via Raghav veturi
Think back to what life was like 10 years ago today. iPhones were still a glimmer in Steve Jobs’ eye, Donald Trump was a reality TV star and Lehman Brothers was still very much a respected bank. And just as notable for many companies and investors, trading would have just begun on the OTCQX. Clearly, much has changed in politics, tech and finance over the past decade, and through it all, the OTCQX has provided an essential service for public companies around the globe that deserve to be taken seriously, yet don’t have the resources for a listing on the major exchanges.
What’s the OTCQX?
The OTCQX is considered today to be the best of the three tiers that make up the OTC Markets Group for companies that fulfill its qualification criteria, followed by the OTCQB, with the Pink as the bottom tier.
Before the OTC Markets Group adopted this tiered structure, many companies of varying sizes and influence were struggling with a severe credibility gap in the eyes of the public… and understandably so. After all, just about any company was able to trade on the Pink Sheet, regardless of their legitimacy. Since then though, the OTC Markets Group President and CEO R. Cromwell Coulson and his team has been focused on the “Open, Transparent and Connected” nature of the financial marketplace, and have worked to add more legitimacy to OTC stocks.
In a 2008 interview with EQUITIES Magazine, just a year into the launch of OTCQX, Coulson explained why OTC Markets embraced such a significant undertaking to improve this segment of the financial markets.
”We wanted to create a process on top of the inter-dealer quotation system we operate -- and on top of the inter-dealer quotation system that the OTC Bulletin Board operates -- that gives visibility to the companies that deserve it in the space,” Coulson said. “And with that, we created OTCQX”
He noted that financial professionals in London created the AIM market for emerging growth companies in order to provide transparency and efficiency to securities that aren’t listed on the London Stock Exchange’s main board… a model they emulated when creating the OTCQX.
“We're building America's Venture Market,” Coulson told Equities.com in 2015. “If you look around the world, what are the venture markets out there? There’s the TSX Venture Exchange in Canada and the London Stock Exchange has the AIM Market, and then you look at our marketplaces in the US. The big success metric for venture exchanges is the number of graduates to an exchange… We are the US venture market where smaller companies come to season and grow. We're also where global companies trade that are already listed on a stock exchange in their home market and are looking for a lighter regulatory touch in the US, a market that is more efficient, with less complexity and cost.”
“At the top of our marketplaces is OTCQX, which is for our more established companies, companies that are not penny stocks, companies with an operating business,” Coulson said.
How the OTCQX Ensures Legitimacy of Companies Traded on the Exchange
While there are of course many benefits for listing on the largest US exchanges like the NYSE, DOW or Nasdaq, there are also a few major caveats. Perhaps chief among them: It’s expensive. That’s been reason enough for many large and prestigious companies to opt for a listing on the OTCQX over the past decade. There are also many extremely stringent disclosure and legal requirements - and associated fees - inherent in a listing on the major exchanges, which companies can avoid on the OTCQX.
Unlike those on the major exchanges, companies trading on the OTCQX are not required to register or report to the SEC. That’s a great benefit for companies looking to be traded, but it can understandably cause wariness for prospective investors. That’s why the OTC Markets Group requires any traded company to post financial information with the OTC Markets Group. Additionally, US companies must have ongoing operations (i.e., no shell companies) and cannot be in bankruptcy, while foreign issuers must meet the requirements of qualified foreign exchanges.
Additional oversight of the OTCQX securities is provided by requiring sponsorship for each issuer by approved third-party investment banks or law firms, called Principal American Liaison (PAL) for non-US issuers and Designated Advisors For Disclosure (DADs) for US issuers.
These measures help OTCQX Marketplace to aid investors further by:
- Separating superior companies from OTC companies that are financially challenged.
- Separating more ethical companies from those involved in questionable activities.
- Enabling investors to participate in the growth of foreign blue chips.
- Allowing investors to view real-time Level 2 quotes with detailed market data and market depth.
A Proven Model After 10 Years
“It took 10 years for people to say the AIM was a success,” Coulson said back when the platform was only a little over a year old. “We’re building something long term. Our hope is that we can use it as a product to give credibility to the companies that deserve credibility and keep out the companies that don’t.”
Well, it’s been 10 years, and today the OTCQX home to small companies looking for legitimacy and large multinationals alike, allowing the exchange to thrive in an increasingly competitive global marketplace. By Coulson’s own assertion, it appears the OTCQX can be considered a resounding and important success for solid companies going public, and the investors who put their faith in them.
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