OTC Markets Group

The OTC market is where all securities that are not listed on a U.S. stock exchange, such as NASDAQ or the New York Stock Exchange, trade in the U.S. Unlike a traditional exchange, companies do not choose to “list” on the OTC but, instead, broker-dealers decide which unlisted securities they wish to trade OTC – usually based on investor demand. Individual broker-dealers trade directly with each other rather than going through a central stock exchange. There is an incredible diversity of companies whose securities trade OTC – including large international companies with primary listings on foreign stock exchanges, community banks, large-cap companies in financial distress or that have reporting problems, and smaller U.S. companies that are either not able or interested in listing on a U.S. exchange. Some OTC securities are actively traded each day and others are relatively inactive and infrequently traded.

OTC Markets Group is not a stock exchange, regulator, or a broker-dealer. OTC Markets Group operate an interdealer quotation system and electronic messaging service, called OTC Link^®, for broker-dealers to trade OTC equities. About 150 broker-dealers “make” markets in 10,000 OTC securities on the OTC Link system. OTC Markets Group organize these securities into 3 tiers: OTCQX, OTCQB and OTC Pink. This competing market maker model is similar to NASDAQ’s and the 150 broker-dealers making markets on the OTC Link system also make markets on NASDAQ.

Regulation of the OTC Market

Although OTC Markets Group operates many of the services used to trade OTC securities, it does not regulate the companies or the trading in the OTC markets. Stock exchanges have specific quantitative and qualitative listing and maintenance standards, which are stringently monitored and enforced. Companies listed on a stock exchange have reporting obligations to the exchange, and an on-going regulatory relationship exists between the exchange and its listed companies. OTC Markets facilitates quotation of unlisted securities by broker-dealers. As such, there is no regulatory relationship between OTC Markets and the companies whose securities are quoted on its platform.

FINRA, the Financial Industry Regulatory Association, regulates broker-dealer activity in the OTC market. It writes and enforces rules concerning the quotation and trading of OTC securities and it operates the trade reporting facility. Recently there has been a trend of increasing regulation in the OTC markets. FINRA has begun a process of normalizing existing OTC market rules to apply to all OTC equity securities, regardless of whether or not it is being quoted by a broker-dealer in an interdealer quotation system. (Previously many of its rules only applied to securities quoted on its own FINRA BB.) It is also bringing many rules to the OTC market that were formerly applicable only to trading in exchange-listed securities, such as Short Interest Reporting and Display of Customer Limit Orders.

How Do Companies Get onto the OTC Market?

Because it is not an exchange, companies do not choose to be traded on the OTC market. Broker-dealers decide which stocks to quote for best execution of their customer orders. There are 3 ways that securities begin trading in the OTC market:

• A broker-dealer files a Form 211 with FINRA in order to begin quoting the security on an interdealer-quotation system. This method is generally used for companies that have no history of trading in the public markets or to begin trading again after a lapse in trading.
• De-list from an exchange. When a security is delisted from an exchange, the trading in the stock generally moves to the OTC market.
• Reverse merger into a shell company already traded OTC.

OTC Market Tiers

The OTC market represents a broad and diverse group of companies with a variable level of financial strength, disclosure availability and management quality. Market capitalizations range from micro-cap start-ups to large cap multi-national companies. In order to help investors navigate this market, OTC Markets organizes all securities quoted on its system into three tiers: OTCQX, OTCQB and OTC Pink. They believe that segmenting the OTC marketplace motivates issuers to provide the highest level of disclosure and compliance based on their capabilities and leads to more efficient capital allocation by investors.

• OTCQX^® – The Intelligent Marketplace

OTCQX is the intelligent marketplace for the best OTC companies with the highest financial standards and superior information availability.

• OTC Pink^™ Current Information

Companies that follow the International Reporting Standard or the Alternative Reporting Standard by making filings publicly available through the OTC Disclosure & News Service pursuant to OTC Markets Group Guidelines for Providing Adequate Current Information are designated as OTC Pink Current Information. The Current Information category is based on the level of disclosure and is not a designation of quality or investment risk. This category includes shell or development stage companies with little or no operations as well as companies without audited financials, and as such should be considered extremely speculative by investors.

There are no financial or qualitative standards to be in this tier.

• OTC Pink Limited Information

Designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available. The Limited Information category also includes companies that may not be troubled, but are unwilling to meet OTC Markets’ Guidelines for Providing Adequate Current Information. Companies in this category have limited financial information not older than six months available on the OTC Disclosure & News Service or have made a filing on the SEC’s EDGAR system in the previous six months.

• OTC Pink No Information

Indicates companies that are not able or willing to provide disclosure to the public markets – either to a regulator, an exchange or OTC Markets Group. Companies in this category do not make Current Information available via OTC Markets Group’s News Service, or if they do, the available information is older than six months. This category includes defunct companies that have ceased operations as well as ‘dark’ companies with questionable management and market disclosure practices. Publicly traded companies that are not willing to provide information to investors should be treated with suspicion and their securities should be considered highly risky.

FINRA BB

FINRA operates an electronic bulletin board for OTC stocks which they call the OTC Bulletin Board. Quotation on the FINRA BB is limited to SEC reporting issuers and community banks who file with banking regulators. Over the years, this has resulted in the false perception by investors that the “best” OTC securities are on the FINRA BB when, in fact, it has no financial or qualitative standards.

Virtually all securities on the FINRA BB are also quoted on the OTC Link system. Furthermore, there are approximately 1,000 SEC reporting companies that are quoted on OTC Link and not the FINRA BB. In an effort to better distinguish all OTC securities that are registered and reporting with U.S. regulators, OTC Markets Group created the OTCQB tier.