Tag Archives: Securities Law

What Happens to Stock When a Company is Delisted from an Exchange?

If an Issuer is “Delisted” from the NASDAQ or NYSE, Does This Affect its Shares?

No.  If a Shareholder owns stock in an Issuer that was delisted from a national exchange like the NYSE or NASDAQ and is now being quoted on OTC Markets, nothing changes regarding the shares themselves.

A Shareholder will remain the beneficial owner of the stock even after the Issuer is delisted and that stock can be traded through any broker-dealer that regularly deals in the Over-the-Counter Markets or in OTC securities.

Which Brokers Accept Delisted Stock?

Will the delisted stock be accepted by E-Trade or TD-Ameritrade?  Probably not, but those are not your broker of choice for OTC Bulletin Board or OTC Markets Pink Sheet stocks anyway.

Can companies get “delisted” from the OTCQX, OTCQB and OTC Pink marketplaces?

No. OTC Markets quotes stocks but is not an exchange so there are no “listings.”  The only way a public company’s stock stops being quoted in either the OTCQX, OTCQB and OTC Pink Sheet marketplaces is if every broker-dealer stops quoting the stock.

In those rare circumstances when public companies shares no longer exist, but they still have a trading symbol, and are still being quoted, the Issuer has an obligation to notify FINRA.  FINRA will investigate and, if warranted, eliminate the trading symbol, and inform OTC Markets that the ticker is no longer valied. OTC Markets  will then remove the quotations in that stock from OTCMarkets.com.

Shareholders needing referrals to brokers who specialize in the OTCBB, OTCQB, OTCQX and Pink Sheet stocks can contact Matt Stout, securities attorney, for a referral at (410) 429-7076.

Issuer Tips on Presenting Securities for DTC Eligibility

Once an OTCBB, OTCQB or Pink Sheet’s securities are DTC eligible, it is important to focus on a few key requirements that can help DTC promptly process the Issuer’s securities and make sure these transactions are accurately reflected within the records at DTC.

CUSIP Number Assignment

The first key requirement to ensure that DTC eligible securities are processed correctly is for the Issuer’s securities lawyer to obtain a new CUSIP number from Standard & Poor’s CUSIP Service Bureau for each new issuance.

New CUSIP Required for Every Corporate Action Event

A new CUSIP number must be obtained for every “corporate action event” that either generates a new class of shares, or which causes a material change to an existing class of shares.

New CUSIP is Required Before a Reverse Split Becomes Effective

The classic example of a corporate action event requiring a new CUSIP is a reverse stock split., which cannot be declared effective by FINRA until a new CUSIP has been assigned.   This new CUSIP number is then printed on each new stock certificate, and helps shareholders, transfer agents and DTC keep track of the new issuance.

DTC Chills Are Tracked Under a Specific CUSIP

The CUSIP number becomes very important when questions of a DTC chill arise, since the way DTC checks for a chill is by CUSIP number.

When an Issuer’s securities lawyer calls or emails DTC to inquire about a DTC chill that a market maker believes was placed on an Issuer’s stock, the first question DTC will ask is “what is the CUSIP?”  With the proper CUSIP number, it is possible to get an answer on the status of DTC eligibility or a DTC chill quickly.

Certificate Format

The certificate format for DTC registered securities is a matter best handled by the Issuer’s Transfer Agent.  Issuers are encouraged not to be too creative with their certificate design, since DTC requires that the certificates comply with American National Standards Institute (“ANSI”) standards.

Proper Placement of Stamps and Labels on Certificates

Compliance with the ANSI ensures the processing is not delayed due to improper placement of stamps, bar code labels or other processing marks and materials.  By requiring that these processing stamps and labels stay within the “standard assignment area” Issuers can help DTC streamline processing time, which helps shareholders.

Avoid Having to Revalidate or Guarantee Certificates

When stamps, labels and bar codes are placed outside of the standard assignment area, the face of the certificate could be considered “mutilated” and require a revalidation or guarantee of the certificate by the Issuer or the Transfer Agent, which can take considerable time.

As a securities attorney with expertise representing OTC Bulletin Board (OTCBB), OTCQB and OTC Pink Sheet Issuers, Matt Stout can recommend Transfer Agents that also specialize in the over-the-counter market.

Restrictive Legends

Most stock certificates for DTC eligible OTC Issuers initially bear a restrictive legend noting that the securities are subject to SEC Rule 144.

When these stock certificates are accepted for deposit by DTC they are sent back to the Issuer’s Transfer Agent for re- registration into the name of Cede & Co., as nominee for DTC.  At that time, the restrictive legend is removed from the certificate and the DTC legend must  appear on the certificate that is then registered in the name of Cede & Co.

Once the certificate is in the name of DTC’s Nominee, Cede & Co., when these securities are transferred by book- entry in the DTC system, DTC Participants (broker-dealers) and the beneficial owners of the stock will not be aware of any restrictive legend.

Each stock certificate registered in the name of Cede & Co. will bear the following DTC Legend:

Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.

OTC Bulletin Board and OTC Markets Issuers with questions on the DTC eligibility process, or on the the process of clearing restricted stock for OTC shareholders can contact Matt Stout, securities lawyer for further information at (410) 429-7076.

What is Cede & Co in Relation to DTC?

When Issuers of OTC securities are reviewing their Shareholder lists, the free trading securities held by Shareholders that have already “cleared” and are in “the system” are shown as owned by Cede & Co.  Because of this, Issuers often wonder what Cede & Co is and how it is related to DTC.

Cede & Co is DTC’s Partnership Nominee

Once a certificate has cleared and deposited deposited by Direct Participants with DTC, all subsequent transfers of those securities are registered in the name of DTC’s partnership nominee, Cede & Co.

Cede & Co Does Not Affect Beneficial Ownership

The deposit of Securities with DTC and their registration in the name of Cede & Co. does not change beneficial ownership.   However, DTC has no knowledge of the beneficial owners of the securities once they are in Cede & Co’s name.

Instead, DTC’s records reflect only the identity of the broker-dealer, bank, trust company, or clearing firm to whose accounts the securities are credited.

While DTC does not track beneficial ownership, it is still the responsibility of the Direct and Indirect DTC Participants to maintain an account of their holdings on behalf of customers.

Current Public Information and the Alternative Reporting Standard Under Rule 144

Current Public Information Under Rule 144

Under SEC Rule 144, there must be “adequate current information” about the OTC Markets Issuer publicly available before the sale of restricted stock can be made. According to the SEC for “reporting companies” that file quarterly and annual financial reports with the SEC via its EDGAR filing system, this generally means that those Issuers have complied with the periodic reporting requirements of the Securities Exchange Act of 1934.

The reporting companies’ compliance with those reporting requirements is easily seen on OTC Markets via the current OTCQB or OTCQX designation, which demonstrates that an Issuer is current in its filings.

Current Information Under the Alternative Reporting Standard for Pink Sheets

For “non-reporting” companies, that are not subject to the reporting requirements under the Securities Exchange Act of 1934, this current information requirement means that certain company information is publicly available via OTCMarkets.com in the form of Quarterly and Annual reports showing the Issuers unaudited balance sheet, profit & loss statement and cash flow statement are posted.

It also means that the Pink Sheet Issuer’s Information and Disclosure Statement is posted on time, as well as.   The OTC Markets disclosures include information regarding the nature of the Issuer’s business operations, the bios of its officers and directors, and its share and debt structure.

OTC Pink Current

A Pink Current designation on OTCMarkets.com provides investors with the knowledge that the Pink Sheet Issuer has timely filed all of its disclosures and financials on OTCIQ in compliance with the Alternative Reporting Standard.

If those disclosures and financials are detailed and professionally prepared, they can be as informative and revealing to investors as an SEC Form 10-Q or 10-K.

A Pink Current Issuer is considered to have satisfied the requirement of “adequate public information” under Rule 144.

What Is the Holding Period Under Rule 144 for Affiliates?

An Affiliate under Rule 144 is typically an officer, director, or large shareholder of an OTC public company who is in a “relationship of control” with the issuer.  Before an Affiliate may sell restricted securities under SEC Rule 144, he or she must hold them for a certain period of time, depending on whether the issuer is an OTC Bulletin Board, or an OTC Markets Pink Sheet.

Holding Period for SEC Reporting Companies and Pink Sheets

If the Issuer is an “SEC reporting company” under the Securities Exchange Act of 1934, such as an OTCBB, OTCQB, or OTCQX, then the Affiliate must hold the securities for a minimum of six (6) months before resale.

If the Issuer of the securities is a Pink Sheet, and thus not subject to SEC reporting requirements, then the Affiliate must hold the securities for at least one (1) year before resale.

Holding Period Begins When Shares Are Paid For

Either holding period begins when the securities are purchased and fully paid for or earned (if acquired for services). It is important to remember that the holding period (and Rule 144 in general) only applies to restricted securities.

If Affiliates purchase securities in the public markets, these shares are free trading, and not restricted, so there would technically be no holding period under Rule 144.

However, this is often difficult to document, especially if the shares are intermingled or held at the same broker.  Affiliates wishing to purchase securities of the Issuer in the public markets would do well to keep good records, since it may become necessary to trace these non-restricted shares back to their source to prevent them from unduly being classified by the Transfer Agent or clearing firm as restricted.

Affiliates Should Wait Greater Than Ninety Days After Resigning

If an Affiliate purchases additional stock from the Issuer, this will not affect the holding period of earlier purchased stock of the same class.  However, Affiliates who sell stock to Non-Affiliate Shareholders can inadvertently cause those shares to be considered Affiliate Shares unless greater than 90 days has past since the Seller has ceased to be an Affiliate.

In practice, it is best for Affiliates of OTC Bulletin Board and OTC Markets Pink Sheet companies to fully document their holding period, and especially to document when they cease to be an officer, director, control person or 10% holder of the Issuer’s stock.

Likewise, it is important for investors purchasing stock privately from “former” Affiliates to review the Issuer’s Board Resolutions and filings to determine when the Seller officially ceased to be an Affiliate, since the Transfer Agent, broker and clearing firm will want to know these details.   An OTC Securities Lawyer like Matheau J. W. Stout can provide legal advice to the purchasers of Affiliate stock and draft 144 legal opinion letters that detail the origin, history and affiliate status of the shares.

Foreign Broker Dealer Registration Under the Securities Exchange Act of 1934

Foreign broker-dealers are required to be registered under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”) unless they are exempt under the Foreign Broker-Dealer Exemption (Rule 15a-6).

Every broker dealer which physically operates in the US must register with the SEC even if their business is directed only to foreign investors outside of the boundaries of the United States.

Every foreign broker dealer that attempts to market securities to any person in the United States must also register with the SEC.   This marketing includes the use of the internet, including blogs, websites, and emails to offer securities to US citizens, residents or companies.

Further information on what foreign broker dealers can do to remain exempt under the Foreign Broker-Dealer Exemption is shown in this post by Matheau J. W. Stout, Securities Lawyer.

What Financials are Required for Pink Current Status on OTCMarkets?

Pink Current Status Requires Financials in a Specific Format

Pink Current       Achieving Pink Current status is worthwhile for any Issuer listed on the Pink Sheets, since it provides investors with the confidence that comes from being a fully reporting company under the Alternate Reporting Standard.  In order for an Issuer on the OTCMarkets Pink Sheets to maintain its status as “Pink Current” the Company must file both Quarterly and Annual financial reports when due.   Many Pink Sheet Issuers discover that OTCMarkets requires these financials in a specific format, which is sometimes not what their bookkeeper provides at tax time.  There is also a specific way the financials should be posted within the OTC Disclosure and News Service so that they clearly state for which “period end” the financials apply.

Many Issuers Post Inadequate or Improper Financials in OTCIQ and Stay at Yield Sign

Many times, Issuers post inadequate or improperly formatted financials and wonder why they stay at a Yield Sign (Pink Limited Information).  When this happens, an Issuer must go back and reformat the financials in order to comply with OTCMarkets guidelines, which sometimes requires emails with OTCMarkets staff.  It is easy enough for management or an Issuer’s securities counsel to delete the improper reports and upload new PDFs showing the correct format which OTCMarkets requires.  Although the OTC staff is always helpful, and willing to assist Issuers learning the OTCIQ process, working with an experienced microcap securities attorney can help do things right the first time, saving accounting costs with some planning beforehand. At the Law Office of Matheau J. W. Stout, Esq., we often serve as corporate counsel to Pink Sheet companies, and serve as authorized user on OTCIQ so that we can make sure the postings are done correctly each time.  This saves Issuers considerable time so management can focus on operating the business rather than on the legal and administrative aspects of reporting.

OTCMarkets Requires Issuers to Post a Balance Sheet, Profit & Loss Statement and Cash Flow Statement

Each of these reports should state the Issuer’s corporate name in the heading, as well as the “period end” date, such as September 30, 2013.  Quickbooks has the ability to format the Quarterly Report properly, so long as the user specifies the parameters and requests a Balance Sheet, P&L and Cash Flow Statement.   Taking the time to format these properly once will save considerable time and expense later, since each Quarter the same reports will be posted.  Consolidated reports can be used by Issuers having multiple subsidiaries, so long as this is clearly disclosed.  OTCMarkets provides helpful information for Issuers on all aspects of using the OTIQ service, including an article on how to save financials to a PDF.  Issuers interested in obtaining Pink Current Status can begin the process by reviewing an OTCIQ Agreement and submitting it to OTCMarkets.com.


What is the Difference Between a Stop Sign and Caveat Emptor on OTCMarkets?

A Stop Sign Usually Means an Issuer is Simply Behind in its Quarterly and Annual Filings

Stop Sign       When a Pink Sheet Issuer falls behind on the filing of its OTCMarkets  financials and disclosures, it can be marked a stop sign (Pink No Information) on OTCMarkets.com.  This also happens when a former OTCQB, or bulletin board Issuer ceases to fulfill its SEC reporting obligations.  The bottom line here is that a Stop Sign is not in itself a “bad sign.”

Securities Attorneys Can Help Bring OTCMarkets Filings Current

If the only reason for the Stop Sign is that the Issuer is behind in its filing, and if those filings can be made current, then this presents an opportunity for new management.  A securities attorney can call the helpful staff at OTCMarkets.com to review the history of the Issuer and find out if there is another other substantive issue that caused the Stop Sign.  If not, then the matter is simple enough:  the Issuer needs to subscribe to OTCMarkets’ Disclosure and News Service, and bring its filings current.  The costs involved are easily quantifiable by securities lawyers like Matheau J. W. Stout, and it always makes sense to find out, even if an Issuer is not ready today to begin posting past due filings.

Issuers Marked Caveat Emptor Are Not Always Guilty of Wrongdoing

caveat-emptor       In contrast, Caveat Emptor (Skull and Crossbones) stocks are believed to have some negative element in their past history, which is significant enough for OTCMarkets.com to warn all prospective investors:  Buyer Beware.  In some cases, past management or promoters associated with the Issuer have become entangled in SEC problems unrelated to the Company, or are the subject of state inquiries.  Sometimes there were actual violations of securities law that are connected to the Issuer itself, and sometimes there is simply a misunderstanding that can be fixed by presenting evidence to the regulatory authorities involved.

Undocumented Press Releases and Violations of State Blue Sky Laws are the Reasons Why Many OTCMarkets Issuers are Marked Caveat Emptor

On many occasions, these inquiries stem from press releases that were deemed questionable by officials, and in others someone has inadvertently run afoul of state Blue Sky laws which govern the process of registering sales of stock in private placements.   In all cases, there is a process by which management can provide documentation and other evidence to clear the persons involved, and thus the Issuer, from any wrongdoing.   Sometimes the management and shareholders of an Issuer marked with the Skull and Crossbones decides its not worth the time and costs involved in “cleaning up” their vehicle.

Issuers Marked Caveat Emptor May Be Able to Clear Themselves of Any Wrongdoing with a Securities Lawyer’s Help

It makes sense for controlling shareholders to hire a qualified securities law firm, like the Law Office of Matheau J. W. Stout, Esq. to perform some due diligence into the matter, so that the costs and time frame can be quantified.  In many cases, it is easier to remove this stigma than shareholders of Caveat Emptor stocks might think, and it is nearly always worth a look.

More information regarding the differences between a Stop Sign and Skull and Crossbones Stock Can Be found on OTCMarkets.com here.

When Should a Pink Sheet File Interim Disclosures with OTCMarkets?

Minimum Reporting Requirements Require Quarterly and Annual Disclosures by Pink Sheet Companies

OTCMarkets requires its Current Pink Sheet customers to file Quarterly and Annual Reports and only one Annual Information and Disclosure Statement as minimum requirements in order to maintain “current pink” status.   However, many Issuers don’t know that they have the option of filing Interim Reports and Interim Disclosures, as well.  Within the OTCIQ reporting system, there are, in fact, options to file nearly any type of report an Issuer could think of.

OTCMarkets Pink Sheet Issuers Should Err on the Side of Full Disclosure

Just as we advise our SEC reporting clients to file Form 8-K whenever anything material happens, and to look at this requirement as an opportunity rather than a burden, companies listed on the OTCMarkets Pink Sheets should likewise file Interim Disclosures under the same guidelines.  Whenever there is a doubt about whether or not an event is “material” management of microcap Pink Sheet companies should err on the side of full disclosure.

Interim Disclosures Make Rule 144 Legal Opinions Easier for Pink Sheets

Although some Issuers might find it a hassle to file Interim Disclosures, filing them whenever something material happens will make it easier for Shareholders to clear stock.  This is because perhaps the primary requirement when clearing restricted stock of OTCMarkets Pink Sheet companies is the preparation of a Rule 144 letter by a qualified securities attorney.  At the Law Office of Matheau J. W. Stout, Esq., our securities attorneys prepare 144 legal opinion letters for many Pink Sheet companies.

And the main element of that 144 opinion when the Issuer is a Pink Sheet, is whether or not adequate, current public information is available on the Company.   When Pink Sheets take the trouble to file Interim Disclosures, in addition to timely filing their Quarterly and Annual Reports and Disclosures with OTCMarkets.com, there is little doubt that that legal opinion will be accepted by transfer agents and brokers.  This means happier Shareholders and more market liquidity.

When Does an Issuer Need to File an 8-K?

An 8-K is Filed When Something Material Happens

One of the most often asked questions of a securities attorney is when an Issuer is required to file an 8-K.  There is a laundry list of specific events that require the filing available at SEC.gov and on the Form 8-K itself.  But it is helpful for management of small public “bulletin board” companies, listed on the OTCMarkets OTCQB, to look at these requirements as more of an opportunity to both document and share news, instead of trying to find a way “not to file” to avoid administrative hassle and costs.

The short answer is whenever there is a material development or the occurrence of an “event” that the Issuer’s shareholders (and the investing public) should know about.  These material events may differ greatly when comparing a development stage, micro cap company with Google or Microsoft, and therefore it likely that a development stage company should actually be filing more 8-Ks if it is actively operating.

Microcap Issuers Should Provide As Much Information As Possible to Shareholders

At the Law Office of Matheau J. W. Stout, Esq., we advise our OTCQB and OTCBB microcap public company clients to err on the side of full disclosure, and if there is a doubt as to whether or not the transaction or event is “material” the Issuer should file the 8-K.  Simply put, there is no penalty for providing shareholders with too much information (“TMI”) as long as that information is accurate and the SEC appreciates those public companies which go above and beyond in communicating with their shareholders.

File an 8-K When News Goes Out In a Press Release

Although it may seem obvious, quite often, development stage OTCQB and bulletin board public companies are so eager to issue good news to the public through press releases that they forget to file the 8-K.  In general, if the news is press release worthy, it might very well be considered material, and there should be an 8-K filed within four (4) business days of the occurrence of the event.   Because of the difference in market cap, shareholder base, revenue and cash flow, the signing of (or loss of ) a Letter of Intent or Purchase Order for $50,000 may not be material for Google, but it may be radically good (or bad) news for a newly reporting Issuer still in the development stage with few assets and no revenue.

This kind of thinking (that there is no such thing as “TMI”) prevents many problems.  When small public companies take the time to think hard about whether the news being distributed can be easily and well documented, that moment of pause can save many headaches later.