OTC Markets: Pink Sheet Listings

2024-05-05

Listing on a national exchange like NASDAQ or the NYSE is not the only option available to private companies seeking to go public. Listing on a national exchange means that companies must file with the Securities Exchange Commission (SEC) and make reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act), as amended. Over-the-counter (OTC) markets are alternate trading services (ATS) that allow private companies to go public without the rigorous process, stringent regulations, and increased fees that the Securities Exchange Commission (SEC) reporting brings. The largest of these is the OTC Markets Groups.

The OTC Markets Group divides companies into three tiers, allowing investors to quickly gauge the level of risk an investment may involve:

  • OTCQX: intended for established companies.
  • OTCQB: intended for early-stage and developing companies.
  • OTC Pink (formerly “Pink Sheets”): a broker-driven marketplace that allows company securities to be traded without disclosure or involvement by the company. OTC Pink is further segmented based on the information companies provide to investors, whether it is Current Information, Limited Information, or No Information. 

Each tier has its own requirements. The focus of this post is the OTC Pink market.

Under Rule 15c2-11 of the Exchange Act, private companies may go public through the OTC Pink market by submitting a Form 211 with the Financial Industry Regulatory Authority (FINRA) through a sponsoring market maker. A sponsoring market maker is a registered broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. 

To qualify for a Form 211 application, the company must demonstrate that it has enough shareholders to create a robust trading market. To do so, the company should have both: 

  1. at least 20 nonaffiliate shareholders who: 
  2. paid cash consideration for their shares and 
  3. have owned those shares for at least 12 months, and 
  4. at least 1 million shares outstanding, of which at least 250,000 are free trading shares.

Form 211 Application

Rule 15c2-11 requires that companies have current information available before a market maker can quote the security. Form 211 satisfies this requirement through its many disclosure requirements, including: 

  • Identification of officers, directors, and those holding more than 5% interest in the company;
  • Detailed descriptions of the following: 
  • The issuer’s business, products or services offered, assets, and sources of revenue,
  • The company’s facilities, including location, square footage, and whether owned or leased,
  • The company’s free-trading shareholder base,
  • Any exemptions from registration under the Exchange Act,
  • All relationships among each shareholder and the issuer, its officers and directors, and other shareholders,
  • Whether any officer or director had any regulatory action taken against him by any security-related regulatory agency or has been convicted of a felony in the last 5 years,
  • All private offerings
  • The steps the Company plans to take in furtherance of its business plan, and 
  • Any future financing plans; and
  • Copies of the following: 
  • The company’s certificate of incorporation and bylaws, including amendments,
  • A shareholder list generated by a current transfer agent,
  • A statement indicating whether any person or entity has control of the shares listed under another shareholder’s name,
  • A legal opinion stating the tradability of the free-trading shares,
  • A schedule of all material patents, trademarks, trade names, service marks, and copyrights,
  • A detailed business plan,
  • Form D filed with the SEC,
  • Each investor’s subscription agreement with proof of payment,
  • Unaudited financial statements for the last 2 fiscal years
  • Partnership and/or joint venture agreements,
  • Merger and/or consolidation agreements,
  • All stock or asset purchase agreements for the last 5 years,
  • Agreements evidencing stock rights, warrants, or options, and
  • Any other material agreements or letters of intent entered into by the company.

Once FINRA has processed a Form 211 application, a representative will respond with comments, asking for further information, documentation, or clarification where necessary. Either the sponsoring market maker or the issuing company must then respond to each comment. This process will continue until FINRA is satisfied that the disclosures satisfy the requirements of Rule 15c2-11, at which point the sponsoring market maker may publish quotes for the company’s securities. If these quotes are published for at least 30 days, other market makers can publish quotes as well through a process called “piggy backing.”  

15c2-11 Exceptions Under Rule 144

While 15c2-11 generally requires that companies register in order to be listed, companies can list without registration under Rule 144 if they meet its requirements. Rule 144 of the Securities Act of 1933 provides a safe harbor for unregistered companies, but it is not available to companies that are or were ever a shell company. 

Pink Sheet Transfers

Companies may transfer from the Pink Sheets to other OTC markets like OTCQB, OTCQX, or OTCBB, provided that there is no exemption. Transferring may be advantageous to a company because OTC Pink is known for holding high-risk companies, which may make an investor wary of the companies it holds.

DIRECT LISTINGS WITH THE LAW OFFICES OF DESTINY AIGBE, LLC

There are many options that come with listing on over-the-counter markets, each with different requirements and consequences. What we have discussed above is only one of the many listing options available to companies. If you have any questions regarding the above information, what options your company has available to it, or what form of listing is best for your company, reach out to our offices today.