Microcap Securities

What Are Microcap Securities?

The term “microcap” in this case applies to small public companies with low or “micro” capitalizations with securities quoted on the OTC Bulletin Board (OTCBB) or the OTC Markets OTCQX, OTCQB and Pink Sheets.

Whereas, the Wall Street definition of “microcap” would include public companies with a market capitalization of less than $250 million, most OTC Bulletin Board and OTC Markets OTCQB, OTCQX and Pink Sheets companies have market caps of less than $50 million, and development stage Issuers typically have few assets and limited operations.

While many microcap companies that meet the eligibility requirements are successful in becoming listed on the NASDAQ or NYSE MKT (formerly AMEX) exchanges, most are quoted in the OTC marketplace regardless of size.

Microcap stocks tend to be priced below $5 and are often termed “penny stocks” though that description does not fit many OTC Bulletin Board and OTC Markets Pink Sheet stocks.  Some microcap companies trade heavily and are household names, while others are little known outside of the penny stock space and trade in low volumes.

Where Do Microcap Securities Trade?

Most microcap securities trade in the “over-the-counter” (OTC) market.  Their securities are not “listed” on a national exchange like the NYSE or NASDAQ, but are instead quoted on the OTC Bulletin Boardor OTC Markets.  As a practical matter, if an OTC issuer has liquidity, their securities can be deposited with many brokers that specialize in OTCBB and OTC Markets securities, and most trading platforms will carry quotations for microcap securities, as well.

OTC Bulletin Board

The OTC Bulletin Board is operated by the Financial Industry Regulatory Authority (FINRA).  The OTCBB is FINRA’s electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many OTC equity securities that are sponsored by a market maker and are fully reporting with the SEC or with their banking or insurance regulator.

Securities listed on the OTCBB are essentially equivalent to the OTC Markets OTCQB market tier, in that both file quarterly and annual audited financial reports with the SEC.   However, the OTCBB has been largely eclipsed by OTC Markets OTCQB, since investors searching OTCMarkets.com can find information and the filings of all fully reporting SEC companies, while OTCBB has information on only those issuers which elected to become quoted on the OTCBB.

Nevertheless, public companies that are fully reporting to the SEC are often called “bulletin board” companies because that term is widely recognized.

OTC Markets

OTCMarkets.com (also referred to sometimes as “OTC Link”) is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in exchange-listed securities, OTC equity securities, foreign equity securities and certain corporate debt securities. In addition to publishing quotes, OTC Markets.com allows its broker-dealer customers/subscribers to send and receive trade messages, allowing them to actually negotiate trades. OTC Markets/OTC Link is a member of FINRA, an SEC registered broker-dealer and an “Alternative Trading System.”

OTC Markets is divided into three market tiers:

OTC Pink or “Pink Sheets”

The OTCMarkets.com Pink Sheets is an open marketplace for equity securities, with no minimum financial standards and no SEC reporting requirements.  Within the OTC Pink market tier, there are three categories, depending on whether or not the Issuer has elected to subscribe to the OTC Markets Disclosure and News Service and to post its Quarterly Reports, Annual Reports and Information and Disclosure Statements.

Pink Current

Those OTC Markets Pink Sheet issuers that are “fully reporting” under the OTC Markets alternative or alternate reporting standard are known as Pink Current.

Pink Limited Information

Pink Current Issuers that become late in making quarterly or annual filings are dropped to Pink Limited Information (Pink Yield Sign).

Pink No Information

Those public companies that are more delinquent in their filings with OTC Markets (or which have never filed with OTC Markets and ceased filing with the SEC long ago) are classified as Pink No Information (Pink Stop Sign).

In many instances, quality companies with significant revenue, assets and ongoing operations (including some which are household names) choose to remain on the Pink Current market tier even though they could be quoted on the OTCQB or OTCBB if their financials were audited.

OTCQB

The OTCMarkets.com OTCQB or “QB” market tier is comprised of Issuers which are essentially the equivalent of “bulletin board” companies, even though these securities may not be listed on the OTCBB.  The OTCQB is reserved for the securities of public companies that are current in their SEC filings or “fully reporting” to the SEC (or more rarely, to a U.S. bank, thrift or insurance regulator).  This fully reporting status does not imply a certain level of assets or revenue, but does reflect that the OTCQB Issuers provide PCAOB audited financials, whereas Pink Sheets are not required to have audits.

OTCQX

The OTCMarkets.com OTCQX or “QX” is reserved by OTC Markets Group for the securities of public companies that meet certain eligibility requirements involving net tangible assets or average revenue, have audited financial statements, and partner with a third-party securities attorney or investment bank, known as a Designated Advisor for Disclosure (DAD) that reviews disclosure and acts as a professional advisor.

Like QB Issuers, the OTCQX Issuers are current in their reporting to the SEC (or more rarely, a U.S. bank, thrift or insurance regulator), or they are current in their reporting obligations on OTCQX.com under the Alternative Reporting Standard.

OTCMarkets.com carries information on two additional categories of microcap companies:

Grey Sheets

Grey sheets or gray sheet securities are not listed on any stock exchange, and are also not formally quoted on OTC Markets or OTCBB. Unsolicited transactions are processed independently and are not centrally listed or quoted anywhere. Trades are reported to a self-regulatory organization (SRO), and the SRO then passes the information to market data companies.

Caveat Emptor

OTC Markets labels an Issuer with the skull and crossbones when there is a public interest concern associated with the public company. This could include a spam marketing campaign or stock promotion, or a known investigation of alleged fraudulent activity associated with the company or its affiliates or insiders.