Perhaps the foremost concern of the buyers of a public vehicle, or of any major investor seeking to purchase a large stake in a OTC Bulletin Board or OTC Pink Sheet issuer, is the existence of aged convertible debt. This is not only true from a balance sheet perspective, but also true because of the potential for the conversion of aged debt into large blocks of free trading stock under SEC Rule 144 or the provisions of 4(1).
Conversion Features May Not Be Public Information if the Issuer is Not Current in its OTC Markets Filings
Because Pink Sheet issuers do not have to file SEC Form 8-K, the fact that management may have just taken out a large loan with high interest and severe default provisions may not come to light for a full quarter, if the issuer is Pink Current. OTC Markets Quarterly and Annual Reports do not require a photocopy of the actual Convertible Promissory Note to be included, although its terms are supposed to be fully outlined within the Notes to the financial statements and within the Annual Disclosure itself.
If the issuer is Pink Yield Sign or Pink Stop Sign, information on that loan, including the principal amount, interest rate, and maturity date may not be publicly available at the moment a securities attorney is reviewing the OTC Markets filings. Perhaps most importantly, the conversion features of the loan may not be known.
Pink Sheet Issuers Rarely File Interim Reports to Disclose Convertible Debt
While one could argue that OTC Pink Sheet issuers should be filing Interim Disclosures and Interim financials when a debt of material size is undertaken, the fact is that this rarely happens, both due to lack of knowledge on the part of management and due to the perceived cost associated with the filings.
For this reason, it is recommended that any group performing due diligence on an OTC Pink Sheet retain a securities lawyer to not only review the filings, but request the actual debt instruments from the company for review. Even when these debts are not mentioned in the filings, once must presume they exist and proceed accordingly. Securities lawyer, Matt Stout, is available to perform due diligence on all tiers of OTC Markets Pink Sheet issuers.
Convertible Debt of OTC Bulletin Board and OTCQB Issuers
SEC reporting public companies file Forms 10-Q, 10-K and 8-K, among others, with the SEC using the EDGAR filing system. OTC Issuers that retain PCAOB registered auditors and undergo the quarterly and annual audits are the only companies eligible to be quoted on the OTC Markets tiers known as OTCQX and OTCQB.
During the process of an audit, issuers are required to obtain confirmation’s of debt owed to each creditor, which show the terms and current balance. Auditors then use these debt confirmations to provide the loans payable figures found in 10-Q and 10-K reports.
Likewise, FINRA’s OTCBB or OTC Bulletin Board only posts quotations for issuers which are current SEC filers, all of which are undergoing PCAOB audits.
OTCBB and OTCQB Issuers Should Report Debt on Form 8-K
Having an OTC issuer’s stock quoted on the OTC Bulletin Board or the OTC Markets OTCQB tier implies that the companies are “currently reporting” with the SEC. This fact gives investors, and securities attorneys doing due diligence, some degree of peace of mind since in theory, all material events, including the taking on of convertible debt, should be reported.
Form 8-K, known as the “Current Report” is used whenever there is the occurrence of a “material event” in a company’s operations. There are several common events that trigger an 8-K filing. Convertible Notes of any size should be considered by the management of OTC public companies to be material, and the news, whether perceived as good or bad, should be found in the filings. In reality, however, this is not always the case.
It is important to remember that reviewing an issuer’s filings is only the first step in performing due diligence for a securities lawyer. The next step should always be asking questions about what is not shown in the SEC and OTC Markets filings, even if the issuer is an SEC reporting company.
For further information on how aged convertible debt can be reviewed in OTC Bulletin Board and Pink Sheet companies, contact Matheau J. W. Stout, securities lawyer at (410) 429-7076.