OTCQX and OTCQB: The OTC Markets Path

Full Transcript

Welcome to Securities Lawyer 101, the podcast from Hamilton and Associates Law Group in Boca Raton, Florida. Not every public company starts on a national exchange. Many trade on the markets operated by O-T-C Markets Group. Today we'll look at the two higher tiers, O-T-C-Q-X and O-T-C-Q-B.

First, some context. The O-T-C Markets are not stock exchanges. O-T-C Link A-T-S is an S-E-C-registered alternative trading system where broker-dealers quote and trade securities. O-T-C Markets Group organizes companies into tiers based on the quality and availability of their disclosure and on other standards.

O-T-C-Q-B, often called the Venture Market, is designed for early-stage and developing companies. To qualify, a company generally has to be current in its reporting, whether through SEC filings, Regulation A reports, or O-T-C Markets' alternative reporting standard. It must meet a five-cent minimum bid price test for initial qualification and one-cent on an ongoing basis, satisfy public float and shareholder standards, have priced quotes from a market maker, maintain a verified company profile, complete the required annual management certification when applicable, and pay an annual fee. Shell companies and companies in bankruptcy face restrictions.

O-T-C-Q-X, the Best Market, sets a higher bar. Companies must meet stronger financial standards, including specified requirements relating to net tangible assets, revenue, market capitalization, bid price, shareholders, and public float, along with corporate governance requirements, including independent directors and an audit committee. The specific requirements vary depending on the company's eligibility route and whether it is a U.S. or international company. Shell companies, blank-check companies, companies in bankruptcy, and penny stocks generally aren't eligible. International companies may also need a sponsor.

Why do these tiers matter? Visibility and credibility are part of it. The tier provides investors and market participants with information about the company's disclosure, financial, and governance standards. There are also practical benefits. O-T-C-Q-X and O-T-C-Q-B securities currently qualify for secondary-trading exemptions in a majority of states through recognition of the markets as electronic equivalents of securities manuals, although the applicable state law should always be checked. This can make it easier for brokers to handle the stock.

How does a company get there? If the stock isn't already quoted, the first step is usually a Form two-eleven, which is submitted to FINRA by a broker-dealer seeking to initiate or resume quotations, subject to applicable exemptions. The company also generally needs its shares to be eligible for electronic clearing through the Depository Trust Company, often called D-T-C eligibility. Then the company applies to O-T-C Markets for the tier it wants. We'll cover Form two-eleven and D-T-C eligibility in more detail in a later episode.

Companies that report under O-T-C Markets' alternative reporting standard, rather than filing with the SEC, may also need an attorney letter confirming that their disclosure provides adequate and current information, particularly when their financial statements are not audited by a P-C-A-O-B-registered firm. Companies should also watch for designations such as a promotion flag or the Caveat Emptor skull and crossbones, which O-T-C Markets can apply when it identifies stock promotional activity or public-interest concerns. Those designations can seriously affect trading, and getting them removed takes a deliberate process.

Staying on these tiers takes discipline. Companies must stay current in their reporting, keep meeting the bid price and other standards, and complete annual certifications. Falling short can mean moving down to a lower tier, which can hurt liquidity and investor confidence.

For many companies, O-T-C-Q-B or O-T-C-Q-X is a strong home in its own right. For others, it's a stepping stone to Nasdaq or the New York Stock Exchange.

Companies should choose an O-T-C tier based on what they can maintain, not just what they can reach on the application date. A higher tier can provide greater market visibility, but recurring disclosure, certification, price, shareholder, and governance requirements continue after admission. Management should know who will prepare each report, who will verify the company profile, when attorney letters are required, and how quickly the company can respond if O-T-C Markets requests additional information.

The public-information record needs to tell one consistent story. The company name, business description, officers, directors, control persons, outstanding shares, transfer agent information, address, and website should align across disclosures, the issuer profile, state records, and the company's own site. Conflicts invite questions from investors, brokers, attorneys, and market operators. They can also slow reviews when the company later seeks financing or an uplisting.

Promotion flags and public-interest designations should be treated as operational events, not merely public-relations problems. The company should preserve communications with promoters and investor-relations providers, review disclosure and trading activity, correct inaccurate public information, and coordinate its response with counsel. Removing a designation may require more than publishing a press release. The best prevention is accurate disclosure, careful oversight of third parties, and a clear record showing who is authorized to speak for the company.

A tier application should include a maintenance plan for the next twelve months. That plan should assign every disclosure, certification, profile update, attorney letter, fee, and governance action to a named owner with an internal deadline. Admission based on a one-time cleanup is fragile. The better objective is a repeatable process that keeps the company eligible without emergency corrections every reporting period.

That's it for this episode. If you're exploring the O-T-C Markets, call Hamilton and Associates Law Group at five six one, four one six, eight nine five six, or visit Securities Lawyer 101 dot com to speak with a securities attorney. This podcast is for general information only. It is not legal advice, and listening does not create an attorney-client relationship. Securities rules change, so speak with qualified counsel about your specific situation.