Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Wednesday, July 24, 2013

OTCMarkets Disclosure Tiers

Companies who go public can list on national securities exchanges such as NASDAQ, the American Stock Exchange or the New York Stock Exchange. The securities of companies who go public can also be quoted by The OTCMarkets Group, Inc. (“OTCMarkets”).
The OTCMarkets Group is a private company that operates an electronic inter-dealer quotation system that displays quotes and last-sale information for securities. OTCMarkets does not require companies whose securities are quoted on its system to meet any eligibility requirements.
Many companies quoted by OTCMarkets do not file periodic reports or audited financial statements with the Securities and Exchange Commission (“SEC”), and many have not filed registration statements with the SEC. As such, it can be difficult for the public to find current, reliable information about these companies.

OTCMarkets Disclosure Tiers

Companies quoted by OTCMarkets are categorized, according to the level of disclosure they provide to the public through OTCMarkets’ website. The OTCMarkets’ disclosure tiers are discussed below. It is important to note that the anti-fraud provisions of the federal securities laws are applicable to both reporting and non-reporting issuers quoted on the OTCMarkets.


OTCQX is the top disclosure tier of OTCMarkets. To list on this tier a company must undergo a qualitative review and meet financial standards. The OTCQX is a market tier frequently chosen for issuers that have filed registration statements with the SEC or who are registered with and file reports to the SEC.
The OTCQB is in the middle disclosure tier of OTCMarkets. The only requirement for companies in this tier is that they are reporting with the SEC. Companies in this tier have often filed registration statements with the SEC most often on Form S-1. All companies may use SEC Form S-1 to register a securities offering including companies conducting direct public offerings as part of a going public transaction.

OTCMarkets OTC Pink

OTC Pink is the third tier of OTCMarkets. OTC Pink companies can choose the level of disclosure they provide to investors and may have current, limited or no public disclosure. Being listed on the OTC Pink tier indicates that a company has either submitted information no older than six months to the Pink Sheets News Service or that they have made a filing on the SEC’s EDGAR system in the previous six months. This category includes shell companies or development stage companies with little or no operations as well as companies without audited financial statements, and as such companies on this tier should be considered extremely speculative by investors. Issuers in this tier  have typically not filed registration statements with the SEC.
Current SEC reporting companies and non-U.S. companies that are listed on a qualified foreign stock exchange automatically qualify for the Pink Sheets Current Information Tier.
OTCMarkets OTC Pink Disclosure Requirements
Issuers not reporting with the SEC must meet the following requirements to be quoted with the Pink Sheets Current Information Tier:
1.    Subscribe to the OTC Disclosure and News Service;
2.   File an Initial Information and Disclosure Statement with the OTCMarkets Service;
3.   Submit a signed Attorney Letter Agreement;
4.   Post a legal opinion from a securities lawyer stating among other things that they have provided adequate public information;
5.   Publish annual updates to the Disclosure Statements filed including unaudited GAAP compliant;
6.   Post financial information on the OTCMarkets website no later than 90 days after the end of each fiscal year;
7.   Publish Quarterly Updates to disclosure statements, including unaudited GAAP compliant financial statements, for posting on the OTCMarkets website no later than 45 days after the end of each fiscal quarter;
8.   Publish current updates within 10 business days in the event that any of the information contained in the disclosure statement (including information contained in any prior update) has become materially inaccurate or incomplete, or upon the occurrence of certain material events; and
9.   Publish a quarterly attorney letter regarding the adequacy of the issuer’s public disclosures.

OTCMarkets Limited Information

The Limited Information tier is designed for companies that are unwilling or unable to meet Pink Sheets’ guidelines for providing adequate current information. These are often companies with financial reporting problems, economic distress, or that are in bankruptcy. This tier indicates companies that are unwilling or unable to provide disclosure to the public markets – either to a regulator, a stock exchange or OTCMarkets. Companies in this category do not make current information available. 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 unwilling to provide investors with information should be treated with suspicion and their securities should be considered highly risky and subject to a total loss of one’s ill-considered investment.
OTCMarkets Caveat Emptor
This tier often includes companies that are subject to an SEC trading suspension, spam campaign, stock promotion or known investigation of fraudulent activity.
The solution for issuers seeking to become public is to file a registration statement under the Securities Act of 1933. If an issuer does not have an underwriter, they can register securities in a direct public offering.   Issuers expecting to obtain and maintain DTC need to recognize that it is more difficult if they go public in a reverse merger transaction with a public shell company because of the perceived fraud associated with reverse merger companies.  Additionally, issuers  should avoid using the services of securities professionals who have been the subject of SEC investigations and enforcement actions.  The key to being listed on the OTCMarkets is SEC registration.

This informational memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates Securities Lawyers. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney

101 Plaza Real South, Suite 201 South
Boca Raton, Florida 33432 
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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