OTC Pink Companies Qualify for S-1 Resale Equity Line Financing

The SEC has changed its policy regarding resale registration requirements for OTC Pink companies. It allows OTC Pink companies to use Form S-1 for an equity line financing transaction. Once the S-1 becomes effective, investors can sell securities at market price. This policy change dramatically improves the circumstances of OTC Pink companies seeking capital.

How Equity Financing for OTC Pink Companies Worked Before

Rule 415 sets the stage for re-sale offerings. Generally, companies on the OTC Pink market could not use Rule 415 to allow their shareholders to sell securities in the market. Until the recent change, registration statements for these companies required a fixed price, unless trading on the OTCQB.

There’s no specific rule defining what a market is. However, the SEC formerly used Item 501(b)(3) of Regulation S-K to set the guidelines for OTC Pink equity line resales. Under 501, the offering price listed on a prospectus or registration statement must represent a fixed price or formula.

In 2013, the SEC recognized the OTCQB and OTCQX as authentic markets. The commission referred to the corresponding Compliance and Disclosure Interpretation to justify the at-market resale registration statement. This applied to OTC Markets traded on the OTCQB or OTCQX.

Equity Line Financing Transactions

So, what is an equity line financing transaction? In this transaction, a company offers shares to investors, who are the equity line providers. The price is determined by a formula that discounts the stock, making it more affordable than typical market prices. Additionally, the investor has a certain amount of time to make the purchase and limited rights for declining the buy.

In an equity line transaction, the investor faces fewer risks due to the delayed puts and the formula tied to market price. According to the SEC, equity line financing registrations are indirect primary offerings. The SEC has released several guidelines regarding equity line financing prior to the most recent change.

How and When to File a Resale S-1 Registration Statement

An OTC Pink company can file an S-1 registration form for the resale of securities. Your company must complete the following tasks to resell securities:

  • The company has to finalize the transaction of securities before filing for a registration statement.
  • The resale registration statement has to be completed on the form used for primary offerings.
  • In the prospectus, the company has to identify the investors as both shareholders and underwriters.

So, OTC Pink companies can register the resale of securities before exercising the equity line put. However, your company and investors must have a fixed agreement when you file the resale registration statement.

As stated above, this is considered a primary offering, so your company must be eligible to use the form for this purpose. The SEC also requires an existing market on national or recognized trading systems, which now include OTC Pink companies and related exchanges.

The SEC will recognize the resale registration statement if you and the investors agree on:

  • the number of shares for resale
  • the capital available under the agreement
  • the terms of the resale agreement
  • the discounted price (or formula) of shares

The company must disclose this information when filing the form.

What OTC Pink Companies Can Expect from the SEC Going Forward

The SEC will allow OTC Pink companies to file a resale registration statement if all the requirements are met. The commission has clearly stated that it considers OTC Pink as an existing securities market. As such, it has filed an active Form ATS to conduct equity line financings.

With the new 15c2-11 rules and the diligent self-regulation of the OTC markets, the future may bring full-fledged recognition as a legitimate market that can also file regular re-sale registration statements.

Colonial Stock Transfer is proud to serve OTC Pink companies. Since 1987, we have acted as a professional stock transfer agent, creating and maintaining positive shareholder relationships with SEC compliance. Contact us at 877-285-8605 to learn more about this essential service.


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