Mark Elenowitz: Reg A+ Issuers that Want to Trade on OTC Markets Have a Problem

Today, Reg A+ received a big boost from the Securities and Exchange Commission (SEC) as they announced that reporting firms will soon be able to use the security exemption.

Old Regulation A was an exemption that just about no one used – ever. It took the JOBS Act of 2012 to breathe life into the moribund securities exemption. The SEC created two separate Tiers (1 & 2) with issuers using the 2nd Tier able to raise up to $50 million while pre-empting state blue sky rules – a huge improvement (even if the states did not like it).

But another challenge has emerged to issuers who want to raise capital using Reg A+ and then trade them on OTC Markets.

According to Mark Elenowitz, CEO of TriPoint Global Equities and Banq, Reg A+ works fine for “listed” securities that go on to trade on the NYSE or NASDAQ. Shareholders can easily sell their shares on these exchanges. But Reg A+ issued securities that trade on OTC Markets (an ATS) suffer from the ability of investors to be able to deposit and trade the securities of the issuers they invested in.

“One of the biggest issues with liquidity on the OTC is not just the TA’s and market makers but the fact that almost no clearing firms will accept the deposit of low priced securities,” explains Elenowitz. “This trend started in 2009 with FINRA Notice to Members 09-05 and has reached its nadir with the recent settlement agreement between the SEC and Cor Clearing.  A safe harbor would allow clearing firms to re-enter the market for low priced securities without fear of regulatory overreach. This should apply to Reg A and S-1 securities that have filed and are current with the SEC.”

Elenowitz says the announcement today that “34 Act issuers” may use Reg A soon a very positive event:

“This applies to issuers on the OTC Markets.  Unfortunately, if  the investors of OTC Reg A issuers cannot sell their investments, capital formation for small cap issuers will come to a grinding halt.   Why would an investor invest, if they can’t sell?”

Elenowitz’s platforms use Reg A+ regularly (including security tokens). He is hoping for a clear solution soon.

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