The winds of change are blowing throughout the “Over the Counter” (OTC) stock market world. Investors and traders have been steadily growing tired of shams and the lack of transparency when researching publicly traded companies and even more tired of getting hoodwinked out of their hard-earned money by companies that ended up being completely fraudulent.
The Security and Exchange Commission (SEC) has recognized and acknowledged the problems of the OTC market for years, but with over 9,300 OTCBB and Pink Sheet traded companies, it has, quite simply, been underpowered to fully address these issues to the level that it requires. Resurgence is happening with the SEC recently cracking down hard on unethical promoters and companies with this trend fully expected to continue. Aiding in this effort to create more transparency, the OTCQX has been gaining popularity as its primary goal is to provide a premiere platform of information for investors based on the company’s compliance to meet a higher set of standards.
“Regulation” is a word that has been thrown around the OTC very loosely for years, as it is a difficult task to ever really fully complete. As mentioned above, there are simply too many companies listed on the OTC markets for the regulatory committees to sift through them constantly without greatly expanding their employee base. What the OTCQX does is provides companies the option of proving to investors that they are committed to “opening their doors,” so to speak, to their investors and potential investors by meeting the guidelines of qualitative and quantitative requirements. This is actually two-fold as it provides transparency for the company and shows a dedication to move on to more prominent exchanges such as AMEX, NASDAQ or NYSE in the future.
Understand that the focus of this article is on the OTCQX and the PremierQX tier of Pink OTC Markets. The other tiers of their system are relevant in the overall perspective of proving information and attempting to clean up listings, but will be discussed in further articles.
So what makes the OTCQX enticing to companies and investors? For companies, it is designed to separate them from the masses and build shareholder confidence based on the premise of meeting higher criteria that many companies simply cannot accomplish. Expanding on this idea, investors seeking more elite OTC companies will more easily discover the company which will increase the shareholder base and hopefully increase liquidity and share price based on demand. While the number is steadily growing, only 114 companies are listed at the OTCQX level to date. However, the combined market cap of those 114 companies is more than 10 times greater than all of the companies listed on AMEX. In fact, a number of large cap international companies, such as Adidas, BASF, Deutsche Telekom, and Roche trade on OTCQX presently as a less costly alternative to NYSE or NASDAQ where SEC filings are required.
Minimum requirements for U.S. companies to be listed on the OTCQX include:
• Ongoing business operations (no shell, bankruptcy, blank-check or development stage companies)
• Minimum $0.10 Bid price – This used to be $.25, but has since been changed as other financial aspects such as total assets, value of market shares, net income, revenues, etc. have been added as requirements for OTCXQ listing.
• Inclusion in S&P or Mergent Manual – These are public listings of companies which satisfies the Blue Sky requirements for secondary transactions in many states, together with a list of any other states in which the security is Blue Sky compliant and eligible to be sold by brokers in those states.
• 50 round lot shareholders – This means that a company must have at least 50 beneficial shareholders each with a minimum of 100 shares of the Company’s common stock.
• Retain a Designated Advisor for Disclosure (DAD) – A DAD is an independent third party that meets OTCQX standards as a securities market professional that will review the issuer and offer advice on compliance with current federal and state securities laws and OTCQX regulations. Both parties (the DAD and the Company) will submit letters of credibility and understanding of the rules for OTCQX listing.
• Provide disclosure to the marketplace via the SEC’s EDGAR system or pursuant to OTCQX U.S. guidelines(a more tailored approach to shareholder reporting that does not require SOX 404 internal control audits among other items) – The Sarbanes–Oxley Act of 2002 (commonly called “SOX”) has been a topic of much debate since its inception. It was created after scandals such as Enron and Tyco cost investors billions of dollars, but has been criticized as being far too complex and possibly reducing America’s international competitive edge with regards to foreign financial service providers. While similar, the OTCQX’s Alternative Disclosure Guidelines are not as complex.
• Annual U.S. GAAP (Generally Accepted Accounting Principles) financials audited by a PCAOB (Public Company Accounting Oversight Board) registered audit firm – This is standard issue for companies wishing to fully disclose financials.
• Also part of the listing process is a thorough investigation of the management team and the member’s backgrounds with regards to previous actions involving the stock market. Any fraudulent or misappropriate actions can be reason for the Company being denied OTCQX listing.
*Note that Companies listed on the higher PremierQX tier must also have 100 round lot shareholders, a $1 Bid price, hold annual shareholder meetings and meet other financial criteria. Premier QX listing is similar in nature to continued listing requirements for a Nasdaq Capital Market listing, without the higher burden of cost.
The OTCQX Platform is 100% electronic, whereas the OTCBB platform is still a telephone platform, and allots investors the ability to trade through all major online and full-service brokerage firms in the U.S., including, but not limited to, Schwab, E*TRADE, Scottrade, TD Ameritrade, and Fidelity. Trades are settled and cleared in the U.S. much like all other NASDAQ or NYSE security with trade reports being disseminated through Yahoo, Bloomberg, Reuters, and most other financial data providers. For active traders, a relatively unique feature is that the OTCQX platform provides Real-Time Level 2 Quotations (full quote montage) to the public for free.
So what does all of this mean? Simply stated, the OTCQX is providing companies the ability to distinguish themselves and show a commitment to provide information to investors on a variety of levels. While some companies have offered this sort of diligence to their investors in the past, there was never a platform or tier system to elevate themselves from the pack of the thousands of other companies that simply traded under the generic label of having “.OB” after their four letter ticker symbol. It is a legitimate attempt to clean-up the OTC market and a welcome new way of investigating possible investments or keeping track of current ones for many people in the investment community. Will it mean the end of all corruption and lack of transparency? Of course not, but it is a step in the right direction.
More information on the OTCQX can be derived from the OTC Markets website at www.otcmarkets.com.