Small Companies funds raising - Over-the-counter (OTC) stocks
- Haim Ratzabi
- Oct 16, 2022
- 4 min read
Lately, while I was researching for public raising funds alternatives for small companies, I was focusing on the essence of company's decision to move from the OTC list to other stock exchange. I found that it is quite complex, and that you should have a careful review of all of the Initial Listing of Primary Equity Securities requirements and the related rules. So, I want to share some major points with you:
The Definition of OTC Stocks
Over-the-counter (OTC) stocks are traded directly through a network of market makers or broker-dealers. OTC stocks are not listed on national securities exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq, which is why they are called unlisted.
OTC stocks typically have lower share prices than those of exchange-listed companies. Many OTC stocks trade at less than $5 a share and are known as penny stocks or micro cap stocks. Individual investors may find them attractive because of their low prices. However, these inexpensive shares can be risky and highly speculative.
OTC trades take place on various electronic platforms. One of the more well-known ones is the OTC Bulletin Board (OTCBB), which was operated by the Financial Industry Regulatory Authority (FINRA) before the OTCBB was sold to investment bank Rodman & Renshaw.
Why OTC Stocks Are Important
OTC stocks allow small companies to sell shares and investors to trade them. Major exchanges have minimum capitalization and other requirements that many small companies can’t meet. So selling shares OTC allows them to raise capital and sell shares without meeting those standards. Not all OTC companies are small, however. Some large companies trade on the OTC market because they choose to avoid the traditional exchanges’ requirements, which may include filing extensive financial reports.
Cost is also a factor. A listing on the Nasdaq will vary depending on entry and annual fees and market tier. As an example, companies pay entry fees of $50,000 up to 15 million shares and $75,000 0ver 15 million. To maintain a listing, they have to an annual fee based on how many shares outstanding they have.
How OTCQB Works
The Financial Industry Regulatory Authority (FINRA) regulates broker-dealers that operate in the OTC market. The OTCQB market is run through OTC Link, an electronic inter-dealer quotation system that is owned and operated by OTC Markets Group.5
OTC Markets Group listed more than 12,000 companies on three stock exchanges as of early 2022:2
The OTCQX Best Market: for established, investor-focused U.S. and international companies. It is the most selective of the three tiers, has the highest reporting standards, and has the strictest oversight.
The OTCQB Venture Market: for entrepreneurial stage and development stage U.S. and international companies. QTCBQ companies have to report their financials and submit to some oversight.
Pink Market: also known as Pink Sheets, includes companies that are not current with their disclosures to the SEC. It has no reporting requirements and may also include bankrupt companies, which the other two tiers do not.
The OTC website lists eligibility requirements for companies that want to be listed on the OTCQB market. These include:
Audited annual financial statements that are prepared in accordance with U.S. GAAP standards or, for international reporting companies or alternative reporting companies, listed on a Qualified Foreign Exchange
Current disclosure available through SEC reporting or other qualifying standard
Meet minimum bid price test of $0.01
Not be in bankruptcy
Have at least 50 beneficial shareholders, each owning at least 100 shares.
Have a freely traded public float of at least 10% of the total issued and outstanding of that security
How Does a Stock Move From OTC to a Major Exchange?
It isn't impossible for a company that trades OTC to make the leap to a major exchange. But, as noted above, there are several steps it must take before they can list.
The company and its stock must meet listing requirements for its price per share, total value, corporate profits, daily or monthly trading volume, revenues, and SEC reporting requirements. For example, the NYSE requires newly listed companies to have 1.1 million publicly held shares held by a minimum of 2,200 shareholders with a collective market value of at least $100 million. Companies that want to list on the Nasdaq, on the other hand, are required to have 1.25 million public shares held by at least 550 shareholders with a collective market value of $45 million.
Second, it must be approved for listing by an organized exchange by filling out an application and providing various financial statements verifying that it meets its standards. If accepted, the organization typically has to provide written notice to its previous exchange indicating its intention to voluntarily delist. The exchange may require the company to issue a press release notifying shareholders about this decision.
While a lot of fanfare may occur when a stock is newly listed on an exchange—especially on the NYSE—there isn't a new initial public offering (IPO). Instead, the stock simply goes from being traded through the OTC market to being traded on the exchange.
Finally, I can say that in order to have such move you should consult legal consoles that specialized in such move.
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