OTC Markets Group Guidance on Dilution Risk with Respect to OTCQX and OTCQB Applicants

OTC Markets offers three unique marketplaces for trading over-the-counter (OTC) stocks: the OTC Pink Market, the OTCQB Market and the OTCQX Market. The OTCQB Market and the OTCQX Market offer many benefits not offered by the OTC Pink Market, including:

1. Enhanced Visibility – The OTC Markets for OTCQB and OTCQX attract a diverse range of investors actively seeking out high-quality, well-managed companies.
2. Credibility – The higher reporting standards imposed on the OTC Markets for OTCQB and OTCQX enhance the credibility of public companies trading on these marketplaces.
3.  Liquidity – listing on the OTCQB or OTCQX can increase a company’s liquidity.

The OTCQX is the top tier of the OTC Markets Group’s three marketplaces, so it has the strictest eligibility requirements. The following chart provides a snapshot comparison of the current Eligibility Standards for US Issuers to be listed on either the OTCQB or OTCQX.

Once listed on the OTCQB or OTCQX, companies must maintain compliance with ongoing requirements to retain their listing. These requirements include timely filing of financial reports, maintaining a minimum bid price, and meeting any additional conditions imposed by the OTC Markets. Failure to meet these requirements may result in a company being downgraded or removed from the OTCQB or OTCQX (See OTCQB Standards and OTCQX Rules for more information).

However, with its recent dilution risks guidance, OTC Markets wants issuers to know that when reviewing a company’s application to get listed on the OTCQB or OTCQX, OTC Markets may reject an application based on dilution risk if it determines that admission of the company’s securities would likely be detrimental to the interests of investors. 

While the facts and circumstances relevant to each applicant differ, OTC Markets generally considers the following factors in its review process to determine the potential for dilution risk concerns:

• • Whether an issuer has recent or currently outstanding convertible notes with conversion features that provide significant discounts to the current market price of its securities and whether such notes are held by company officers, directors and control persons.
  • Whether an issuer has other classes of outstanding securities that are convertible into common stock at largely discounted rates and are not held by officers or directors.
  • A capital table and/or “toxic financing” structure that will substantially reorganize the share ownership of the company.
  • Whether an issuer has had a history of substantial increases in the amount of its outstanding shares.
  • Whether an issuer has had a history of multiple or large reverse stock splits.
  • Whether an issuer has engaged lenders that have been the subjects of regulatory actions regarding “toxic financing” and related concerns.

After consideration of the factors described above, OTC Markets may approve applications for certain companies that have participated in convertible financing arrangements. In those circumstances, the OTC Markets rules and standards require OTCQX and OTCQB companies to provide timely disclosure of all convertible financing arrangements as well as annual summary information regarding their convertible financing history. This disclosure includes the conversion terms, names of investors and the number of shares issued to date and may be key for investors and market participants in identifying dilution risk.