Issuers frequently overlook the OTC Markets requirement that issuers file informational updates within 10 business days of any event that causes any of the information contained in previously filed disclosures to become materially inaccurate or incomplete. For example, the foregoing obligates issuers to provide updated disclosures when the information concerning its public float or issued and outstanding securities is materially changed if such change occurred after the period of the report. Consider the example of an issuer that files a quarterly report on April 1 for the period ending March 31, that states its float is 1,000,000 shares. On April 15, the issuer enters into a convertible loan agreement, which upon conversion requires it to issue 200,000 shares. Based on this material issuance increase and the transaction itself, the issuer must amend its March 31 disclosures within ten days of filing under OTC Markets rules. Under Rule 10b-5 of the Securities Exchange Act of 1934 (discussed below), the issuer has an obligation to immediately amend its March 31 report because the report omits a material fact that the issuer has an obligation to issue 200,000 shares, which upon issuance will represent more than 20% of reported public float. Failure to file this amended and updated disclosure would render the issuer’s March 31 statement to be misleading since the issuer did not disclose that the 1,000,000 shares in the float will be diluted by 20%. Even though the April 15 agreement was entered into after the March 31 report, the issuer has an obligation to update the report under both the OTC Markets disclosure requirements and 10b-5.
Unfortunately Pink Sheet issuers, as well as their attorneys repeatedly fail to recognize that every public company must make adequate public information available to investors pursuant to Rule 10b-5 which prohibits making untrue statements of material fact as well as omitting material facts necessary to make the statements not misleading. For purposes of determining materiality, the standard employed is what a reasonable investor would consider important in their investment decision under the totality of the circumstances. For instance, as stated above, Pink Sheet issuers have the unfortunate tendency to fail to make timely disclosure of material agreements that require the issuance of securities, often convertible notes or purported convertible debt. These types of agreements and related non-disclosures have been the subject of recent SEC scrutiny and enforcement cases.
The bottom line in the OTC Markets disclosure platform is that issuers as well as their attorneys may fail to recognize and put into practice the transparency required to comply with 10b-5 and the OTC Markets disclosure requirements, the repercussions of which are devastating to investors as well as the issuer who could become the subject of SEC enforcement actions, SEC trading suspensions and DTC Chills of the Issuer’s stock.
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