The Industry’s View of OTCQB/OTCQX vs. OTCBB
The OTCBB has no particular listing or quotation requirements other than that the issuer must adhere to the reporting requirements of the Securities Exchange Act of 1934, and be current in their reports; the same requirements that apply to the OTCQB . OTCQX actually imposes some additional, more stringent, requirements that I have detailed previously. The following summary of the differences between the OTCQB and OTCBB is drawn almost entirely from www.OTCMarkets.com . Primarily, Inter-Dealer Quotation/Trading Systems allow broker-dealers to post and disseminate their quotes (share prices) to the public marketplace and, in the case of OTC Link, negotiate trades at agreed-upon prices. The two major Inter-Dealer Quotation Systems are: OTC Link (operated by OTC Markets Group) and FINRA’s OTCBB. This is a major distinction since FINRA, who operates the OTCBB, is a registered Self-Regulatory Organization (SRO) and OTC Link is not. OTC Link allows broker-dealers to quote any OTC equity security eligible for quoting under SEC Rule 15c2-11. Currently, there are over 10,000 securities quoted on the OTC Link system and far fewer on the OTCBB, though I don’t know the exact number. OTC Link allows broker-dealers to view all quotes for OTC securities and, if desired, trade those securities through OTC Link. As quoted directly from www.OTCMarkets.com “The FINRA OTCBB system, on the other hand, is a quotation only system, without the electronic messaging capabilities of OTC Link. Only companies that are SEC-reporting are eligible for quotation on the FINRA OTCBB. Since these securities may also be quoted on OTC Link, many OTCBB eligible securities are ‘Dually-Quoted’ on both inter-dealer quotation systems. Currently, 99% of OTCBB eligible securities are quoted on OTC Link.” The majority of broker-dealers quote the securities of SEC-reporting companies on OTC Link over the FINRA OTCBB . According to OTC Link this is because the OTCBB does not have electronic trading capability. Whatever the reason, from my own knowledge and experience, I am finding that the majority of broker-dealers do indeed prefer the OTC Link and many will not even entertain the option of quoting on the OTCBB.
The SEC’s View and Why the OTCBB remains relevant However, here is the kicker, and it’s a dandy, the SEC views all three tiers of the otcmarkets.com as just the “Pink Sheets”. So what does that mean in the real world? Here is a quote from a comment letter received from the SEC while attempting to register an equity line and the re-sale of certain selling shareholder’s securities for an OTCQB quoted security: “The staff notes the Investment Agreement contains a put option that is based on a formula tied to the public price, However, because the staff does not consider the Pink Sheets to be a public market, the staff does not consider the private placement to be complete. The selling shareholder must wait until exercise of the put and receipt of the shares before the shares can be registered for resale. With regard to the remaining shares being offered, since there is no public market, the shares must be priced. Please revise the cover page to remove the equity line shares and replace the pricing information of the remaining shares with an established price range until such time as your common stock is listed on the OTCBB. After your common stock is quoted on the OTCBB, you can file a post-effective amendment indicating that the selling stockholders may sell all or a portion of these shares from time to time in market transactions through any stock exchange or market on which our stock is then listed, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices.” As you may be now, I was somewhat confused by the comment and telephoned the examiner. After several calls with the examiner and his review of the matter with the office of Small Business Policy and Chief Counsel at the SEC, there was no confusion. All three tiers of the OTC Link are considered “Pink Sheets” by the SEC staff. The OTC Link is not considered a market and therefore: (1) there can be no at-the-market pricing of securities registered for re-sale by an Issuer on behalf of its selling shareholders; and (2) there can be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market), for OTC Link quoted securities. Moreover, the only way to be eligible to quote on the OTCBB, even if you are already quoted on the OTC Link is through a 15c2-11 application or to qualify for a short-form 211 exemption application , both of which must be submitted to FINRA by a Market Maker. Simply stated, if you are an OTCQB or OTCQX quoted Issuer in talks with one of the many equity line providers, you should also be working with a market maker to file a new 15c2-11 application to become quoted on the OTCBB. The SEC’s Rationale The SEC’s opinion is that since FINRA controls the OTCBB and FINRA is a registered SRO, there is a level of regulatory involvement that might not exist on the OTC Link. I pointed out that both are Inter-Dealer Quotation Systems that require a valid 15c2-11, which 211 applications are submitted through FINRA. Moreover, FINRA regulates and oversees all broker dealers, regardless of what quotation system they use. The second reason proffered was that the OTCBB is a more established market and therefore there is a higher assumption of market integrity. However, from a real time technological standpoint it seems the OTC Link is more advanced. Moreover, far fewer securities are quoted on the OTCBB than the OTC Link, and thus, logically, the OTC Link is more indicative of the market as a whole. After a friendly debate on these issues with the SEC staff, I received the third and probably most telling of the reasons: the SEC established the policy that the privately held Pink Sheets (regardless of how they now structure themselves) was not a market and that the FINRA controlled OTCBB was a market, a long time ago and for now they are standing behind that policy. Conclusion I know many other Issuers are facing or have recently faced the same issue as my clients. The SEC staff was clear that I am not the first to debate the issue with them and that especially recently the issue is being raised more and more often. I suspect that as soon as the Office of Small Business Policy catches up on its Dodd-Frank and JOBS Act related duties; the small cap world will see some policy change. Let’s hope that the policy change is that the OTC Link’s OTCQB and OTCQX qualify as a “market”. The other potential alternative, mentioned by an SEC staffer in one of our friendly debates, is a change such that OTCBB does not qualify as a market, and neither does the OTC Link, leaving at-the-market pricing solely available for exchange traded securities. Can I pretend I didn’t hear that?
