Back in October 2010 I wrote a blog titled “Has the OTCBB been replaced by the OTCQX and OTCQB”; at the time and up until May 16, 2013, my opinion was “yes” with one big caveat. Prior to May 16, 2013, all three tiers of the OTC Link were considered “pinksheets” by the SEC staff. Prior to May 16, 2013, the OTC Link was not considered a market and therefore: (1) there could be no at-the-market pricing of securities registered for resale by an Issuer on behalf of its selling shareholders; and (2) there could be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market), for OTC Link quoted securities.
On May 16, 2013, the SEC updated their Compliance and Disclosure Interpretations confirming that the OTCQB and OTCQX marketplaces are now considered public marketplaces for purposes of establishing a public market price when registering securities for resale in equity line financings. Accordingly, issuers can now register securities priced at-the-market and conduct equity line financing transactions where underlying convertible equities are priced based on a formula tied to market price.
Background
Over the past years, the historical “pinksheets” underwent major changes, including the creation of certain “tiers” of issuers and a new name for the Inter-dealer quotation system – the OTC Link. The OTC Link divides issuers into three (3) levels: OTCQX, OTCQB, and pinksheets. Quotation on both the OTCQB and OTCQX requires that the Issuer be subject to and current with the reporting requirements of the Securities Exchange Act of 1934.
The Industry’s View of OTCQB/OTCQX vs. OTCBB
The OTCBB has no particular listing or quotation requirements other than that the issuer be subject to the reporting requirements of the Securities Exchange Act of 1934, and be current in their reports—which is the same for the OTCQB.OTCQX actually imposes some additional standards—which I won’t get into for this blog—but which are available in previous blogs.
The following summary of the differences between the OTCQB and OTCBB is mainly from the OTC Link website. Basically the Inter-dealer Quotation/Trading Systems allow broker-dealers to post and disseminate their ‘quotes’ (prices) to the marketplace and, in the case of OTC Link, negotiate trades at agreed-upon prices. The two major Inter-dealer Quotation Systems are: OTC Link (operated by OTC Markets Group) and FINRA’s OTCBB. This is a major distinction as FINRA, which operates the OTCBB, is a registered self-regulatory organization (SRO) and OTC Link is not.
OTC Link allows broker-dealers to quote any OTC equity security eligible for quoting under SEC Rule 15c2-11. Currently, there are over 10,000 securities quoted on the OTC Link system and far fewer on the OTCBB, though I don’t know the exact number (some say under 200). OTC Link allows broker-dealers to view all quotes for OTC securities and, if desired, trade those securities through OTC Link.
As quoted directly from otcmarkets.com, “The FINRA OTCBB system, on the other hand, is a quotation only system, without the electronic messaging capabilities of OTC Link. Only companies that are SEC-reporting are eligible for quotation on the FINRA OTCBB. Since these securities may also be quoted on OTC Link, many BB eligible securities are ‘Dually-Quoted’ on both inter-dealer quotation systems. Currently, 99% of OTCBB eligible securities are quoted on OTC Link.”
The significant majority of broker-dealers quote the securities of SEC-reporting companies on OTC Link as opposed to the FINRA OTCBB. According to OTC Link, this is because the OTCBB does not have electronic trading capability. Whatever the reason, from my own knowledge and experience, I am finding that the majority of broker-dealers do indeed prefer the OTC Link and many will not even entertain the option of quoting on the OTCBB.
The SEC’s Historical View
However—here is the kicker, and it’s a dandy—up until this month, the SEC viewed all three tiers of the otcmarkets.com as just the “pinksheets.” So what did that mean in the real world? Here is a quote from a comment letter received from the SEC while attempting to register an equity line and the resale of certain selling shareholder’s securities for an OTCQB quoted security:
“The staff notes the Investment Agreement contains a put option that is based on a formula tied to the public price, however, because the staff does not consider the Pink Sheets to be a public market, the staff does not consider the private placement to be complete. The selling shareholder must wait until exercise of the put and receipt of the shares before the shares can be registered for resale. With regard to the remaining shares being offered, since there is no public market, the shares must be priced.
Please revise the cover page to remove the equity line shares and replace the pricing information of the remaining shares with an established price range until such time as your common stock is listed on the OTCBB. After your common stock is quoted on the OTCBB, you can file a post-effective amendment indicating that the selling stockholders may sell all or a portion of these shares from time to time in market transactions through any stock exchange or market on which our stock is then listed, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices.”
As you may be now, I was somewhat confused by the comment, and I telephoned the examiner. After several calls with the examiner and his review of the matter with the office of Small Business Policy and Chief Counsel at the SEC, there was no confusion.
All three tiers of the OTC Link were considered “pinksheets” by the SEC staff. The OTC Link was not considered a market and therefore: (1) there could be no at-the-market pricing of securities registered for resale by an Issuer on behalf of its selling shareholders; and (2) there could be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market), for OTC Link quoted securities.
The SEC Reasoning
The SEC reasoned that since FINRA controls the OTCBB and FINRA is a registered SRO, there is a level of regulatory involvement that might not exist on the OTC Link. However, both are Inter-Dealer Quotation Systems that require a valid 15c2-11, which 211 applications are submitted through FINRA. Moreover, FINRA regulates and oversees all broker-dealers, regardless of what quotation system they use.
The second reason proffered was that the OTCBB is a more established market and therefore there is a higher assumption of market integrity. However, from a real-time technological standpoint, it seems the OTC Link is more advanced. Moreover, far fewer securities are quoted on the OTCBB than the OTC Link, and thus, logically, the OTC Link is more indicative of the market as a whole.
The New Standard
On May 16, 2013, the SEC added the following to its Compliance and Disclosure Interpretations:
- Question: When may a company file a registration statement for the resale by the investors of securities sold in a private equity line financing?
- Answer: In many equity line financing’s, the company will rely on the private placement exemption from registration to sell the securities under the equity line and will then register the ‘resale’ of the securities sold in the equity line financing. In these types of equity line financings, the delayed nature of the puts and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). We, therefore, analyze private equity line financings as indirect primary offerings.
While we analyze private equity line financings as indirect primary offerings, we recognize that the ‘resale’ form of registration is sought in these financings. As such, we will permit the company to register the ‘resale’ of the securities prior to its exercise of the put if the transactions meet the following conditions:
- the company must have ‘completed’ the private transaction of all of the securities it is registering for ‘resale’ prior to the filing of the registration statement;
- the ‘resale’ registration statement must be on the form that the company is eligible to use for a primary offering; and
- In the prospectus, the investor(s) must be identified as underwriter(s), as well as selling shareholder(s).
We will not object that a private transaction is not ‘completed’ based on the lack of a fixed price if the agreement provides for pricing based on a formula tied to market price and there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX or OTCQB marketplaces of OTC Link ATS. [May 16, 2013]“
Conclusion
The OTCBB has become a historical term of historical relevance.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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