Introduction of the OTC Market's New Tier: The OTCID
December 4, 2024
The FKBR Quick-Take series explores trending legal topics to provide quick answers to common questions. In this edition, our Corporate & Securities team discusses the introduction of the OTCID, a new market tier designated by the OTC Markets Group Inc. (the “OTC Markets Group”).
The over the counter (“OTC”) market is a decentralized marketplace which relies on a network of broker-dealers to facilitate trading in securities. This is different from a traditional stock exchange like the NASDAQ or the NYSE which are centralized platforms that use a match engine to match trades.
The OTC Markets Group provides an avenue for the trading of about 12,000 U.S. and global securities in the OTC market. It categorizes companies’ securities into different tiers based on the amount and quality of information made available to the public (the “OTC Markets”). The current OTC Markets’ tiers are summarized below.
1. The OTCQX is the OTC Markets’ highest tier; companies in this tier are subject to higher qualifications, including disclosure requirements.
2. The OTCQB is the next tier after the OTCQX; it provides a network for trading securities of companies which are current in their reporting but may not qualify for the OTCQX.
3. The Pink Market, which is also called the open market, is a lower segment of the OTC Markets with lower disclosure requirements. This market is further divided into:
Current Information;
Limited Information, and
the Expert Market.
Companies are further designated on the Pink Market with symbols depending on the level of disclosure provided to the markets as well as the timeliness of such disclosure.
On October 14, 2024, the OTC Markets announced that in July 2025, the Pink Current Information will become the OTCID and companies that do not provide updated information will be downgraded to the Pink Limited Information or the Expert Market.
Quick Takes
1. What is the OTCID?
The OTCID is a redefined version of the Pink Market Current Information tier. It is a basic reporting market for companies that meet a minimal current information standard and provide management certification, without the qualitative standards of the OTCQX and OTCQB markets.
2. Are there eligibility and compliance standards that are expected to come with the OTCID?
Yes, we expect new eligibility and compliance standards. OTC Markets stated that it will release these requirements later this year, giving companies ample time to provide the information needed to meet the new OTCID market standards.
3. What are the consequences of non-compliance with the prospective standards of the OTCID?
Companies that do not comply with the OTCID standards by providing updated information, ongoing reporting, and management certifications will be downgraded to either the Pink Limited Information or the Expert Market, whichever is applicable. The Pink Limited Information tier signals to broker-dealers and investors that a company does not provide adequate current information, while the Expert Market is a marketplace without public broker-dealer quotations, designated for companies that provide no disclosure. Securities that trade on the Limited Information tier are deemed to be riskier due to the limited information available. For the Expert Market, quotations are unsolicited only and are restricted from public viewing. Only broker-dealers and professional or sophisticated investors are allowed to view quotations in the Expert Market. Generally, downgrading of a company’s securities may result in lower trading volume and stock prices.
4. How should companies currently listed on the Pink Current Information prepare for these new standards?
1. Monitor Announcements Closely. Stay informed about the specific eligibility requirements for the OTCID which are expected to be released by the OTC Markets later this year. This information will be necessary in understanding what additional criteria may apply, such as new financial disclosures, corporate governance requirements, or other compliance protocols. We will announce these requirements to our clients as well as on our websites and social media channels.
2. Review Compliance Practices. It would be prudent for a company to begin assessing its current reporting and disclosure practices to identify any gaps in transparency, as the new OTCID standards could require more detailed or frequent disclosures. It may be worthwhile to conduct an internal compliance audit to ensure readiness for a higher standard.
3. Engage Advisers. Consult with professional advisers, such as our firm, who specialize in capital markets to better understand the potential impacts of the prospective OTCID standards on the company. These advisers can provide insights into how to structure the company’s disclosures and filings to align with OTC Markets’ expectations.
We will continue to monitor developments related to the OTCID standards and any new eligibility requirements announced by OTC Markets. As updates become available, we will provide information and guidance to help with understanding and meeting the prospective standards. This is a preliminary overview of the OTCID and is not intended to be comprehensive. This quick take article is intended for general information purposes and should not be construed as legal advice. If you have questions or would like more insights on the topic discussed in this edition, please contact any of the following members of our Corporate & Securities team:
Lynne Bolduc, Partner (lbolduc@fkbrlegal.com)
Josephine Rachelle Aranda, Senior Associate (jaranda@fkbrlegal.com)
Ikechukwu Ubaka, Associate (iubaka@fkbrlegal.com)
