Over the Counter (OTC) Markets
OTC Markets is not a formal stock exchange. OTC Markets is a less major market that trades smaller companies’ stock. OTC markets are made up of groups of companies that trade stock among themselves using the OTC Markets platform. It is possible for companies to transition from OTC Markets to markets on major exchanges, provided that they meet the major exchanges’ listing requirements. The three branches of OTC Markets are OTCQX, OTCQB, and OTC Pink. These branches have varying requirements, detailed below. Also, FINRA oversees a securities market called the OTC Bulletin Board (OTCBB), another provider of quotes on the OTC markets. Below is a brief summary of these four branches of OTC securities.
- OTCQX: This market is not the most populated due to its extensive qualifying requirements, but is the right fit for wealthier corporations in good standing with the SEC.
- OTCQB: The OTCQB primarily lists small and emerging ventures that have accurate financial reports and comply with the SEC’s regulations.
- OTCBB: The OTCBB is not recommended, as it has been replaced by OTCQB, but lists companies that sell SEC-registered securities.
- OTC Pink: Lists companies in an open marketplace, void of any regulatory requirements.
OTC Pink Tiers
Companies fit into five specific tiers within the OTC Pink market.
- Current Information: These companies frequently provide information in the form of their financial reports to the SEC or OTC Markets.
- Limited Information: The companies that provide information less frequently, and have not submitted any reports within the last half year.
- No Information (Red Flag): Companies in this category have either provided no information or it has been more than six months since their last report. This is a red flag for other companies that wish to trade, as businesses in this category may not be trustworthy.
- Caveat Emptor: This phrase is Latin for “Let the buyer beware.” OTC Markets strongly discourage investors from considering these markets, as they continue to provide little to no financial information. These companies may be engaging in scams or other manipulative business practices.
- Grey Market: Grey market companies are not trading on any OTC markets due to their lack of financial reporting or failure to keep up with SEC rules. These companies consequently struggle to attract devoted investors.
To list securities on over-the-counter markets, companies must file a 15c2-11 application to the Financial Industry Regulatory Authority (FINRA). Filing a 15c2-11 form requires issuers to abide by the requirements of Rule 15c2-11. Broker dealers must receive specific information from issuers to meet these requirements. This includes but is not limited to financial reports and issuer forms such as a prospectus and all Form 10-K, 10-Q and 8-Ks. To file a 15c2-11, the issuer must be in good standing with the SEC, remaining up to date on their filings by meeting all the required deadlines. Once the broker-dealer has the required issuer information, they submit it to FINRA through a market maker.
Not all issuers who wish to trade on OTC markets have to file a 15c2-11. There are numerous exceptions, including, for example, having traded the securities you wish to trade over the counter on a formal exchange previously. Contact Issuer Consulting today to receive professional assistance filing your 15c2-11 application or determine if you qualify for any of its exceptions.