OTCQX Requirements, Rules, and Standards

August 8th, 2016 by Laura Anthony, Esq.

OTCQX Requirements, Rules, and Standards

Today is the first Lawcast in a series detailing the OTCQX listing requirements. OTC Markets made changes to the quotations rule and standards for the OTCQX, which changes went effective on June 13, 2016. These most recent amendments accommodate companies completing an IPO onto the OTCQX and which therefore have no prior trading history. Such entities either have a recently cleared Form 211 with FINRA or are completing the 211 application process through a market maker, at the time of their OTCQX application.

The newest changes will (i) allow companies that satisfy the no penny stock rule by meeting the $5 bid price test to use unaudited, interim financials to meet certain OTCQX financial standards; and (ii) provide a phase-in compliance period for US companies to meet the OTCQX corporate governance requirements.

The OTCQX previously amended its listing standards effective January 1, 2016 to increase the quantitative criteria for listing and to add additional qualitative requirements further aligning the OTCQX with and as an excellent stepping stone prior to listing on a national stock exchange.

In addition, effective May 6, 2016 OTC Markets collaborated with Morningstar, an independent research and equity ratings firm, to provide research and ratings on all OTCQX companies. The research reports are available on a company’s quote page on the OTC Markets website. As part of each Morningstar report, the company’s equity is rated as to valuation, illustrating an over or under valuation, based on the Morningstar analysis. The Morningstar reports are updated daily.

Morningstar reports are also published under the research section of each OTCQX company’s quote page on the OTC Markets website.

A well-known issue for all small- and micro-cap companies is a lack of independent research or analysts’ coverage. I’ve reviewed several of the Morningstar reports and they provide very good information.

As I wrote about in my most recent Huffington Post piece, going public provides a method to access capital markets for the growth of the big companies of tomorrow, but is in and of itself an expensive and difficult process. For companies that are still relatively young in their business lifecycle, satisfying the regulatory requirements of being an exchange traded public company is time intensive and consumes manpower hours that could otherwise be dedicated to corporate growth and development.
However, being viewed as a penny stock can make the access to capital available for public companies, much more challenging. Many institutional investors have mandates prohibiting or limiting investments or trading in penny stocks and depositing penny stocks with brokerage firms is a difficult process for investors in unregistered PIPE transactions.

Through the OTCQX, the OTC Markets has created a venture exchange platform to become the recognized and respected venue for small and micro cap companies.

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