OTC Markets Boosts Standards for OTCQX as it Pushes Upmarket

The OTC Markets Group has strengthened its market standards for companies listed on the OTCQX market. OTCQX is their best market for established US and international companies. Listing firms must now adhere to high-quality financial standards and must be sponsored by a third party advisor such as an investment bank.   Today there are more than 400 companies traded on the OTCQX from 20 different countries. Current aggregate market cap of OTCQX tops $1.47 trillion.   Year to date these companies have generated $35 billion in trading volume. The rule changes will become effective on January 1, 2016.  By raising eligibility standards, OTC states it will better align with established regulatory standards and exchange industry best practices.  Management also believes the move will improve recognition amongst investors and regulators.Cromwell Coulson at SEC

“The introduction of strengthened OTCQX eligibility requirements combined with new common sense, best practice corporate governance standards for U.S. companies and banks further distinguishes OTCQX as a trusted public market that is efficiently linked by technology and transparency,” said R. Cromwell Coulson, President and CEO of OTC Markets Group.  “Our goal with these changes is not only to improve the quality of OTCQX, but to enhance regulatory recognition of OTCQX as an investable market and make it easier for investors and our network of broker-dealers to analyze, value and trade these securities.”

The OTC strategy also aligns with new securities exemptions in search of liquidity. Companies that raise capital under Reg A+ may choose to list on OTC markets. In fact Elio Motors, raising capital under Reg A+, stated in a filing that it intended to trade on OTCQX. For companies that cannot meet the more rigorous standards the OTCQB is positioned as the venture market for earlier stage companies.

The OTCQX rule changes do the following:OTCQX Best Marketplace

  • Strengthen OTCQX financial standards, including a continuing penny stocks prohibition. It has enhanced its current OTCQX rule that prohibits penny stocks, as that term is defined by the U.S. Securities and Exchange Commission (SEC), from qualifying for OTCQX by adding a continuing penny stock prohibition.  U.S. companies will be required to meet a higher initial bid price of $0.25 and new initial and ongoing market capitalization requirements of $10 million and $5 million to trade on the OTCQX U.S. tier.  The ongoing bid price requirement for OTCQX U.S. tier companies will remain $0.10. International companies will be required to meet new initial and ongoing minimum bid prices of $0.25 and $0.10 to trade on the OTCQX International tier, as well as higher initial and ongoing market capitalizations of $10 million and $5 million, respectively.  OTCQX U.S. tier and OTCQX International tier companies will be required to have at least two market makers with priced quotes on OTC Link ATS within 90 days of joining.
  • Add corporate governance standards for U.S. companies and banks – OTC Markets Group has introduced new corporate governance standards for U.S. companies and banks. These standards already followed by the majority of U.S. companies on OTCQX. These include:
    • A minimum of two independent directors on the board of directors;
    • An audit committee composed of a majority of independent directors;
    • Conduct annual shareholders’ meetings and submit annual financial reports to shareholders at least 15 calendar days prior to such meetings.
  • Align OTCQX U.S. Premier tier standards with financial standards of markets recognized by many states for Blue Sky law issuer exemptions to align with the financial standards of markets recognized by many U.S. states for issuer exemptions from state Blue Sky laws.  Updated standards include:
    • A bid price requirement of $4 for initial qualification and $1 ongoing;
    • A market capitalization of $10 million for initial qualification and $5 million ongoing for companies with a public float of at least $15 million, or $50 million initially and $35 million ongoing for companies with a public float of at least $1 million and $750,000 in net income as of the most recent fiscal year end (banks will be required to have a public float of 500,000 to qualify for OTCQX U.S. Premier);
    • A 3-year operating history.

In addition, the OTCQX U.S. Premier tier has a stockholders’ equity requirement of $4 million for initial qualification and $1 million ongoing, and a requirement of at least four market makers with priced quotes on OTC Link ATS within 90 days of the company joining OTCQX.

  • Align OTCQX International Premier tier standards with recognized margin eligibility standards for global companies –OTC Markets Group has modified the standards of OTCQX International Premier, the highest OTCQX tier for non-U.S. companies, to align with the margin eligibility standards set by the Federal Reserve and the SEC.  These updated standards include:
    • A global market capitalization of $1 billion for initial qualification and $500 million ongoing;
    • A 5-year operating history;
    • Average weekly share volume of 200,000 or dollar volume of $1 million for initial qualification, and 100,000 shares or $500,000 ongoing.

In addition, OTCQX International Premier tier companies will be required to have at least four market makers with priced quotes on OTC Link ATS within 90 days of joining.

Counting MoneyOTC Markets Group also has raised the annual fee to trade on OTCQX to $20,000 but emphasize this is less than half the cost of a NASDAQ listing.  Companies already listed on OTCQX as of December 31, 2015 will have until 2017 to meet the new standards or be transitioned to the OTCQB Venture Market.

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