Forms 211: OTC Markets’ New Role – Quotation, Trading Suspensions and Listing
We’ve written several times about the Securities and Exchange Commission’s (“SEC”) amendments to Rule 15c2-11, first proposed in September 2019 and adopted in September 2020. The amended rule will finally become effective on September 28, 2021. That is important because no stock that trades over-the-counter can trade at all unless it’s compliant with the relevant provisions of the rule.
The Financial Industry Regulatory Authority (“FINRA”) has always played a significant role in the practical application of Rule 15c2-11. It once administered and operated the OTC Bulletin Board (“OTCBB”) and dealt with the issuers that traded on it. Just before the turn of the new century, the SEC decided that all OTCBB companies had to register stock with the Commission or be dumped to the lowly Pink Sheets. The Pinks had recently been purchased by a group of investors who believed they could make a go of them, and they went on to do just that, eventually changing the name to OTC Markets Group. The OTCBB died a slow death, largely due to FINRA’s lack of interest and failure to innovate; on September 17, FINRA announced it would “retire” the OTC Bulletin Board entirely at a date not yet fixed, but probably in the fourth quarter of this year. (That announcement has been made several times in the past five years; the OTCBB seems always to be on its way out but not quite gone.)
FINRA continues to process corporate action requests by OTC issuers and to process Forms 211. When an issuer wants to initiate or resume quotation until now, it’s needed to find a sponsoring market maker willing to file a Form 211. In order to do so, he needed to obtain information from the company, including financial statements that needed to be accurate but not audited, and send the completed form to FINRA. If anything in the documentation is incorrect, the sponsoring market maker could be found liable. He was not permitted to charge for preparing and submitting a Form 211.
Emerging Growth Company Status and the Going Public Process
Going public offers many benefits to companies seeking to grow their business, including:
- Enhanced ability to raise capital,
- Liquidity for founders and shareholders,
- Increased visibility
- Improved financial position,
- Enhanced credibility,
- Enhanced ability to attract and retain employees and
- The ability to offer valuable incentives to employees and consultants.
An Emerging Growth Company is defined as an issuer with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year. Status as an Emerging Growth Company offers many benefits to issuers going public. Most companies quoted on the OTC Markets OTC Link qualify as Emerging Growth Companies.
SEC Pursues Unregistered Dealers, Toxic Financing, Toxic Convertible Notes
2020 and 2021 have been historic years for Securities and Exchange Commission (“SEC”) enforcement action against toxic lenders as unregistered dealers. We recently wrote about the interesting SEC enforcement actions that examine toxic financings and the question of whether the individuals and entities that purchase convertible promissory notes from public companies are “dealers” according to the definition established in Section 15(a)(1) of the Securities and Exchange Act of 1934 (“Exchange Act”).
Informally known as “toxic lenders” or “dilution funders” because the terms of their financing agreements contain provisions that almost always result in harm to investors and issuers alike, they’re considered by many to be the scourge of the penny stock market. Typically, the notes they buy can be converted at any time, often at a discount to market price of 70 percent or more. As the lender converts and sells, stock price drops. To avoid making insider filings to the SEC, the lender’s financing agreements specify that he may own no more than 4.99 percent of the company’s stock at any time. But that in no way stops him from converting his note continuously, in a succession of tranches. Since the conversion ratio is pegged to the security’s recent average bid price, every time he converts, he gets more stock than the time before. As he sells tranche after tranche, the company’s stock price enters freefall. Sometimes the only remedy for the issuer is a large reverse split.
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OTC Markets Requests 15c-211 Disclosures by June 30
OTC Markets Pink companies will need to update their disclosure to ensure they comply with the new requirements.
- Alternative Reporting Companies: OTC Markets has updated the Disclosure Guidelines for Alternative Reporting Companies to include all the information required under amended Rule 15c2-11. Companies must follow the Guidelines to be designated “Current Information” or “Limited Information” and remain publicly quoted.
- Bank Reporting Companies: OTC Markets has created new Disclosure Guidelines for Bank Reporting Companiesto include all the information required under amended Rule 15c2-11. Banks and bank holding companies must follow these Guidelines to be designated “Current Information” or “Limited Information” and remain publicly quoted.
- International Reporting Companies: Companies that are current in their periodic disclosure and are listed on a Qualified Foreign Exchangethat requires disclosure in English will remain in compliance and may continue to be publicly quoted. Other international companies seeking to ensure their ongoing compliance may publish their disclosure directly to OTC Markets for review.
OTC Markets has indicated Impacted OTC Pink companies should provide the required disclosure to OTC Markets by June 30th. This will ensure that the OTC Markets Issuer Compliance Team has sufficient time to review and update market status for companies prior to the rule’s compliance date on September 28th. Securities that do not meet the Rule’s disclosure standard will have their public quotes removed from the OTC Markets Pink as of the September deadline.