over the counter quotation system using the website www.pinksheets.com it now simply refers to the lower tier of entities that trade on the over the counter market. In fact the URL www.pinksheets.com no longer exists with users being redirected to the new www.otcmarkets.com.

Three Levels of Reporting

The new www.otcmarkets.com divides issuers into three (3) levels: OTCQX; OTCQB and PinkSheets. The new website also provides quotes for the OTCBB but it seems this is just more as a comfort or segue until the industry gets used to the idea that the “bulletin board” is no more. The OTCBB has no particular listing or quotation requirements other than that the issuer be subject to the reporting requirements of

December 9, 2010

Potential Impact of Rule SEC Release #34-60515 Regarding Proposal to Extend Regulation NMS Coverage to OTC Securities

FINRA, in August of 2009, filed Release No. 34-60515 with the SEC. FINRA proposes to extend certain NMS protections to quoting and trading in the OTC market for equity securities.

In summary:

Restrictions on sub-penny quoting;
Prohibitions on locked or crossed markets;
Implementation of caps on access fees;
Requirements of transparency of customer limit orders.

FINRA’s goals, part of broadly anticipated changes in financial systems, are proposed as part of efforts to both modernize and achieve higher “quality” in the OTC marketplace.

1. Sub-Penny Quote Restrictions

FINRA addresses both issues of modernization and higher quality by proposing to restrict sub-penny quoting in conjunction with removing the requirement that ATS’s include non-subscriber access fees within its quote. Restricting sub-penny quoting may help prevent the practice of “stepping ahead” of displayed limit orders by trivial amounts.

The proposal will most effect small businesses whose securities trade for under $1.00. Under FINRA’s proposal, market participants will be able to quote in increments ranging

October 7, 2009

OTCBB Reporting Requirements Enable Successful Reverse Mergers

Companies subject to the reporting requirements of the Securities Exchange Act of 1934 (amended to the “Exchange Act”), without current business operations, and trading on the NASDAQ Over the Counter Bulletin Board (“OTCBB”), commonly known as Bulletin Board Shells, have become the vehicle of choice for private companies seeking to go public through a reverse merger.

Although the domestic economy has slowed, reverse mergers still flourish, and Chinese-based companies in particular have taken the lead in reverse mergers with Bulletin Board Shells. As old sectors slow, new sectors such as biofuels, health supplements, and agricultural science have risen to lead the charge into the public arena.

SEC Reporting Requirements Make Due Diligence Practical

Bulletin Board Shells have become the vehicle of choice for private companies seeking public status. This is due in part to increasing industry pressure for public companies to maintain total disclosure of their financial condition and operations.

Bulletin Board Shells and OTCBB Companies must prepare and file

October 5, 2009

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