Interesting reporting possibilities for pink sheets.
July 2007
New Tiered Quotation System Created For The Pink Sheets OTC Market
Abstracted from: Pink Sheets (Parts 1 and 2)
By: M. Ridgway Barker and Randi-Jean Hedin Kelley Drye & Warren, Stamford, CT
Metropolitan Corporate Counsel - Vol. 15, No. 3, Pg. 21 (Part 1); Vol. 15, No. 4, Pg. 43 (Part 2)
New tiered approach for the OTC market. Over-the-counter stocks are generally considered risky investments. The OTC issuer is usually small, closely held, thinly traded, and not required (by the Sarbanes-Oxley Act or other securities regulations) to provide much information to investors. OTC stocks are quoted on Pink Sheets, a privately owned electronic quotation service that provides small issuers with a trading platform. To facilitate OTC issuers that want to distinguish their securities from riskier investments or pump-and-dumpers, Pink Sheets has launched a tiered approach to quotations. Corporate finance and securities attorneys Ridgway Barker and Randi-Jean Hedin outline the new approach, which categorizes OTC issuers, based on the strength of each company's operations and disclosures, into seven tiers: OTCQX, Emerging Equities List, Current SEC Filers, Adequate Current Information, Limited Information, Public Interest Concern, and No Information.
Requirements for qualification. Issuers that qualify for quotation in the highest category—OTCQX—may choose it as a simpler, less costly alternative to listing on the national exchanges, note the authors. OTCQX issuers must meet the financial qualifications for a national exchange, provide ongoing financial reporting, hold annual stockholders' meetings, and have 100 round-lot beneficial holders. Companies in Premier QX (the top level of OTCQX) must also have a bid price of at least $1, while PrimeQX issuers may have a bid price of less than $1. International issuers that are listed on certain international stock exchanges can qualify for PrimeQX if they hire a Proposing Advisor for Listing ("PAL") and meet certain disclosure requirements. When international companies meet the requirements of PrimeQX as well as the New York Stock Exchange's Worldwide Listing Standards, they can qualify for International PremierQX. The second tier—Emerging Equities List—is open to companies that can provide adequate disclosure, including GAAP-audited financial statements and an attorney's letter on the quality of disclosure. Companies on the Emerging Equities List, such as special-purpose acquisition companies, generally would not have the business operations necessary to be on OTCQX. Issuers on the lower tiers are those that provide little to no disclosure and are barely transparent or not at all. The lowest tier covers companies that have made no disclosures and that use disreputable promotion mechanisms. For the two bottom tiers, the Pink Sheets will display a skull-and-crossbones or a stop-sign icon beside the ticker symbol.
The application process for OTCQX. Companies that might prefer the OTCQX designation, the authors suggest, include: an existing OTC issuer capable of meeting the new requirements; a small exchange-listed company looking for more appropriate (i.e., less onerous) disclosure requirements for its needs; an issuer listed on a foreign exchange that wishes to protect itself against involuntary SEC registration; and a growth company hoping to offer its investors more liquidity although it lacks the scale of operations of an exchange-listed company. To qualify for OTCQX, the issuer submits an application to Pink Sheets, which may set additional conditions before listing the company. Within 30 days after applying, the issuer must post the disclosures required by the OTCQX rules (including audited financial statements) on the Pink Sheets News Service. The company's CEO and CFO must certify the truthfulness of the disclosures and financial statements and the adequacy of the company's working capital. OTCQX-listed companies must post ongoing quarterly and annual financial reports and provide interim disclosure of events material to the company's stock.
DAD's role and requirements. As part of the application process for OTCQX, a company must engage a professional, independent advisor to guide it through the listing process. The goal of the requirement, the authors indicate, is to underpin the market's confidence in the quality of the OTCQX issuer's disclosures. The Designated Advisor for Disclosure ("DAD"), who must be an investment banker or a securities attorney, assists the company in complying with the disclosure requirements, federal and state securities laws, and the OTCQX rules. The DAD must verify that the issuer meets the requirements of OTCQX and understands the disclosure requirements. Investment bank DADs must have at least $5 million in net capital, a majority of the bank's board must have at least two years' experience in the securities business, and it must have raised at least $50 million as an underwriter for securities listed on NASDAQ. Attorney DADs—which can be used only by seasoned issuers whose shares have been publicly traded for at least two years—need significant experience advising on federal securities-law disclosure obligations, and they cannot be paid in company stock.
Abstracted from Metropolitan Corporate Counsel, published by Metropolitan Corporate Counsel Inc., 1180 Wychwood Road, Mountainside, NJ 07092. To subscribe, call (908) 654-4840; or visit www.metrocorpcounsel.com.
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