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Changes to the OTCQB

posted in Going Public, OTC, Public Companies, Securities by

THE OTC MARKET

Over-The-Counter (“OTC”) securities are securities that are not traded on a formal exchange such as the NYSE, TSX, NASDAQ, etc. Instead, a company’s OTC securities are traded by broker-dealers who negotiate directly with one another. Depending upon the company’s integrity of its operations, its level of disclosure, and it degree of investor engagement, the OTC Markets Group organizes a company’s OTC securities into three (3) categories: OTCQX®, OTCQB®, and the OTC Pink®.

The OTCQX is designed for investor-focused companies that meet high financial standards, are current in their disclosure, and receive third party advisory services. The companies categorized into the OTCQX are distinguished by the excellence of their operations and diligence with which they convey their qualifications.

The OTCQB is the venture stage marketplace. It is a marketplace for companies that are smaller or in its early-stage that report to a U.S. regulator (such as the SEC). The OTCQB is the middle tier of the three OTC markets for trading OTC securities provided and operated by OTC Markets Group.

The OTC Pink is a marketplace that offers trading in a wide spectrum of equity securities through any broker. A company’s OTC securities that are categorized in OTC Pink only provide a base level of trading efficiency, and are in this category by reasons of default, distress, or design.

DESIRE TO CHANGE THE OTCQB MARKET

Currently, there are over 3,000 securities traded on the OTCQB with an average of 10 market makers per security. While the OTCQB has grown, company executives and investors have been wanting the OTCQB to be improved. From that desire, the OTC Markets Group has planned to implement certain changes to the OTCQB to improve this marketplace.

The OTC Markets Group’s goal is to make the OTCQB a real venture stage marketplace in the United States. In order to meet this goal, the OTC Markets Group will implement new requirements that provide more reliable information to investors, and holds companies on the OTCQB to higher standards.

CHANGES TO THE OTCQB MARKET

Beginning May 1, 2014, the OTC Markets Group intends to implement new eligibility standards where (1) companies will be required to meet a new bid price test,  (2) submit an annual OTCQB Certification signed by the company’s CEO or CFO, and (3) pay an application and annual fee.

(1)   Bid Price

OTC Markets Group will implement a one penny ($0.01) bid price requirement which is intended to remove companies that are most likely to be the subject of dilutive stock fraud schemes and promotions.

(2)   Annual OTCQB Certification

Each company’s CEO or CFO must sign an annual OTCQB Certification, stating that their company information is current. This Certification will be required for any security newly qualified to be publicly quoted by a broker-dealer under SEC Rule 15c2-11, or when an OTC Pink traded company becomes a current SEC reporting company.

By supplying this Certification, investors will gain access to information such as: the company’s reporting status, company profile, information on management and boards, major shareholders, law firms, transfer agents, and IR/PR firms.

(3)   Application and Annual Fee

Companies are also required to pay an annual $10,000 fee in order to be on the OTCQB marketplace. In addition to the annual fee, companies must also pay a one-time $2,500 application fee.

For companies that are already on the OTCQB, the application fee will be waived. However, current OTCQB companies must pay an annual $7,500 fee for the first two (2) years, where afterwards, the company will pay the normal $10,000 annual fee.

CONCLUSION

The changes to the OTCQB marketplace should improve investor confidence, and be a much better option for engaged and investor-focused venture stage companies. The added transparency and minimum standards should be a welcomed improvement for investors, broker-dealers, company advisers, regulators, company executives, and shareholders.

If you are interested in learning more about the changes to the OTCQB marketplace and how it may affect you, then please contact Larry Horwitz at lhorwitz@horwitzarmstrong.com.

14 Apr, 14

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