Pink Sheets launched OTCQX, a new market tier providing a premier trading, quotation and disclosure venue for securities of the highest quality companies in the United States' over-the-counter markets. On May 15, 2006, Pink Sheets, LLC began accepting applications to OTCQX and the International OTCQX premium tiers. The OTCQX premier tier levels require issuers to meet specific standards and ongoing public disclosure obligations. Part I of this article provided an overview of the seven new categories differentiating issuers listed on the Pink Sheets. Part II will provide an overview of the application process for companies willing and able to meet the quality disclosure requirements of OTCQX.
OTCQX will be divided into PremierQX and PrimeQX. The requirements to qualify for PremierQX, which launched March 5, 2007, include maintaining a minimum bid price of $1, holding annual shareholders' meetings and publishing audited financials.1 PrimeQX is available to issuers who satisfy the same requirements, but trade for less than $1.2,3 OTCQX is designed to meet the needs of a diverse group of issuers, including:
existing domestic issuers trading in the OTC market that are seeking premium status and have the ability to meet the financial disclosure requirements of the new rules;
small companies currently listed on a traditional exchange that desire a reporting mechanism more customized to their needs than provided by SOX, while maintaining liquidity and transparency to their current investors;
venture-backed growth companies that lack the scale of operations for an exchange listing, but wish to offer greater liquidity to current investors; and
foreign exchange-listed companies seeking access to the U.S. equity markets, while using the Rule 12g3-2b exemption under the Securities Exchange Act of 1934 (the "Exchange Act") to protect themselves against an involuntary, mandatory SEC registration.4
Appoint A Designated Advisor For Disclosure
OTCQX offers issuers a platform for greater disclosure and credibility. In an effort to bolster investor confidence in the quality of OTCQX issuer disclosure, third party independent advice and review by securities market professionals, known as Designated Advisors for Disclosure ("DADs") for U.S. issuers and Proposing Advisors for Listing ("PALs") for international issuers, are required.5 The issuer must nominate an Investment Banker DAD or Attorney DAD who will advise them in the OTCQX listing process. The DAD shall use its best efforts to assist the issuer's management and Board of Directors in meeting their disclosure requirements and provide advice on compliance with current federal and state securities laws and OTCQX rules.6
In January 2007, Pink Sheets released new, more rigorous standards to qualify to serve as a DAD.7 Operating under the theory that companies are known by the company they keep, Pink Sheets insists that the DAD concept is critical to the success of the new platform. The standards require Investment Banker DADs:
have a net capital of not less than $5 million;
if a corporation, a majority of its board of directors (if a partnership, a majority of its general partners and, if an LLC, a majority of its managing members) are persons with at least two years experience in the investment banking or securities business, and
be actively engaged as an underwriter or selling agent in public or private offerings of equity securities, as a manager or co-manager, who has raised more than $50 million in such offerings of aggregate gross proceeds for issuers of equity securities that at the time any such offering closed or thereafter were listed on Nasdaq.8
Attorney DADS are only available to Seasoned Public Issuers.9 Each attorney who will provide services must demonstrate substantial experience providing advice regarding disclosure obligations under the federal securities laws to an issuer with a class of securities registered under Section 12(b) of the Exchange Act. Each attorney DAD may not accept payment for its services in the securities of the issuer or any of its affiliates. In addition, any issuer that utilizes an attorney DAD may not, during anytime it is listed on OTCQX, engage in any public or private offering, except through a broker-dealer that satisfies the requirements to serve as a DAD.10
DAD Verifies Issuer's Eligibilty
Prior to submitting an application to OTCQX, the Company's DAD should verify that the issuer meets the eligibility requirements as described in the OTCQX rules and understands the initial and ongoing disclosure requirements. Every OTCQX-listed company will be required to meet defined standards, including:
providing ongoing quarterly and annual financial reports posted on OTCQX.com;
providing interim material event disclosure of any information that may affect the shares;
providing an annual audit;
management disclosure and annual management certification;
100 round lot shareholders;
ongoing operations (no shells, blank check or special purpose acquisition companies); and
inclusion in the S&P or Mergent Manual, which satisfies the Blue Sky requirement transactions in many states.11
After the DAD qualifies or certifies that the issuer meets the above eligibility requirements, the issuer must submit the application to Pink Sheets, LLC. Pink Sheets may then require the DAD to clarify or amplify any information in the application or supporting documents or require the company to provide further undertaking or other conditions prior to admission.
The DAD and the Company will be given confirmation of receipt of approval within five business days of receipt by Pink Sheets. The Company will be given a user name and password to access the Pink Sheets News Service for posting required disclosures.12
Initial Disclosure Obligations
Companies must post the initial disclosure obligations required under the OTCQX Rules within thirty days of making an application to OTCQX. The rules require disclosure of audited balance sheets, audited statements of income, cash flows and changes in equity made in accordance with GAAP standards. All of these disclosures should be accompanied by a letter from independent public accountants.
Furthermore, the company's CEO and CFO must make certifications that they have reviewed the disclosures and to the best of their knowledge the financial statements are truthful and the company will have sufficient working capital. The certification must be published in the Pink Sheets News Service. The company's DAD must also submit a Letter of Introduction for the Company which in substance states the DAD qualifications and its appointment to provide education, advice and assistance to the company. The DAD will also note the company's formal compliance with necessary requirements and provide a description of its limited due diligence.13 In addition, Attorney DADs must provide negative assurance whereas Investment Banker DADs must file a Form 21114 and the company's auditor must submit an Auditor Letter.
The Company and DAD will be notified in writing of the outcome of the application. If accepted, Pink Sheets will send counter-signed agreements to both the Company and DAD. The Company must then submit:
a 100 word company profile containing a factual description of the Company's activities; and
a list of any changes that would affect the information in the application since submitted.
Pink Sheets is confident that the introduction of the OTCQX will enhance the reputation of the OTC market. The greater disclosure obligations and increased transparency will not only attract investors, but also persuade quality small companies and foreign-exchange listed issuers to list on Pink Sheets. 1 Admission criteria for OTCQX is available on its website, at www.otcqx.com/admission.html.
2 Information regarding the admission process to OTCQX is available on the website www.otcqx.com/process.html.
3 Please see Part I of this article for a summary of the requirements for listing on the International PremierQX and International PrimeQX.
4 The Best of the OTC Market, OTCQX Brochure available at www.otcqx.com/docs/OTCQX-Brochure.pdf.
5 The DAD concept is akin to the nominated adviser (NOMAD) on the London Stock Exchange's AIM.
6 OTCQX Rules, Article One Part A 1.1.
7 Pink Sheets Raises Eligibility Standards for OTCQX Designated Advisors for Disclosure (DADs), Internet Wire (Jan. 11, 2007).
9 Seasoned Public Issuers are those engaged in its current business operations and having a class of its securities publicly traded on the Pink Sheets, the OTC Bulletin Board, or a national securities exchange for not less than two years.
10 Id. The restriction on any public or private offering shall not apply to offerings of securities to employees or to current bona fide equity investors.
11 See OTCQX website, at www.otcqx.com/process.html.
13 OTCQX Rules, Initial Disclosure Obligations, Rule 1.6(d).
14 Form 211 represents that it has satisfied all applicable requirements of Rule 15c2-11 under the Exchange Act and the filing and information requirements of NASD Rule 6640. See OTCQX Rule 1.7(e).
M. Ridgway Barker is Chair of the Corporate Finance & Securities Practice Group of Kelley Drye & Warren LLP. Randi-Jean G. Hedin is a Partner in the Corporate Finance & Securities Practice Group. Acknowledgement is given to Kristen A. Hartofilis , an Associate at Kelley Drye & Warren LLP, for her efforts in the preparation of this article.