On September 28, 2021, more than 2,000 publicly traded companies whose shares had been quoted on OTC Markets Group’s Pink Open Market were shifted to OTC Markets’ limited “Expert Market,” where stocks are essentially suspended from official trading, for failure to make current information about the company publicly available.
This action is the result of the SEC’s position that enhanced disclosure and investor protection are needed in the over-the-counter (OTC) markets, as reflected in the September 2020 amendment to Securities Exchange Act Rule 15c2-11. This rule prohibits dealers from publishing quotations for OTC securities to quotation mediums without first reviewing certain issuer financial information and ensuring that information is current and publicly available.
Under amended Rule 15c2-11, current information about an issuer must be publicly available in order for an issuer’s shares to become quoted initially, and remain quoted, on one of the three main public marketplaces (OTCQX Best Market, OTCQB Venture Market and Pink Open Market) operated by OTC Markets Group. According to guidance from OTC Markets Group, issuers subject to SEC reporting obligations satisfy the requirements of the amended rule if the issuers are current in their SEC reporting obligations. Non-SEC reporting companies would have to satisfy OTC Markets Group’s basic disclosure guidelines and post their company’s financial statements on the OTC Disclosure and News Service.
Issuers who miss, are late or choose not to comply with periodic (annual and quarterly) filing requirements should be aware that their shares could be involuntarily shifted to OTC Markets Group’s limited Expert Market after a short grace period. The Expert Market is available only for unsolicited quotes, meaning broker-dealers may use the Expert Market to publish unsolicited quotes representing limit orders from retail and institutional investors who are not affiliates or insiders of the issuer. Quotations in Expert Market securities are only made available to broker-dealers, institutions and other sophisticated investors.
As a practical matter, if a company’s common stock is moved to the Expert Market, the company’s stockholders will no longer have a public trading market for their shares. Additionally, trading bid and ask prices and share trading volumes will not be publicly quoted and the trading market for the common stock would likely be illiquid and limited primarily to private purchases and sales among individual stockholders. Any transactions would be opaque to the public marketplace and would not necessarily provide the company’s stockholders with a reliable market value for their shares.
A company pushed down to the Expert Market would be able to apply for relisting on OTC Markets Group once a market maker has filed a new Form 211 with FINRA, and the company has made current public information available. This requires a company to locate a market maker to file a Form 211 on its behalf and, once the form is filed, there is no set timeframe for a re-application approval. When compliance with the amended rule is demonstrated, relisting can occur.
The impact of amended Rule 15c2-11 is ongoing. More than ever, OTC companies need to complete and file timely and adequate current public information with the SEC or OTC Markets Group. If they fail to do so, they jeopardize the privilege of being publicly traded in a regulated market.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...