Monday, November 7, 2016

New OTCQX Best Market Initiatives Make Going and Being Public Less Painful

New OTCQX Best Market Initiatives Make Going and Being Public Less Painful

Recently disclosed developments to the OTCQX Best Market platform are likely to reduce the pain of going and being public for both domestic and foreign companies. In a note to clients, Jason Paltrowitz, Executive VP of Corporate Services at OTC Markets Group, outlined the enhancements, which include access by companies to globally recognized quantitative research coverage, a tightening of eligibility requirements, reduced compliance costs, increased transparency by making compliance status available to broker-dealers, and new promotional tools for companies to reach investors.

OTC Markets Group will work with Morningstar®, a leading provider of independent investment research, to provide OTCQX companies with quantitative equity ratings and research reports. To companies not covered by analysts, Morningstar will provide statistically derived quantitative metrics that mimic ratings by its analysts. The service will allow OTCQX companies to provide investors with an independent view of their performance, and investors will be better able to benchmark a company relative to its sector.

To supplement this effort, the “Research Marketplace”, a joint project with three global equity research firms, was launched in September. This online resource, undertaken with ACF Equity Research, Edison and Sidoti & Company, LLC, will provide OTCQX companies with independent research analyses and investment tools.

The bar to listing on the OTCQX has been raised. Penny stocks, shell companies and blank-check companies have been eliminated. The minimum bid price and market cap standards have been increased. An initial bid price of $0.25 and market cap of $10 million will be required for listing, while a minimum ongoing bid of $0.10 and $5 million valuation has to be maintained.

Corporate governance standards are following best practice. The board of an OTCQX company must include at least two independent directors, have an audit committee with a majority of independent directors and, at least 15 days prior to a mandatory AGM, circulate to shareholders an annual financial report.

It appears that the requirement for an OTCQX Advisor will be abolished, although the rubric to ‘submit an initial and annual OTCQX Advisor Letter’ still appears under Eligibility Standards on the OTC Markets Group website. In his note, Mr. Paltrowitz promised that the OTC compliance team would carry out the ‘ongoing company verification process – without the extra burden and expense of the OTCQX Advisor role and annual letter.’

The OTC Compliance Data File, now accessible to broker-dealers, provides important data points on 10,000 OTCQX and other global securities. This simplifies the process of identifying securities that are compliant under the SEC Penny Stock Rule and FINRA’s OTC Recommendation rule. Information in the Compliance Data File includes reporting status, shell status, audited financials status, number of market participants quoting, bankruptcy status and recent split data.

In October, a new transfer agent program designed to improve the transparency of share information was started. Under the program, SEC-registered stock transfer agents will be able to report their clients’ share data, including authorized and outstanding shares, to OTC Markets Group on a regular basis via a secure, electronic file transfer.

The requirement to be included in a Recognized Securities Manual in order to qualify for Blue Sky Manual Exemption has been abolished from the OTCQX Rules. In addition, OTC Markets Group is asking the federal government to allow OTCQX securities to be designated “covered securities”, which would make them exempt from separate state blue-sky law registration and exemption requirements. At present, 12 states have recognized the OTCQX as a securities manual for purposes of their “blue-sky manual exemption.”

Finally, the size and scope of the OTCQX Virtual Investor Conferences, CEO Interviews and Community Spotlight have been expanded, reaching over 30,000 investors to date. These initiatives are an alternative to the traditional company road show and allow more companies to tell their story to their investor community.

With these enhancements, OTC Markets Group may be driving the final nail in the coffin of FINRA’s OTCBB.

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