Going Public

 

LawCast- Legal & Compliance, LLC- Rule 144

The Securities Act of 1933 (“Securities Act”) Rule 144 sets forth certain requirements for the use of Section 4(1) for the resale of securities. Section 4(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” The terms “Issuer” and “dealer” have pretty straightforward meanings under the Securities Act, but the term “underwriter” does not. Rule 144 provides a safe harbor from the definition of “underwriter.” If all the requirements for Rule 144 are met, the seller will not be deemed an underwriter and the purchaser will receive unrestricted securities. Although not set out in the statute, all transfer agents and Issuers, along with most clearing and brokerage firms, require an opinion of counsel as to the application of Rule 144 prior to removing the legend from securities and allowing their sale under Rule 144. The opinion letter must set forth that the facts regarding that Issuer, particular stock and selling shareholder comply with the requirements under Rule 144. Rule 144 only addresses the resale of restricted or control securities, not unrestricted securities or sales directly by an Issuer. Unrestricted securities (such as securities that have been registered under the Securities Act) may be sold without reference or regard to the Rule. Control securities are those securities held by an affiliate of the issuing company, and restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the Issuer. The six-month holding period only applies to Issuers that are subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). A voluntary filer is not subject to the Exchange Act reporting requirements, and the longer one-year holding period is applicable. However, the determination of whether the Issuer is reporting or non-reporting is made as of the time of the proposed sale, as is the determination of the other Rule 144 requirements. Accordingly, if, following the issuance of securities, a non-reporting issuer files a Form 10 registration statement and becomes subject to the reporting requirements of the Exchange Act, the six-month holding period would apply. The current public information requirement is measured at the time of each sale of securities. That is, the Issuer, whether reporting or non-reporting, must satisfy the current public information requirements as set forth in Rule 144(c) at the time that each resale of securities is made in reliance on Rule 144. Many Form 144’s and attorney opinion letters cover a three-month period and a majority of Sellers’ market securities over that three-month period. However, the Seller (or person selling on behalf of the Seller, such as the broker-dealer) is required to make a determination that the current public information is available at the time of each sale. The holding period is determined as of the date of the proposed sale—provided, however, that Rule 144 makes numerous specific provisions for the calculation of the holding period and enumerates specific instances in which a holding period may be tacked onto the holding period of previously issued securities. For example, in determining the holding period where the securities were paid with a promissory note, installment contract or other obligation to pay in the future, the holding period does not begin until payment has been made in full—that is, unless the promissory note or installment contract provides for full recourse against the purchaser of the securities, is secured by fair value collateral other than the securities purchased, and has been paid in full prior to the proposed Rule 144 sale date. As another example, securities acquired from the Issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to be acquired at the same time as the securities on which the dividend is paid or the securities surrendered in the recapitalization. If securities were acquired by the Issuer solely in exchange for other securities of the same Issuer, such as in a 3(a)(9) transaction, the newly acquired securities are deemed to be acquired at the same time as the securities surrendered in the exchange or conversion. When relying on Rule 144 for the resale of over-the-counter traded securities (pinksheets or bulletin board), sellers may only sell 1% of the outstanding securities of the Issuer in every 90-day period. Calculations of volume restrictions based on trading volume are only available for the sale of exchange traded securities. The manner of sale requirements require that securities sold in reliance on Rule 144 be sold only in broker’s transactions, directly with a market maker or in riskless principal transactions. Moreover, the person selling the securities may not arrange for the solicitation of any sale orders. The posting of a customer limit order is not considered a solicitation for purposes of this rule. Finally, and importantly, Issuers and sellers must be aware that Rule 144 is not available to shell companies. A shell company is an Issuer with no or nominal operations or no or nominal non-cash assets. The rule is unavailable for the sale of securities initially issued by a shell company or any Issuer that has, at any time, previously been a shell company unless all the requirements of Rule 144(i)(2) are met. These requirements include that the Issuer no longer be a shell company, is subject to the reporting requirements of the Exchange Act for 12 months following the time that it filed Form 10 information indicating it was no longer a shell company, and is current with all Exchange Act reporting requirements.

LawCast- Legal & Compliance, LLC- Using Social Media for Corporate Announcements

Background

Previously, on April 2, 2013, in response to a Facebook post made by Reed Hastings, CEO of Netflix, the Securities Exchange Commission (“SEC”) issued a report confirming that companies can use social media, such as Facebook and Twitter, to make company announcements in compliance with Regulation Fair Disclosure (Regulation FD) as long as investors are alerted as to which social media outlet is being used by the company. Regulation FD requires that companies take steps to ensure that material information is disclosed to the general public in a fair and fully accessible manner such that the public as a whole has simultaneous access to the information.  Regulation FD ended the era of invitation-only conference calls between company management and a select group of brokers and investment bankers, in which plans and earnings would be discussed and material information shared in advance of such information becoming public knowledge.  In its report issued on April 2, 2013, the SEC confirmed that Regulation FD applies to social media in the same manner it applies to company websites.  In a series of blogs entitled SEC Guidance on Social Media and Websites for Company Announcements and Communications published here , and 4/25/2013, 5/3/2013, and 5/14/2013 I discussed this guidance. Moreover, federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue while it is “in registration” in connection with a public offering.  The purpose of these regulations is to ensure that communications are fair and balanced and not intended to condition the market for the offering.  Failure to comply with these restrictions could delay or prevent the public offering and result in civil and criminal penalties. According to the SEC, “in registration” refers to the entire process from the time an issuer reaches an understanding with its managing underwriter or an internal decision to file a registration statement, through the period of effectiveness.  In addition to the anti-fraud provisions, the SEC requires that certain notices (a “legend”) be placed on written communications. Similarly, the federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue in conjunction with the solicitation of shareholder consent and proxies associated with a business combination transaction (i.e., a merger).

New Guidance on Use of Social Media for Communications Related to or During an Offering

The SEC has many rules and regulations related to communications surrounding an offering period.  Rule 134 addresses communications made after the filing of a registration statement by an Issuer regarding the issuer, the offer, and procedural matters related to the offering.  Except where the communication is a simple tombstone ad containing no more than the contact information and a URL link to the filed registration statement, and identifying the type of security and price range and underwriter, Rule 134 requires that certain legends appear on all such communications.  For instance, Rule 134(b) requires the following legend on all communications after the filing of a registration statement and prior to its effectiveness: “A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.” Rule 134(d) requires that a communication that is accompanied or preceded by the prospectus must contain the following legend: “No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.” Clearly, some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the required statements together with the other information. The April 21, 2014, SEC C&DI update answers the question “[U]nder what circumstances would the use of a hyperlink to the required statements satisfy the Rule 134(b) or Rule 134(d) requirements?” The SEC provides the following answer: “Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders and potential investors, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 134(b) or Rule 134(d) in the following limited circumstances:

  • The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
  • Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
  • The communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication is capable of including the required statements, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required statements would be inappropriate.” [April 21, 2014] Moreover, the SEC provided guidance on a Company’s responsibilities for a third party’s re-transmission or re-posting of a Company’s communication.  That is, the SEC addresses a Company’s responsibility where a third party retweets or shares a company communication.  In particular, the SEC C&DI provides: “Answer: If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer. As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.” [April 21, 2014] Note that Securities Act Release No. 33-8591 (July 19, 2005) is the Securities Offering Reform Act of 2005, which included the initial enactment of Rule 134.  A complete discussion of the Securities Reform Act is beyond the scope of this blog; however, the Act loosened up pre- and post-filing offer and communication rules dramatically. In addition, Rule 433 contains requirements for communications (“free writing prospectus”) made after the effectiveness of a registration statement which information is not contained in such registration statement.  The SEC repeats its guidance related to direct company communications and third-party reposts of such communications, verbatim, in relation to Rule 433.

New Guidance on Use of Social Media for Communications in Connection With a Business Combination Transaction

Similar to the rules related to communications during an offering process, the SEC has rules related to communications both before and after the filing of a registration statement in conjunction with a business combination (merger) transaction and communications made for the purpose of soliciting votes in favor of or against a proposed transaction.  Rule 165 governs such communications.  Rule 165 communications requires a legend, similar to Rule 134, on Company communications. Again, some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the required statements together with the other information. The April 21, 2014, SEC C&DI update answers the question “[U]nder what circumstances would the use of a hyperlink to the legend satisfy the Rule 165(c)(1) requirement?” The SEC guidance mirrors the guidance related to Rule 134 communications.  The SEC states: “Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 165(c)(1) in the following limited circumstances:

  • The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
  • Including the legend in its entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
  • The communication contains an active hyperlink to the required legend and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication is capable of including the required legend, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required legend would be inappropriate. This position also applies to written communications that constitute solicitations made in reliance on Exchange Act Rule 14a-12 and pre-commencement written communications subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a).” [April 21, 2014]

Conclusion

Although this guidance is helpful, it is also problematic.  In particular, the SEC requires “[T]he communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.”  The obvious issue is: how can a Company satisfy this requirement and include any other information of relevance in 140 characters or fewer?  Also not addressed is whether a Company can post a series of communications, which are obviously related both in topic and time (such as a delay of no more than a few minutes between each post), and only include the required hyperlink and statement in one of such posts.

LawCast- Legal & Compliance, LLC- Risk Factor Disclosures For Reporting Public Companies

A risk factor disclosure involves a discussion of circumstances, trends, or issues that may affect a company’s business, prospects, operating results, or financial condition.  Risk factors must be disclosed in registration statements under the Securities Act and registration statements and reports under the Exchange Act.  In addition, risk factors must be included in private offering documents where the exemption relied upon requires the delivery of a disclosure document, and is highly recommended even when such disclosure is not statutorily required.

The Importance of Risk Factors

Risk factors are one of the most often commented on sections of a registration statement.  The careful crafting of pertinent risk factors can provide leeway for more robust discussion on business plans and future operations, and can satisfy a wide arrange of SEC concerns regarding existing financial and non-financial matters (such as potential default provisions in debt, dilution matters, inadvertent rule violations, etc.). Although smaller reporting companies are not required to include risk factors in their annual Form 10-K and quarterly Form 10-Q, they may do so voluntarily and we recommend that such risk factors be included in their annual Form 10-K.  As a reminder, a “smaller reporting company” is an issuer that is not an investment company or asset-backed issuer or majority-owned subsidiary and that (i) had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter; or (ii) in the case of an initial registration statement, had a public float of less than $75 million as of a date within days of the filing of the registration statement; or (iii) in the case of an issuer whose public float as calculated by (i) or (ii) is zero, had annual revenues of less than $75 million during the most recently completed fiscal year for which audited financial statements are available. Risk factors, together with safe harbor language regarding forward-looking statements, can provide protection for forward-looking information contained in a document, such as plans and expectations,  that do not pan out as expected or intended.  Risk factors warn current and potential investors as to the risks of either purchasing or continuing to own the company’s stock.   As the securities of smaller reporting companies are often high-risk penny stocks or thinly traded, and such companies tend to be in the business development and growth stage of their corporate life cycle, protections against failed or changed plans is fundamental. By providing proper disclosure of the material risks associated with investing in a company’s securities, a company can mitigate the risk of liability to its shareholders should that risk come to pass.  Risk factors act as an insurance policy and strong defense in the face of shareholder litigation. The “bespeaks caution” doctrine refers to a line of judicial case law holding that statements of future forecasts, projections and expectations in an offering or other disclosure document are not misleading as long as they contain adequate cautionary language disclosing specific risks.  Section 21E of the Exchange Act, enacted as part of the Private Securities Litigation Reform Act of 1995, codifies this doctrine for qualifying issuers.  Section 21E provides a public company with a safe harbor defense in securities litigation challenging forward-looking statements.  Among other exclusions, companies that issue penny stocks may not rely on Section 21E, but may rely on the “bespeaks caution” line of case law. To avail itself of the safe harbor protection, the forward-looking statements must be identified and be accompanied by meaningful, cautionary language that identifies important factors that could cause actual results to differ materially from those projected—i.e., risk factors.   To provide protection, the risk disclosure must be specific, not just boilerplate.

SEC Rules and Guidance on Risk Factors

Regulation S-K sets forth the non-financial statement disclosure requirements for both the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) and is applicable to both registration statements and ongoing reporting requirements.  In addition, Regulation S-K serves as a guide in the preparation of private placement disclosure documents.  Items 501 and 503 of Regulation S-K include the requirements for the disclosure of risk factors. Risk factors must be disclosed in registration statements under the Securities Act and registration statements and reports under the Exchange Act.  Item 503 of Regulation S-K requires concise, logically organized statements of the particular risks involving either the company, industry or the offering being made by the company.  The statements should be categorized and appear in order of importance under each category. Item 503 requires that the disclosure of risk factors in a registration statement be included in the beginning immediately following the summary section, or if there is no summary section, immediately following the cover page. Item 501 requires that the risk factor section must be prominently cross-referenced by page number, on the cover page of a registration statement.  Most companies comply with this rule by using bold, italics, larger font size or a combination thereof to comply with this rule. Risk factor disclosures cannot contain countervailing or offsetting language.  That is, a company cannot explain away the risk. Like many areas of securities laws, the SEC gives broad guidance on disclosure, trying to avoid boilerplate language.  The SEC requires the reporting company to make relevant risk factor disclosures that are germane, concise and written in plain English.  The risk factors should be written as of the date of the report in which they are contained regardless of the period of the financial statements contained in such report.  Each risk must have a heading that adequately describes the risk being disclosed and such heading should be bolded, italicized or both.  Each risk must be concise and focused on a single material risk.  The risks must be easy to read and written in such a way to highlight the most important information. As mentioned above, the SEC requires that the risks be written in plain English.  This requirement is codified in Rule 421(d) of Regulation C.  Over the years, the SEC has published and updated plain English handbooks.  The SEC plain English guidelines require that the risk factor section contain (i) short sentences; (ii) definitive, concrete, everyday words; (iii) active voice; (iv) tables or bullet point lists, whenever possible; (v) no legal jargon or highly technical business terms; and (vi) no multiple negatives.

Categories of Risk Factors

In general, risk factors pertain to the company, the industry, or the investment or offering.  Company risks are those specific to the reporting company such as particular restrictive covenant documents, reliance or dependence on a concentrated source, or a history of losses.  Industry risks are particular to the industry of the reporting company, such as technology, manufacturing, textile, or commonly in today’s market, cannabis.  Investment or offering risks are those specifically tied to the security or trading market for the company’s securities, such as illiquidity.  The risks included in each category should be organized in the order of materiality and importance. The common broad areas of risk factor disclosure include:

    • Absence of an operating history;
    • Absence of revenues;
    • Absence of profits;
    • An accumulated deficit;
    • High degree of leverage (debt);
    • Dependence on a single or small number of products, suppliers, customers, manufacturers or markets;
    • Dependence on key personnel;
    • Dependence on particular financial resources or source of capital;
    • Early stage of product development;
    • Competition;
    • Adequacy of production and/or distribution;
    • Technological factors such as possible obsolescence;
    • Capital needs and the lack of adequate current or future funding;
    • A concentration of voting control in management or others;
    • The absence of a trading market or a thinly traded, low-priced market;
    • Litigation;
    • Governmental regulations;
    • Foreign operations and the effects of foreign regulations, export laws, and currency fluctuations;
    • Labor matters;
    • Intellectual property matters;
    • Restrictive covenants in contracts; and
    • Off-balance sheet arrangements

Risks that apply to any issuer or any offering should be avoided.  For example, a general statement that an economic downturn would negatively impact a business should not be included; however, a concise statement that a particular economic change, such as a reduction or increase in the federal interest rate (or whatever change impacts the reporting business), and the particular risk associated with that change, could be included.  Specific example are encouraged.

Typical SEC Comments on Risk Factors

Risk factors are one of the most often commented on sections of a registration statement or SEC report.  These common SEC comments illustrate the SEC’s focus in reviewing risk factor disclosures.

    • We suggest that you revise your risk factor captions to make your disclosure more meaningful to your investors and shareholders.  Some of your risk factors merely state a fact about your business. You should succinctly state in your captions the particular risk that results from the uncertainty.
    • Some of your risk factors are too vague and generic and do not adequately describe the risk that follows.  Readers should be able to read the risk factor heading and come away with a strong understanding of what the risk is and the result of the risk as it specifically applies to you.  Revise your subheadings accordingly.
    • In each risk factor, get to the risk as quickly as possible and provide only enough detail to place the risk in context.  In some of your risk factors, the actual risk you are trying to convey does not stand out from the rest of the information.
    • Avoid presenting risks that could apply to any issuer in your industry, do not reflect your current operations, are not material, or are generic, boilerplate disclosures.  Rather, tailor each risk factor to your specific facts and circumstances.
    • Revise each risk to remove mitigating information.
    • Consider including a risk factor that addresses XYZ.
    • Provide the information investors need to assess the magnitude of the risk.
    • Where possible, quantify the risk.
    • The introductory paragraph to your risk factors section is not complete, there may be risks that you do not consider material now but may become material, or there may be risks that you have not yet identified.  You must disclose all risks that you believe are material at this time.
    • You include more than one risk under one subheading.  Revise to include only one risk under each subheading.

As always, competent legal counsel should be utilized in crafting SEC reports and/or offering disclosure documents.

LawCast- Legal & Compliance, LLC- Bringing Delinquent Filers Current SEC Delinquent Filers Program

In 2004 the Securities and Exchange Commission (“SEC”) instituted the Delinquent Filers Program and created the Delinquent Filers Branch as part of its Division of Enforcement.  The Delinquent Filers Branch was instituted to encourage publicly traded companies that are delinquent in the filing of their required periodic reports (Forms 10-K and 10-Q) under the Securities Exchange Act of 1934 (“Exchange Act”) to provide investors with accurate financial information upon which to make informed investment decisions. The securities registrations of issuers that fail to make their required periodic filings are subject to suspension or revocation by the SEC and other enforcement proceedings. Since it was instituted, the SEC Delinquent Filers Branch has suspended the trading and/or revoked the registration of thousands of companies, often in sweeps of large groups of filers in a single day.  Generally, a delinquent filer will receive a letter from the SEC giving the Company 15 days in which to make the filings current, and if such filings were not made current during that time, the SEC would institute administrative proceedings to revoke the registration of the Company’s securities.

Becoming Current

A Company that is delinquent in its reporting requirements has three options to become current in its reporting requirements.  Upon filing the delinquent reports, the Company will satisfy the current information requirement for use of Rule 144 and will satisfy the “filed all reports” requirement for use of Form S-8. Option A: File All Past Due Exchange Act Reports This option is fairly self-explanatory; however, a few practice notes are helpful.  In preparing and writing the past due reports, the drafter should complete all the information to the current date of filing the report.  The description of the business and business plans, the names and bios of the officers and directors, and the sale of unregistered securities should be written as of the date of filing—provided, however, that there should be an added section in the MD&A which discusses the financial statements attached to that particular report and addressing that particular period.  Where appropriate, historical information should be disclosed.  So, for example, if the officers and directors have changed, there should be an explanatory disclosure as to the changes and historical information presented, followed by the current officer and director information as of the date of filing. Accordingly, when completing all past due filings, the bulk of each document will be exactly the same, with the differences consisting of the financial statements, the MD&A section discussing the financial statements for that particular period, and the front page disclosing the date for which the report applies.  Each report must be signed and certified by the current chief executive and accounting officers. Filing all delinquent reports will not satisfy the requirement that a Company has “timely filed” all periodic reports, but it will satisfy the requirement that the Company has filed all reports required to be filed over the subject period of time. Option B: Request Permission for and File a Multi-year Comprehensive Form 10-K A Company desiring to file a multi-year comprehensive Form 10-K must obtain permission from the SEC, which requires a great deal of initial groundwork to demonstrate the ability to file the required report in a timely fashion.  In particular, a Company desiring to file a multi-year comprehensive Form 10-K must submit correspondence to the SEC’s Office of Chief Accountant at the Division of Corporation Finance with extensive detailed information regarding the missing reports and how the company intends to complete the multi-year comprehensive Form 10-K, including the exact financial statements to be included, the date the filing will be made, the auditor that has been retained (it is helpful for the auditor to include a statement that he or she has, in fact, been retained and is engaging in the required services), and any other supportive facts demonstrating the Company’s ability to comply with the request.  This is just a brief summary of the information that must be submitted when requesting the ability to become current using the multi-year comprehensive Form 10-K. Of course, competent counsel should be retained to either make the submission on the Company’s behalf or assist in the process.  Generally, the SEC responds within 10 days. As with Option A, the multi-year comprehensive Form 10-K will not satisfy the requirement that a Company has “timely filed” all periodic reports, but it will satisfy the requirement that the Company has filed all reports required to be filed over the subject period of time.  Upon filing the multi-year comprehensive Form 10-K, the Company will satisfy the current information requirement for use of Rule 144 and will satisfy the “filed all reports” requirement for use of Form S-8. Option C: Terminate Exchange Act Registration by Filing a Form 15 Followed by a Form 10 Registration Statement If a Company qualifies to do so, they may file a Form 15, terminating its Exchange Act registration and thereby relieving it of the Exchange Act reporting requirements.  To qualify to file a Form 15, a Company currently must either have fewer than 300 shareholders, or fewer than 500 shareholders if it has assets of less than $10 million. Title V of The JOBS Act amends Section 12(g) and Section 15(d) of the Exchange Act as to threshold shareholder requirements and registration and deregistration requirements such that the shareholder threshold before requiring registration and subsequent reporting with the SEC has been increased from 500 to either (a) 2,000 or more, or (b) 500 or more unaccredited shareholders.  It is expected that the SEC will implement rules to amend Exchange Act Rule 12g-4 to conform with Section 12(g). A Form 15 does not technically relieve a Company’s obligation to file past due reports (only future reports); however, in practice the SEC does not generally require such filings. An Issuer that files a Form 15 may thereafter file a new Form 10 registration statement subjecting it to the Exchange Act reporting requirements going forward.  As with all Form 10 registration statements, the Form 10 will include two years of audited financial statements. Option C is especially attractive to a Company that is in excess of two years delinquent in its reporting requirements and cannot reasonably obtain the records necessary to complete its audits for those years beyond the two-year period.

SEC Filings and Attorneys

Complying with the SEC reporting requirements is highly technical.  Both the Company and individual signing officers are exposed to liability for the contents of such reports.  Accordingly, the assistance of qualified SEC counsel is not only highly recommended, but imperative in this process.

Securities LawCast©- OTC Markets Quotation Levels And Listing Criteria

OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink.  The OTC Pink, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information.   This blog provides a summary of the listing requirements for each level of quotation on OTC Markets.  OTCQX The OTCQX divides its listing criteria between U.S. companies and International companies, though they are very similar.  The OTCQX has two tiers of quotation for U.S. companies: (i) OTCQX U.S. Premier (also eligible to quote on a national exchange); and (ii) OTCQX U.S. and two tiers for International companies: (i) OTCQX International Premier; and (ii) OTCQX International.  Quotation is available for American Depository Receipts (ADR’s) or foreign ordinary securities of companies traded on a Qualifying Foreign Stock Exchange, and an expedited application process is available for such companies. Issuers on the OTCQX must meet specified eligibility requirements.  Moreover, OTC Markets have the discretionary authority to allow quotation to substantially capitalized acquisition entities that are analogous to SPAC’s.

OTCQX – Requirements for Admission

To be eligible to be quoted on the OTCQX U.S., companies must:

  • Have $2 million in total assets as of the most recent annual or quarter end;
  • As of the most recent fiscal year end have at least one of the following: (i) $2 million in revenues; (ii) $1 million in net tangible assets; (iii) $500,000 in net income; or (iv) $5 million in market value of publicly traded securities;
  • Meet one of the following penny stock exemptions under Rule 3a51-1 of the Exchange Act: (i) have a bid price of $5 or more; or (ii) have net tangible assets of $2 million if the Company has been in continuous operation for at least three years, or $5,000,000 if the Company has been in continuous operation for less than three years which qualification can be satisfied as of the end of a fiscal period or as a result of an interim capital raise; or (iii) have average revenue of at least $6,000,000 for the last three years;
  • Not be a blank check or shell company as defined by the Securities Act of 1933 (“Securities Act”);
  • Not be in bankruptcy or reorganization proceedings;
  • Be in good standing in its state of incorporation and in each state in which it conducts business;
  • Have a minimum of 50 beneficial shareholders owning at least one round lot (100 shares) each;
  • Be quoted by a market maker on the OTC Link;
  • Have a minimum bid price of $0.10 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX. If (i) there has been no prior public market for the Company’s securities in the U.S. and (ii) FINRA has approved a Form 211, then the Company may apply to OTC Markets for an exemption from the minimum bid price requirements, which exemption is at the sole discretion of OTC Markets. In the event that the Company is a Seasoned Public Issuer (i.e., has been in operation and quoted on either OTC Link, the OTCBB or an exchange for at least one year) that completed a reverse stock split within 6 months prior to applying for admission to OTCQX U.S., the Company must have a minimum bid price of $0.10 per share for its common stock as of the close of business on each of the 5 consecutive trading days immediately preceding the Company’s application for OTCQX, after the reverse split;
  • Have GAAP compliant (i) audited balance sheets as of the end of each of the two most recent fiscal years, or as of a date within 135 days if the Company has been in existence for less than two fiscal years, and audited statements of income, cash flows and changes in stockholders’ equity for each of the fiscal years immediately preceding the date of each such audited balance sheet (or such shorter period as the Company has been in existence), and must include all going concern disclosures including plans for mitigation; and GAAP compliant (ii) unaudited interim financial reports, including a balance sheet as of the end of the Company’s most recent fiscal quarter, and income statements, statements of changes in stockholders’ equity and statements of cash flows for the interim period up to the date of such balance sheet and the comparable period of the preceding fiscal year; and
  • Be included in a Recognized Securities Manual or be subject to the reporting requirements of the Exchange Act.

To be eligible to be quoted on the OTCQX International, companies must:

  • Have U.S. $2 million in total assets as of the most recent annual or quarter end;
  • As of the most recent fiscal year end, have at least one of the following: (i) U.S. $2 million in revenues; (ii) U.S. $1 million in net tangible assets; (iii) U.S. $500,000 in net income; or (iv) U.S. $5 million in global market capitalization;
  • Meet one of the following penny stock exemptions under Rule 3a51-1 of the Exchange Act: (i) have a bid price of U.S. $5 or more; or (ii) have net tangible assets of U.S. $2 million if the company has been in continuous operation for at least three years, or U.S. $5,000,000 if the company has been in continuous operation for less than three years; or (iii) have average revenue of at least U.S. $6,000,000 for the last three years;
  • Be quoted by a market maker on the OTC Link (which requires a 15c2-11 application if the company is not already quoted on a lower tier of OTC Markets);
  • Not be in bankruptcy or reorganization proceedings;
  • Be included in a Recognized Securities Manual or be subject to the reporting requirements of the Exchange Act;
  • Have its securities listed on a Qualifying Foreign Stock Exchange for a minimum of the preceding 40 calendar days; provided, however, that in the event the company’s securities are listed on a non-U.S. exchange that is not a Qualified Foreign Stock Exchange, then at the company’s request and subsequent to the company providing OTC Markets Group with personal information forms for each executive officer, director, and beneficial owner of 10% or more of a class of the company’s securities and such other materials as OTC Markets Group deems necessary to make an informed determination of eligibility, OTC Markets Group may, upon its sole and absolute discretion, consider the company’s eligibility for OTCQX International;
  • Meet one of the following conditions: (i) be eligible to rely on the registration exemption found in Exchange Act Rule 12g-2(b) and be current and compliant in such requirements; or (ii) have a class of securities registered under Section 12(g) of the Exchange Act and be current in its SEC reporting requirements; or (iii) if such company is not eligible to rely on the exemption from registration provided by Exchange Act Rule 12g3-2(b) because it does not (A) meet the definition of “foreign private issuer” as that term is used in Exchange Act Rule 12g3-2(b) or (B) maintain a primary trading market in a foreign jurisdiction as set forth in Exchange Act Rule 12g3-2(b)(ii), and is not otherwise required to register under Section 12(g), be otherwise current and fully compliant with the obligations of a company relying on the exemption from registration provided by Exchange Act Rule 12g3-2(b).

To be eligible to be quoted on the OTCQX U.S. Premier, companies must:

  • Satisfy all of the eligibility requirements for OTCQX U.S. set forth above;
  • Have (i) At least (a) 500,000 publicly held shares; and (b) $1 million in market value of publicly held shares; and (ii) at least (a) $500,000 in net income (in the latest fiscal year or in two of the last three fiscal years); or (b) $2.5 million in stockholders’ equity; or (c) $35 million in market value of listed securities;
  • Have a minimum of 100 beneficial shareholders owning at least one round lot (100 shares) each;
  • Have a minimum bid price of $1.00 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX. If (i) there has been no prior public market for the Company’s securities in the U.S. and (ii) FINRA has approved a Form 211 and (iii) the bid price is equal to or greater than $1.00, then the Company may apply to OTC Markets for an exemption from the 30-day minimum bid price requirements, which exemption is at the sole discretion of OTC Markets. In the event that the Company is a Seasoned Public Issuer (i.e., has been in operations and quoted on either OTC Link, the OTCBB or an exchange for at least one year) that completed a reverse stock split within 6 months prior to applying for admission to OTCQX U.S., the Company must have a minimum bid price of $1.00 per share for its common stock as of the close of business on each of the 5 consecutive trading days immediately preceding the Company’s application for OTCQX, after the reverse split;
  • Conduct annual shareholders’ meetings and submit annual financial reports to its shareholders at least 15 calendar days prior to such meetings.

To be eligible to be quoted on the OTCQX International Premier, companies must:

  • Satisfy all of the eligibility requirements for OTCQX International set forth above;
  • As of its most recent fiscal year end, (i) have (a) revenue of U.S. $100 million; (b) global market capitalization of U.S. $500 million, (c) aggregate cash flow for the three preceding years of U.S. $100 million; and (d) minimum cash flow in each of the two preceding years of $25 million; or (ii) have (a) revenue of U.S. $75 million and (b) global market capitalization of $750 million.

To be eligible to be quoted as an OTCQX U.S. Acquisition Company, companies must:

  • Satisfy all of the eligibility requirements for OTCQX U.S. set forth above;
  • Have $25 million in net tangible assets as of the most recent annual or quarterly year end;
  • Have $10 million in market value of publicly traded securities as of the most recent fiscal year end;
  • Have a minimum bid price of $5.00 per share for its common stock as of the close of business on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQX; and
  • Be subject to the reporting requirements of the Exchange Act.

Designated Advisors for Disclosure (“DAD”)/Principal American Liaison (“PAL”)

All U.S. companies that are quoted on the OTCQX must have either an Attorney Designated Advisor for Disclosure (“DAD”) or an Investment Bank DAD.  All DAD’s must be approved by OTCQX after submitting an application.  OTC Markets publishes a list of pre-approved DADs.  A Company may appoint a new DAD at any time, provided that the Company retains an approved DAD at all times. A DAD’s primary role is to provide advice and guidance to a Company in meeting its OTCQX obligations.  The OTCQX puts a great deal of onus on the DAD to be responsible for the Company in which it sponsors, emphasizing the negative impact on the DAD’s reputation for sponsoring Companies that are not of acceptable quality.  In addition to providing advice and counsel to a Company, a DAD is required to conduct investigations to confirm disclosures.  A DAD must submit a Letter of Introduction and subsequent annual letters confirming their duties and the attesting to the disclosures made by the Company. All International companies that are quoted on the OTCQX must have either an Attorney Principal American Liaison (“PAL”) or an Investment Bank PAL; provided however, if the company’s OTCQX traded security is an ADR, the international company may have an ADR PAL.  All PAL’s must be approved by OTC Markets Group.  A company may appoint a new PAL at any time provided they maintain a PAL at all times.

Application to the OTCQX

All U.S. companies that are quoted on the OTCQX must submit an application and pay an application fee.  The application consists of (i) the contractual agreement with OTCQX for quotation; (ii) personal information for each executive officer, director and beneficial owner of 10% or more of the securities, except for companies already traded on a foreign exchange or moving from a recognized U.S. exchange; (iii) designation of the DAD/PAL or application for same; (iv) appointment form for the DAD/PAL; (v) a letter from the Company’s independent auditor affirming their role and qualifications; and (vi) a digital Company logo. All international companies that are quoted on the OTCQX must submit an application and pay an application fee.  The application consists of (i) OTCQX application for international companies; (ii) the contractual agreement with OTCQX for international companies; (ii) the OTCQX application fee; (iv) the OTCQX Agreement for international companies; (v) an application for the international company’s desired PAL if such PAL is not already pre-qualified; (vi) an appointment form for the DAD/PAL; and (vii) a copy of the company’s logo in encapsulated postscript (EPS) format. The application is subject to review and comment by OTC Markets.  OTC Markets may require additional conditions or undertakings prior to admission.  Moreover, the application may be denied if, in the opinion of OTC Markets, trading would be likely to impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.

Initial Disclosure Obligations

A Company must post its initial disclosure documents on the OTC Markets website within 90 days of submission of its application to quote on the OTCQX, and such posting must be confirmed with a notice by the Company DAD/PAL.  The filing of the initial disclosure is a precondition to acceptance of an application for quotation.  Initial disclosure documents include: (i) SEC reports if the Company is subject to the Exchange Act reporting requirements; (ii) current information in accordance with OTC Markets disclosure guidelines including financial statements; and (iii) for International companies not subject to the SEC reporting requirements, all information required to be made public pursuant to Exchange Act Rule 12g3-2(b) for the preceding 24 months, which information must be posted in English. A Company must supplement and update any changes to the initial disclosure within 30 days of acceptance of its application for quotation.  International companies must follow initial disclosure with a PAL Letter of Introduction.

Requirements for Ongoing Qualification for Quotation on the OTCQX

The following is a summary of the ongoing responsibilities for U.S. OTCQX quoted securities:

  • Compliance with Rules – OTCQX quoted companies must maintain compliance with the OTCQX rules including disclosure requirements.  The Company’s DAD/PAL is responsible for reporting their/its potential conflicts of interest;
  • Compliance with Laws – OTCQX quoted companies must maintain compliance with state and federal securities laws and must cooperate with any securities regulators, including self-regulatory organizations;
  • Blue Sky Manual Exemption – Companies must either properly qualify for a blue sky manual exemption or be subject to and current in their Exchange Act reporting requirements;
  • Retention and Advice of DAD – Companies must have a DAD at all times and are required to seek the advice of such DAD as to their OTCQX obligations;
  • Duty to Inform DAD – As part of its duty to seek advice from its DAD, a Company has an obligation to provide disclosure and information to the DAD, including “complete access to information regarding the Company, including confidential and propriety information” and access to personnel;
  • Notification of Resignation or Dismissal of DAD – A Company must immediately notify OTC Markets in writing of the resignation or dismissal of the DAD for any reason;
  • Payment of Fees – a Company must pay its annual fees to OTC Markets;
  • Sales of Company Securities by Affiliates – Prior to transacting in the Company’s securities through a broker-dealer, each officer, director or other affiliate of the Company shall make its status as an affiliate of the Company known to the broker-dealer;
  • Distribution and Publication of Proxy Statements – An OTCQX U.S. Premier company shall solicit proxies for all meetings of shareholders. Companies not subject to the Exchange Act reporting requirements must publish, on the OTC Markets website, copies of all proxies, proxy statements and all other material mailed by the Company to their shareholders within 15 days of such mailing;
  • Redemption Requirements – All redemptions must be either by lot or pro rata and require 15 days’ notice;
  • Changes in Form or Nature of Securities – All changes in form, nature or rights associated with securities quoted on the OTCQX require 20 days’ advance notice to OTC Markets;
  • Transfer Agent – Companies are required to use the services of a registered transfer agent and authorize such transfer agent to share information with OTC Markets;
  • Accounting Methods – Any change in accounting methods requires advance notice of such change and its impact, to OTC Markets;
  • Change in Auditors – All changes in auditor requires prompt notification and a letter from such auditor analogous to Form 8-K requirements;
  • Responding to OTC Markets Group Requests – OTCQX quoted companies are required to respond to OTC Markets comments and amend filings as necessary in response thereto;
  • Ongoing Disclosure Obligations – (i) Companies subject to the Exchange Act reporting requirements must remain current in such reports; (ii) Companies not subject to the Exchange Act reporting requirements must remain current with the annual, quarterly and current reporting requirements of OTC Markets, including posting annual audited financial statements prepared in accordance with GAAP and audited by a PCAOB auditor; (iii) file a notification of late filing when necessary; (iv) quickly release disclosure of material news and recent developments, whether positive or negative, through a press release on the OTC Markets website; (v) an OTCQX Company should also act promptly to dispel unfounded rumors which result in unusual market activity or price variations;
  • General requirements regarding integrity – OTCQX quoted Companies are expected to act professionally and uphold the OTC Markets standards for “high quality”; and to release news and reports that are prepared factually and accurately with neither excessive puffery or conservatism; companies must not report or act in a way that could be misleading; must not inundate with non-material releases; and must not make misleading premature announcements;
  • Maintain Company Updated Profile – OTCQX quoted companies are required to maintain updated accurate information on their profile page and to verify same every six months;
  • DAD Letter – Within 120 days of each fiscal year end and after the posting of the Company’s annual report, every Company must submit an annual DAD letter;
  • To remain eligible for trading on the OTCQX U.S. tier, the Company’s common stock must have a minimum bid price of $0.10 per share as of the close of business for at least one of every thirty consecutive calendar days.  In the event that the minimum bid price for the Company’s common stock falls below $0.10 per share at the close of business for thirty consecutive calendar days, a grace period of 180 calendar days to regain compliance shall begin, during which the minimum bid price for the Company’s common stock at the close of business must be $0.10 for ten consecutive trading days;
  • To remain eligible for trading on the OTCQX U.S. Premier tier, the Company’s common stock must have a minimum bid price of $1.00 per share as of the close of business for at least one of every thirty consecutive calendar days. In the event that the minimum bid price for the Company’s common stock falls below $1.00 per share at the close of business for thirty consecutive calendar days, a grace period of 180 calendar days to regain compliance shall begin, during which the minimum bid price for the Company’s common stock at the close of business must be $1.00 for ten consecutive trading days. In the event that the Company’s common stock does not regain compliance during the grace period, the Company shall have a fast-track option to have its securities traded on the OTCQX U.S. tier.

The following is a summary of the ongoing responsibilities for OTCQX International quoted securities:

  • Eligibility Criteria – The International company must meet the above eligibility requirements as of the end of each most recent fiscal year;
  • Compliance with Rules – OTCQX quoted companies must maintain compliance with the OTCQX rules, including disclosure requirements.  Officers and directors of the company are responsible for compliance and are solely responsible for the content of information;
  • Compliance with Laws – OTCQX quoted companies must maintain compliance with applicable securities laws of their country of domicile and applicable U.S. federal and state securities laws.  The company must comply with Exchange Act Rule 10b-17 and FINRA rule 6490 regarding notification and processing of corporate actions (such as name changes, splits and dividends).  The company must cooperate with any securities regulators, whether in their country of domicile or in the U.S., including self-regulatory organizations;
  • Blue Sky Manual Exemption – Companies must either properly qualify for a blue sky manual exemption or be subject to and current in their Exchange Act reporting requirements;
  • Retention and Advice of PAL – Companies must have a PAL at all times and are required to seek the advice of such PAL as to their OTCQX obligations;
  • Notification of Resignation or Dismissal of PAL – A company must immediately notify OTC Markets in writing of the resignation or dismissal of the PAL for any reason;
  • Payment of Fees – A company must pay its annual fees to OTC Markets;
  • Responding to OTC Markets Group Requests – OTCQX quoted companies are required to respond to OTC Markets comments and amend filings as necessary in response thereto;
  • Ongoing Disclosure Obligations – (i) Companies subject to the Exchange Act reporting requirements must remain current in such reports; (ii) A company that is not an SEC Reporting Company must remain current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and in any event shall, on an ongoing basis, post in English through the OTC Disclosure & News Service or an Integrated Newswire, the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b); (iii) provide a letter to its PAL at least once a year, no later than 210 days after the fiscal year end, which states that the company (y) continues to satisfy the OTCQX quotation requirements; and (z) is current and compliant in its obligations under Exchange Act Rule 12g3-2(b) and that the information required under such rule is posted, in English, on the OTC Markets website or that the company is subject to the SEC reporting requirements and is current in such reporting requirements;
  • PAL Letter – Within 225 days of each fiscal year end and after the posting of the company’s annual report, every company must submit an annual PAL letter. 

Removal from OTCQX International

A company may be removed from the OTCQX if, at any time, it fails to meet the eligibility and continued quotation requirements subject to a 30-day notice and opportunity to address them.  In addition, OTC Markets Group may remove the company’s securities from trading on OTCQX immediately and at any time, without notice, if OTC Markets Group, upon its sole and absolute discretion, believes the continued inclusion of the company’s securities would impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.  In addition, OTC Markets can temporarily suspend trading on the OTCQX pending investigation or further due diligence review. A company may voluntarily withdraw from the OTCQX with 24 hours’ notice.

Fees

Upon application for quotation on the OTCQX, Companies must pay an initial non-refundable fee of $5,000.  In addition, Companies must pay an annual non-refundable fee of $15,000.

OTCQB

To be eligible to be quoted on the OTCQB, all companies will be required to:

  • Meet a minimum closing bid price on OTC Markets of $.01 for each of the last 30 calendar days;
  • In the event that there is no prior public market and a 15c2-11 application has been submitted to FINRA by a market maker, OTC Markets can waive the bid requirement at its sole discretion;
  • In the event that a Company is a seasoned public issuer that completed a reverse stock split within 6 months prior to applying to the OTCQB, the Company must have a post reverse split minimum bid price of $.01 at the close of business on each of the 5 consecutive trading days immediately before applying to the OTCQB;
  • In the event the Company is moving to the OTCQB from the OTCQX, it must have a minimum closing bid price of $.01 for at least one (1) of the 30 calendar days immediately preceding;
  • Companies may not be subject to bankruptcy or reorganization proceedings the Company’s application;
  • Either be subject to the reporting requirements of the Securities Exchange Act of 1934 and be current in such reporting obligations or, if an international issuer, be eligible to rely on the registration exemption found in Exchange Act Rule 12g-2(b) and be current and compliant in such requirements or be a bank current in its reporting obligations to its bank regulator;
  • Not be in bankruptcy or reorganization proceedings;
  • Be duly organized, validly existing and in good standing under the laws of each jurisdiction in which it is organized and does business;
  • Submit an application and pay an application and annual fee;
  • Maintain a current and accurate company profile on the OTC Markets website;
  • Use an SEC registered transfer agent and authorize the transfer agent to provide information to OTC Markets about the Company securities, including but not limited to, shares authorized, shares issued and outstanding, and share issuance history; and
  • Submit an OTCQB Annual Certification confirming the accuracy of the current company profile and providing information on officers, directors and controlling shareholders.

All companies are required to post their initial disclosure on the OTC Markets website and make an initial certification.  The initial disclosure includes:

  • Confirmation that the Company is current in its SEC reporting obligations and has filed all reports with the SEC, that all financial statements have been prepared in accordance with U.S. GAAP, and that the auditor opinion is not adverse, disclaimed or qualified;
  • International Companies –  (i) Companies subject to the Exchange Act reporting requirements must be current in such reports; (ii) A company that is not an SEC Reporting Company must be current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and shall have posted in English through the OTC Disclosure & News Service or an Integrated Newswire, the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b) for the preceding 24 months (or from inception if less than 24 months); and all financial statements have been prepared in accordance with U.S. GAAP and that the auditor opinion is not adverse, disclaimed or qualified;
  • Verification that the Company profile is current, complete and accurate;

All companies will be required to file an initial and annual certification on the OTC Markets website, signed by the CEO and/or CFO, stating:

  • The company’s reporting standing (i.e., whether SEC reporting, bank reporting or international reporting) and briefly describing the registration status of the company;
  • If the Company is an International Company and relying on 12g3-2(b), that it is current in such obligations;
  • That the company is current in its reporting obligations to its regulator and that such information is available either on EDGAR or the OTC Markets website;
  • States the law firm and/or attorneys that assist the company in preparing its annual report or 10-K;
  • Confirms that the company profile on the OTC Markets website is current and complete;
  • Identifies any third-party providers engaged by the Company, its officers, directors or controlling shareholders, during the prior fiscal year and up to the date of the certification, to provide investor relations services, public relations services, stock promotion services or related services;
  • Confirms the total shares authorized, outstanding and in the public float as of that date; and
  • Names and shareholdings of all officers and directors and shareholders that beneficially own 5% or more of the total outstanding shares, including beneficial ownership of entity shareholders.

An application to OTCQB can be delayed or denied at OTC Markets’ sole discretion if they determine that admission would be likely to impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.

Requirements for Bank Reporting Companies

Bank reporting companies must meet all the same requirements as all other OTCQB companies except for the SEC reporting requirements.  Instead, bank reporting companies are required to post their previous two years’ and ongoing yearly disclosure that was and is filed with the company’s bank regulator, on the OTC Markets website.

International Companies

In addition to the same requirements for all issuers as set forth above, foreign issuers must be listed on a Qualified Foreign Exchange and be compliant with SEC Rule 12g3-2(b).  Moreover, a foreign entity must submit a letter of introduction from a qualified PAL which states that the PAL has a reasonable belief that the company is in compliance with SEC Rule 12g3-2(b), is listed on a Qualified Foreign Exchange, and has posted required disclosure on the OTC Markets website.  A foreign entity must post two years’ historical and ongoing quarterly and annual reports, in English, on the OTC Markets website which comply with SEC Rule 12g3-2(b).

Ongoing Requirements

  • U.S. OTCQB companies will be required to remain current in their SEC reporting obligations.
  • A foreign company that is not an SEC Reporting Company must remain current and fully compliant in its obligations under Exchange Act Rule 12g3-2(b), if applicable, and in any event shall, on an ongoing basis, post in English through the OTC Disclosure & News Service or an Integrated Newswire, the information required to be made publicly available pursuant to Exchange Act Rule 12g3-2(b).
  • Banks must remain current in their banking reporting requirements;
  • All OTC Markets posting and reports must be timely filed 45 days following the end of a quarter or 90 days following the end of the fiscal year for US issuers and as soon as practicable but no later than 6 months following the end of the fiscal year end  or 60 days following the end of a quarter for International companies; where applicable, file a notice of late filing allowing for 5 extra days on a quarterly report and 15 extra days on an annual report;
  • All OTCQB companies will be required to post annual certifications on the OTC Markets website;
  • All companies are required to comply with all federal, state, and international securities laws and must cooperate with all securities regulatory agencies;
  • Must pay the annual fee;
  • All companies must respond to OTC Markets inquiries and requests;
  • All companies must maintain an updated company profile on the OTC Markets website and must submit a Company Update Form at least once every six months;
  • All Companies must file interim disclosures in the event the Company undergoes a reverse merger or change of control and make new updated certifications and disclosure related to the new business and control persons;
  • All OTCQB companies must meet the minimum bid price of $.01 per share at the close of business of at least one of the previous thirty (30) consecutive calendar days; in the event that the price falls below $.01, the company will begin a grace period of 180 calendar days to maintain a closing bid price of $.01 for ten consecutive trading days;
  • Use an SEC registered transfer agent and authorize the transfer agent to provide information to OTC Markets about the Company securities, including but not limited to, shares authorized, shares issued and outstanding, and share issuance history.

Officers and directors of the Company are responsible for compliance with the ongoing requirements and the content of all information.  Entities that do not meet the requirements of either OTCQX or OTCQB will be quoted on the OTC Pink.

Fees

Newly applying entities must pay an initial application fee of $2,500, which fee is waived for existing OTCQB entities.  All OTCQB companies will be required to pay an annual fee of $10,000.

Removal/Suspension from OTCQB

A company may be removed from the OTCQB if, at any time, it fails to meet the eligibility and continued quotation requirements subject to a 30-day notice and opportunity to address them.  In addition, OTC Markets Group may remove the company’s securities from trading on OTCQB immediately and at any time, without notice, if OTC Markets Group, upon its sole and absolute discretion, believes the continued inclusion of the company’s securities would impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors. In addition, OTC Markets can temporarily suspend trading on the OTCQB pending investigation or further due diligence review. A company may voluntarily withdraw from the OTCQB with 24 hours’ notice.

OTC PINK    

The OTC Pink, which includes the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information, based on the level of disclosure and public information made available by the company either through the SEC or posted on OTC Markets.  There are no qualitative standards beyond disclosure for OTC Pink companies, which include companies in all stages of development as well as shell and blank check entities.

Current Information

Companies with Current Information status on OTC Markets include both companies that are subject to and current in their SEC Exchange Act reporting requirements and companies that file current information on OTC Markets in accordance with their Alternative Reporting Standards.  The following minimum disclosure is required to maintain Current Information status:

  • If subject to the Exchange Act reporting requirements, compliance with such reporting requirements will satisfy the financial reporting requirements for Current Information;
  • If not subject to the Exchange Act reporting requirements, a company must post annual financial statements, including a balance sheet, income statement, statement of cash flows and notes to financial statements, for the previous two fiscal years or from inception if the company is less than two years old, which annual report must be filed within 90 days of fiscal year end;
  • If financial statements are audited, the auditor report must be posted (audited financial statements are not required);
  • If the company’s financial statements are not audited, an annual Attorney Letter and Attorney Letter Agreement must be posted within 120 days of fiscal year end;
  • If not subject to the Exchange Act reporting requirements, a company must post quarterly financial statements within 45 days of the end of each fiscal quarter;
  • The company profile page on OTC Markets must be current and accurate;
  • File annual and quarterly reports with narrative information and CEO and CFO certifications that track SEC Rule 15c2-11 disclosures and can be completed using a fillable form available through OTC Markets;
  • A company must file a Form 8-K if SEC reporting or submit a news release within 4 days of any of the following:
    • Entry or Termination of a Material Definitive Agreement
    • Completion of Acquisition or Disposition of Assets, Including but not Limited to Mergers
    • Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of an Issuer
    • Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
    • Costs Associated with Exit or Disposal Activities
    • Material Impairments
    • Sales of Equity Securities
    • Material Modification to Rights of Security Holders
    • Changes in Issuer’s Certifying Accountant
    • Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
    • Changes in Control of Issuer
    • Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
    • Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
    • Amendments to the Issuer’s Code of Ethics, or Waiver of a Provision of the Code of Ethics
    • Other events the issuer considers to be of importance

In addition, to maintain Current information status, a company must subscribe to the OTC Disclosure & News Service with an annual fee of $4,200 and a one-time set-up fee of $500. Limited Information Companies with Limited Information status on OTC Markets are delineated by a “yield” sign and post some financial and basic information on the company on the OTC Markets website, but either do not report to the SEC or do not include enough information to satisfy the Current Information requirements.  The following minimum disclosure is required to maintain Limited Information status:

  • Maintain quarterly and annual reports that are no older than 6 months and that include a balance sheet, income statement and total number of issued and outstanding shares;
  • Financial statements must be prepared in accordance with GAAP; and
  • The company profile page on OTC Markets must be current and accurate.

In addition, to maintain Limited information status, a company must subscribe to the OTC Disclosure & News Service with an annual fee of $4,200 and a one-time set-up fee of $500.

No Information

Companies with No Information status on OTC Markets are delineated by a “stop” sign and do not provide any current or updated reliable public disclosure.

Other OTC Market Designations Cveat Emptor – Skull and Crossbones        

Companies with a Caveat Emptor designation on OTC Markets are delineated with a skull and crossbones sign.  These companies have raised concerns such as improper or misleading disclosures, spam campaigns, questionable stock promotion, and investigation of fraudulent or other criminal activity, regulatory suspensions or disruptive corporate actions.  While labeled with a skull and crossbones, a company that does not have Current Information or is not on the OTCQB will have its quote blocked on the OTC Markets website.

Other OTC or Grey Market

Companies labeled as Other OTC or Grey Market are delineated by a grey yield sign.  These companies do not have a current 15c2-11 and are not eligible for quotation by a market maker or broker-dealer until such time as a 15c2-11 application is made with and accepted by FINRA. Due to the aforementioned complexities of OTC Listing Requirements, experienced legal counsel is necessary to assist Issuers.