SEC Denies Anticipated OTC Expert Market

The proposed OTC Expert Market has been officially denied by the Securities and Exchange Commission (SEC).  Earlier this August, the SEC issued a decision on a proposed order that would provide conditional exemption from Rule 15c2-11 for specific broker-dealer quotation publications through an Expert Market.  The suggested market would have been operated by OTC markets.  OTC Markets has confirmed to Colonial Stock that the Expert Market will continue to operate in a limited fashion.

The SEC Release and What it Means

The SEC’s brief statement pertaining to the proposed OTC Expert Market did not provide as much clarity as investors hoped.  The statement consisted of a couple paragraphs containing legalese and financial industry jargon many retail investors are uninterested in deciphering.  In short, the proposed order was formally denied as a component of the commission’s short-term agenda.  Though this does not mean the suggestion won’t be revisited down the line, it puts at least a temporary end to the idea of an OTC Expert Market.

The backstory to the decision is as follows.  The OTC Markets requested the order from the SEC in an attempt to empower broker-dealers to continuously submit/publish proprietary securities quotations for riskier securities such as grey market and limited information symbols.  The market for those quotations would have been limited to professional investors.  Furthermore, this alternative market would not have complied with the recordkeeping and information review requirements as detailed in the revised 15c2-11 rule.

15c2-11 Exceptions

There are some important Rule 15c2-11 exceptions of note.  The rule’s unsolicited quotation exception occurs when the broker-dealer provides a quote that represents orders that are not solicited.  The rule mandates the broker-dealer presented with such a quotation determine if information is publicly available.  If no such information is available, the unsolicited quotation exception will not be applicable.  Written representation provided by a client’s broker can be relied upon if the customer is not considered to be an affiliate or insider.  Such written representation is necessary prior to and also after obtaining the quotation.

The ADTV and asset text exception to rule 15c2-11 is applicable to low-risk securities.  The security is required to meet criteria pertaining to average daily trading volume (ADTV) and aggregate assets along with unaffiliated shareholder equity.  The ADTV value must be a minimum of $100,000 across the two months prior to the quotation publication.  The company is required to have a minimum of aggregate assets and stockholder equity totaling $50 million.

The underwritten offering exception permits a broker-dealer to publish security quotations without performing the otherwise necessary information review for issuers with offerings underwritten by the broker-dealer.  However, the registration statement must have been effective fewer than 90 days before the quotation’s publication by the broker-dealer.

The piggyback exception pertains to a broker-dealer filing information for public view in order to publish quotations.  Company information must be publicly available and formally filed within a specific number of calendar days of the date noted in order for this exemption for publishing quotations to apply.  The piggyback exemption used for quotations can be used by a broker-dealer for 180 days after the culmination of the reporting period.

What’s Next for the Expert Market

OTC Markets has confirmed with Colonial Stock that securities that do not comply with the new Rule 15c2-11 disclosure requirements will not have proprietary market maker quotes in the Expert Market.  The “No information“ stocks will still fall to the Expert market after the Rule 15c2-11 compliance date on September 28, 2021  and will be available only for unsolicited quotes from brokers representing Limit Orders of investors not affiliated with the issuer.  Expert Market Data feeds are available to broker-dealers and other sophisticated investors.

The companies that are “No Information“ or not Pink current in their corporate disclosure can subscribe to the OTC DNS (Disclosure and News Service) product which gives them a platform to post and share their financials and corporate news in accordance with Pink Disclosure guidelines.

After the 15c2-11 compliance date, shell companies will be able to trade for 18 months until they become an operating company. If they don’t become an operating company in 18 months, they will be de-listed. This also applies to OTC companies that become shells after the compliance date– they will have 18 months to demonstrate they are an operating company before getting de-listed.

Though the SEC has officially denied the “proposed” OTC Expert Market, it might be a short-term denial.  Stay tuned.  The SEC could easily approve a modified version of the market in the financial quarters ahead.

Colonial Stock Transfer provides OTC transfer agent services to maintain a mutually beneficial relationship with shareholders, comply with regulations and keep your company operating like a well-oiled machine.  We have been in business since 1987 for good reason.  Our trustworthy transfer agent services are comprehensive, consisting of corporate actions, DWAC/DRS transactions, cash/stock dividend payments, escrow services, proxy meetings, customized reporting and more.

*This should not be construed as legal advice. Please consult with your securities counsel for further details.

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