Category Archives: OTCQX

What are Bid and Ask Prices?

Companies with the goal to go public on the OTC Markets are ultimately looking for their stock to trade.  In the over-the-counter markets,  the most basic terms to understand are the “bid” and “ask.”

What is the Bid?

The “bid” is the highest price a Market Maker will pay to purchase a specific number of shares of stock.  For instance, on a penny stock, a Market Maker may quote a bid of $0.05 and a size of 10,000, meaning that you can sell up to 10,000 shares to the Market Maker at five cents a share.

What is the Ask?

The “ask” is the lowest price at which a Market Maker will sell a specific number of shares of stock.  The ask price is also known as the “offer” price.  The ask price is almost always higher than the bid price.  For example, on the same penny stock, the Market Maker may quote an ask of $0.06 and a size of 20,000, meaning that you can buy up to 20,000 shares from the Market Maker at six cents a share.

What is the Spread?

The spread is the difference between the bid and the ask price.  In the example above, the spread is $0.01.  Market makers make money on the difference between the bid price and the ask price.

In thinly traded markets where volume in a microcap stock is very low, the spread is higher.  When trading volume increases, more shares are bought and sold so a Market Maker will decrease the spread to encourage more volume.  Eventually, multiple Market Makers compete for business by constantly adjusting their bid and ask prices to facilitate trading.

What is OTCQX?

OTCQX is the highest market tier on OTCMarkets.com, and is reserved for “established, investor-focused U.S. and global companies.”  The OTCQX marketplace attracts the best public companies since it has relatively high financial requirements, and only accepts those with a history of compliance with U.S. securities laws that are current in their disclosure.   OTCQX companies must also be sponsored by a professional third-party advisor known as “DAD/PAL.”

Because of these requirements, OTCQX can be a logical step toward a future uplisting onto the NYSE MKT or NASDAQ.

There are Three Types of OTCQX Companies

 OTCQX International

OTCQX International is the marketplace for global companies whose securities are already listed on an international stock exchange.   The platform provides visibility to US investors and a recognized forum for disclosure and transparency.

OTCQX US

OTCQX US is the OTCMarkets’ tier for smaller and high-growth United States based public companies which exceed certain high financial requirements and operating standards.  These OTCQX Issuers are demonstrating a commitment to full disclosure and transparency.

OTCQX for Banks

OTCQX for Banks is the marketplace for well capitalized regional and community banks with strong management.  OTCQX for Banks accepts both SEC reporting banks and non reporting banks, and the platform gives each the ability to increase their investor visibility while meeting existing regulatory requirements.

 

What are SEC Forms 3, 4 and 5?

These forms are used by a public company’s insiders in order to report beneficial ownership of securities.   A corporate insider in this case refers to the public company’s officers, directors, and anyone beneficially owning greater than Ten (10%) Percent of a class of stock registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”).

SEC Form 3

Form 3 is for filing an initial statement of beneficial ownership. An public company insider must file this Form no later than the effective date of the registration statement if the Issuer is registering stock for the first time under Section 12 of the Exchange Act.

If the public company is already registered under Section 12, Form 3 must be filed within Ten (10) days of the date on which the shareholder became an insider–that is, when he or she became an officer, director, or beneficial owner of greater than Ten (10) percent.

SEC Form 4

Form 4 is used for reporting Changes in beneficial ownership to the SEC.  SEC Form 4 must be reported to the SEC within Two (2) business days. There are certain, limited categories of transactions that are not subject to the Two (2) business day reporting requirement.

SEC Form 5

Form 5 is used by insiders  to report transactions that should have been reported earlier on a Form 4.  Form 5 can also be used for “deferred reporting.” If a Form 5 is filed, it is due Forty-Five (45) days following the end of the public company’s fiscal year.

Obligation to File Reports Under the Securities Exchange Act of 1934

Exchange Act Reporting Requirements

When a public company registers its securities under the Securities Act of 1933 (the “Securities Act”) through the filing of an S-1 Registration Statement, it must continue to file periodic reports with the SEC under the Securities Exchange Act of 1934 through at least the end of the fiscal year in which the S-1 becomes effective.

After the end of that fiscal year, the public company must continue reporting to the SEC unless its obligation to report is suspended.   The SEC will suspend an Issuer’s filing obligations if

  1. The number of shareholders falls below 300 for the class of securities offered; or
  2. The number of shareholder is below 500 for the class of securities offered and the Issuer had less than $10 million in total assets in each of the last 3 fiscal years.

An Issuer can request that the SEC suspend its filing obligations by filing a Form 15.   From there, Issuers usually choose to become a Pink Sheet and file under the Alternative Reporting Standard used by the OTC Markets Group.

There are two situations in which a public company would still have the obligation to file SEC Exchange Act reports, regardless of its preference for the alternative reporting standard:

  1. If the public company lists its securities on an exchange, like the New York Stock Exchange, the NYSE MKT or the NASDAQ; or
  2. If the Issuer has record shareholders greater than 2,000.

What is an SEC Trading Suspension?

The Securities and Exchange Commission (“SEC”) has the authority to suspend trading in any stock for up to Ten (10) days when it believes that information about the Company may be inaccurate or unreliable.  Investors can search a list of SEC trading suspensions at SEC.gov.

Reasons the SEC Might Suspend Trading

  1. A lack of “current, accurate, or adequate” information about the public company–   If the Issuer is an OTCQB or OTCQX, this will cause OTC Markets to label it as a Pink Sheet until the filings are current.
  2. Questions regarding the accuracy of publicly available information–  This usually refers to press releases, but can also refer to periodic reports, like the 8-K, that mention financials, mergers or acquisitions.
  3. Trading in the stock–  A concern over insider trading or market manipulation involving email spam is often the cause.

Does trading automatically resume after the Ten Day Suspension?

Microcap stocks that are quoted on OTC Markets or on the OTC Bulletin Board (“OTCBB”) do not automatically resume trading following a 10 day SEC trading suspension.

In order for OTC Markets or FINRA’s OTCBB to resume quoting a suspended stock, the Issuer must have a market maker sponsor a new 15c2-11 filing.

Responding to an SEC Trading Suspension

SEC trading suspensions are valid tactics used by the Commission when there is a public interest concern over either a lack of information or the presence of new information that needs to be verified.

The proper response in either case is to make sure that the Issuer’s filings and press releases are current and accurate.  If a mistake was made, the Issuer should file an Amendment immediately.   Once the filings and news releases are current and accurate, then the next job for the Issuer’s securities counsel is to compile and present documentation which supports the statements made in the filings or news releases which caused the concern.

Public companies which post accurate new releases that state verifiable facts and avoid hyperbole should be able to produce supporting documentation within the 10 day SEC trading suspension, and after review by the SEC, the matter should end there.

While it is often true that an SEC review and response to such documentation could take longer than 10 days, and that a new 15c-211 filing may be inevitable, it is the Issuer’s responsibility to cooperate and assist the SEC in their investigation.   The sooner an Issuer provides documentation to the SEC, the sooner the trading suspension can be lifted.

Microcap public companies or shareholders with concerns over an SEC trading suspension or trading halt can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

 

 

 

 

Can a Pink Sheet Use S-8 Shares to Compensate Consultants Who Raise Capital?

Exchanging Services for Rule 144 Restricted Stock is Common

Among OTCMarkets public companies, it is commonplace for Issuers to pay for consulting services using restricted shares of common stock.   For non-reporting companies, such as Pink Sheets, the usual way is for the CEO and the consultant to enter into a Consulting Agreement which specifies a certain number of shares for a specific scope of work.

This restricted stock is then held for the standard 12 month holding period under Rule 144 before being sold on the market.  Many times, the type of work for which restricted stock is awarded does include activities associated with raising capital, but Rule 144 is the mechanism for clearing the stock, not S-8.

S-8 Can Only Be Used By SEC Reporting Companies

Most Pink Sheets are not SEC filers, but are instead under the OTCMarkets’ Alternative Reporting Standard.  (Due to a recent change in OTCMarkets’ policies governing its OTCQB market tier, many SEC filers saw their OTCQB status change to Pink Sheet when their share price dropped below a penny.)   Because of this distinction, consultants providing services in exchange for true Pink Sheet stock are awarded Rule 144 restricted stock with a 12 month holding period, not S-8 stock, which is free trading.

S-8 Cannot Be Used for Capital Raising Activities

Even if a Pink Sheet was allowed to use S-8, the capital raiser would still be out of luck because stock issued to consultants in exchange for work associated with capital raising cannot be cleared using S-8.  There are no exceptions for this.  In fact, there are 8 requirements for an SEC reporting company to be able to use S-8, and all of them must be met.

Beneficial Ownership Reporting Under Exchange Act Sections 13(d) and 13(g)

Many Affiliate Shareholders of OTC microcap companies are familiar with the Rule 144 reporting requirements and volume trading limitations for the beneficial owners of greater than 10% of an Issuer’s securities.

Section 13 Applies to Exchange Act Reporting Issuers

However, many are unaware that all owners of greater than 5% in any Issuer which has registered a class of its equity securities under Section 240.13 of the Securities Exchange Act of 1934 (“Exchange Act”), are supposed to file Beneficial Ownership Reports with the SEC.

Investors Owning Greater than 5% Must File Schedule 13 Reports

Under Regulation 13D-G, beneficial owners must continue to file these Schedule 13D or the more abbreviated 13G reports as long as their holdings exceed 5%. These Beneficial Ownership Reports provide the SEC with certain background information as well as the investor’s “intentions” which is why these Schedule 13 reports are filed in connection with a tender offer.

Investors seeking further information on the reporting requirements in connection with a tender offer, or with questions on securities law compliance in general, can contact Matt Stout, securities lawyer at (410) 429-7076 or mstout@otclawyers.com.

 

How Do Stock Splits and Reverse Splits Affect Trading Volume Under Rule 144?

Affiliates of OTC Issuers Can Sell 1% Every 3 Months under Rule 144

Under Rule 144, Affiliates of OTC Bulletin Board (“OTCBB”) and OTC Markets OTCQB, OTCQX and Pink Sheet Issuers are only allowed to sell 1% of the total issued and outstanding shares during any 3 month period.

Affiliates of Exchange Listed Issuers Have a Choice Under Rule 144(e)

Affiliates of Issuers listed on national exchanges like the NASDAQ or NYSE MKT are allowed to sell either

  1. 1% percent of the issued and outstanding shares; or
  2. The average weekly trading volume during the 4 weeks before the Affiliate filed Form 144.

Stock Splits Do Not Affect the Affiliate’s Percentage of Ownership

Whether the Issuer is quoted on the Over-the-Counter markets or listed on a stock exchange, neither forward stock splits nor reverse stock splits will affect the trading volume limitations under Rule 144(e) since a forward or reverse split would not change the percentage of the Issuer’s stock that the Affiliate is allowed to sell during the time period chosen.

Calculate Available Volume Under Rule 144 Following a Stock Split

To calculate available trading volume following a forward stock split or reverse stock split, an Affiliate should measure the trading volume as if the split had occurred on the 1st day of the 3 month period, even if it occurs at some later point during the 3 months.

Affiliates of OTC, NASDAQ and NYSE MKT Issuers with questions regarding selling restricted stock under SEC Rule 144 can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

Do OTC Markets Issuers Need Audited Financials?

Public companies quoted on the OTC Markets OTCQX and OTCQB marketplaces require financials audited by a PCAOB auditor.  Those securities quoted on the OTC Markets Pink Sheet market tier do not required audits, though many Pink Sheets do have audited financials.

Audited Financials Not Required for Non Sec Reporting Companies

FINRA does not require the financial statements of Pink Sheets, which are not SEC reporting companies, to be audited for the Form 211 in the 15c2-11 process. Non SEC reporting companies are those that do not publish their financials and disclosures using the 10-Q, 10-K and 8-K using the SEC’s EDGAR filing system.

Unaudited Financials of US Issuers Must Be Prepared in Accordance with GAAP

However, OTC Markets Pink Sheet Issuers that are US companies should have financials that are prepared in accordance with GAAP. Foreign Issuers, meaning those Issuers that are incorporated offshore as opposed to US corporations that have business headquarters or operations outside of the US, are allowed to post financials that do not follow GAAP if they are prepared in accordance with their home country’s accepted accounting standards.

PInk Current Issuers Without Audits Require an Attorney Letter

Whether a US or foreign Issuer, a public company that wants to maintain Pink Current status on OTCMarkets.com will require an Attorney Letter  with Respect to Current Information at least annually, if they do not file reports with the SEC and do not publish audited financials. Companies that want to maintain Pink Limited Information (Pink Yield Sign) are not required to have audited financials.

Issuers with questions regarding PCAOB audits or questions about filing Form 15 with the SEC to transfer to the OTC Markets Alternative Reporting Standard (thus avoiding audits) can contact Matheau J. W. Stout, Esq. at (410) 429-7076 or mstout@otclawyers.com.

What is the Alternative Reporting Standard for OTCQX Issuers?

Most public companies that qualify for the OTCQX market tier are SEC reporting companies and already file the typical 10-Q, 10-K and 8-K forms.  In other words, they are the same fully reporting Issuers you would see on the OTCQX or OTC Bulletin Board….but they make more money and have more assets.

However, even when SEC registration is not required, OTCQX companies must still make information publicly available pursuant to Rule 10b-5 under the Securities Exchange Act of 1934 (“Exchange Act”) and pursuant to Rule 144(c)(2) under the Securities Act of 1933 (“Securities Act”).

In order to comply with these requirements, OTC Markets Group offers the Alternative Reporting Standard for companies that elect to make material information publicly available to investors.

To qualify for OTCQX, U.S., companies not already fully reporting to the SEC can follow the Alternative Reporting Standard.  These companies submit information to OTC Markets per the OTCQX U.S. Disclosure Guidelines and are then subject to the eligibility requirements, terms and conditions of the OTCQX Rules for U.S. Companies.

Under the Alternative Reporting Standard, OTCQX Issuers provide investors with all material information necessary for the investor to make an informed investment decision.  This essentially amounts to the same information SEC reporting companies put in their Form 10 filings.