OTC Markets has issues a comment on the Senate hearing that took place today to discuss the creation of Venture Exchanges. OTC Markets has positioned its platform to provide these services to smaller companies and new types of securities as legalized by the JOBS Act.
The testimony in the Senate included representatives from both the New York Stock Exchange and NASDAQ but did not include a representative from OTC Markets. Just last month OTC Markets announced their exchange had surpassed 500 Companies on their OTCQB venture marketplace, while simultaneously announcing a new composite index representing these companies.
The statement is reproduced below.
Today, the Senate Subcommittee on Securities, Insurance and Investment held a hearing on ‘Venture Exchanges and Small-Cap Companies,’ which included representatives from the NYSE and NASDAQ but unfortunately missed out on the viewpoints of other marketplace operators.
It is important to recognize that the conversation should be about venture markets, not venture exchanges. Small and emerging companies are supported by having a strong ecosystem of broker-dealers that provide the research, stock sales, investment banking and capital commitment necessary to develop and grow a company. We operate marketplaces for 10,000 securities, many of which are small and emerging companies. Last May, we introduced verification standards to our OTCQB Venture Marketplace, and we recently welcomed our 500th OTCQB verified company with more joining every day. These companies look a lot like the majority of companies on the TSX Venture Market in Canada and the UK’s AIM market.
The solution in the U.S. is not to limit venture companies to trading on an exchange, with all the attendant cost and complexity for companies and broker-dealers. Instead, our solution should have a broader focus, inclusive of Alternative Trading Systems (ATSs) that are often better suited to serve company and broker-dealer needs. The leading European venture markets, such as the AIM, NASDAQ’s First North, Denmark’s GXG Markets and London’s ICAP, formerly PLUS Markets, all operate as Multilateral Trading Facilities (MTF), Europe’s version of the ATS, and in the U.S., ATSs are already creating innovation in trading public and private venture companies (think OTC Markets Group’s OTC Link ATS, ICE/NYSE’s Global OTC ATS, NASDAQ’s Private Market and SecondMarket).
Venture exchanges have been created in the U.S. in the past with little success, such as NASDAQ’s BX Venture Market, launched in May 2011, which never took off. There’s nothing to indicate another stock-exchange-led venture exchange in the U.S. is the only answer. The truth is an exchange monopoly in the trading of small-company shares would undermine free choice and competition in the trading of small company stocks and only indirectly address a major roadblock to trading in small company shares – the impact of state Blue Sky laws.
State Blue Sky laws can be onerous and costly. For example, it is impossible for established smaller companies to register or qualify for an exemption for purposes of secondary trading in every state. This limits trading by brokers, and has a chilling effect on capital formation and liquidity for many small, emerging companies. When a small or emerging company is current in its reporting to the SEC, a federal regulator, it does not make sense to force that company to undergo complex, costly review at the state level as well. Currently, only securities that are traded on a national stock exchange are automatically exempt from Blue Sky laws in all U.S. states and territories. This has created a complex web of compliance costs for broker-dealers and smaller companies as well as a headache for investors who are interested in investing in unlisted securities.
Instead of pushing all small, emerging companies to gain some sort of exchange-listed status before they are ready, we should grant Blue Sky preemption to any company that is registered with the SEC (or federal banking regulators) and is current in their periodic disclosure. Likewise, all SEC registered offerings, including offerings of securities exempt under Securities Act Sections 3(a), 3(b) and 5, should be preempted from state Blue Sky laws. Ultimately, broker-dealers should have a choice of where they trade small company shares, whether on their own systems, on an exchange or an ATS such as OTC Markets Group’s OTC Link ATS.
In the U.S., our OTCQB Venture Marketplace is already successfully fostering the development of secondary trading markets for small and emerging companies. These entrepreneurial and development stage companies don’t meet the high financial standards of OTCQX, our Best Marketplace, but they are all current in their reporting to the SEC or a foreign securities regulator and have met additional standards designed to improve their transparency to investors, including background checks on company officers, directors and beneficial shareholders and disclosure of total shares authorized and total shares outstanding directly from the transfer agents.
As Congress and the SEC contemplate measures to enhance the public market for small-cap companies, they should discard any attempts to create a monopoly in small company trading. Broker-dealers, investors and small business owners benefit from the choice, competition and innovation that comes from the development of venture markets rather than venture exchanges.