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Introduction to OTCQX: The Highest Quality Tier of OTC Markets

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by Oluwapelumi Adejumo · 7 min read
Introduction to OTCQX: The Highest Quality Tier of OTC Markets
Photo: OTC Markets Group / LinkedIn

The OTCQX market makes it possible for qualified smaller companies to provide an exchange-quality trading experience with superior information available to investors. Here, you will find more on OTCQX.

OTCQX is a platform that offers a transparent and efficient trading avenue for investors whose companies focus on the United States and the whole world in general. In order to participate in the OTCQX market, however, there are certain criteria that prospective companies must meet. They include high financial standards, best practice corporate governance, compliance with securities laws of the United States, as well as a professional third-party sponsor introduction. These criteria thus rule out penny stocks, shells, and companies in bankruptcy from participating in the OTCQX market.

What Is OTCQX and Who Is It For?

OTCQX is the number one of the three marketplaces that focus on the over-the-counter trading of stocks. The OTCQX platform is provided and ran by the OTC Market Groups. There are certain yardsticks that trade on this platform must meet. In comparison to other tiers, specifically the OTCQB/OTCBB and the Pink Sheets, the OTCQX has the most strict conditions for intending stocks.

The OTCQX specifically targeted US companies and international companies. To be able to participate, companies must be current in their reporting. In addition, they must undergo a yearly verification and management certification process. Firms are also expected to meet the $0.01 bid test and can not be in bankruptcy.

OTCQX International

OTCQX is a United States market for firms with listing on a qualified international stocks exchange. It enables companies worldwide to have improved access to support as well as distribute information in the United States public market without recourse to the cost and complexity of the United States exchange listings.

The OTCQX market specifically addresses an issue that global companies with listings on the international stock exchanges face. These companies are aware of how vital it is to provide investors with a United States market to analyze, value as well as trade their securities, but this was not possible unless they were listed on either NASDAQ or NYSE.

With OTCQX, companies who want to inform and access investors in the United States now have a convenient and efficient alternative. OTCQX companies do not have to report to the SEC and can avoid expensive compliance processes by submitting their native country’s disclosure in English. However, OTCQX has the necessary tools to assist global IROs to distribute information widely to investors via a network of media and partners based in the United States.

OTCQX for United States Companies

The OTCQX market makes it possible for qualified smaller companies to provide an exchange-quality trading experience with superior information available to investors. OTCQX companies are able to get the benefits of being publicly traded, all within a suitable regulatory environment. This will make it possible for management to focus on growing business. Meanwhile, it also helps to increase visibility, improve liquidity, raise more capital at better valuation, and build trust. The benefits of this include:

  • Ability to see price and access market data. OTCQX sets the best price standard by broadly distributing market data via multiple channels, like Bloomberg, Thomson Reuters, etc.
  • Accessibility to company information. OTC Markets Group’s system of tiered markets makes it possible for invests to pick out the highest-quality companies from a bunch. In conjunction with a suite of Corporate Services, they empower public companies to improve the availability and visibility of their information.
  • Option to trade through the broker of your choice. Investors can trade OTCQX securities via the institutional, retail, or online broker-dealer that they prefer. Thus, their trading experience nearly identical to that of trading NYSE or NASDAQ securities.

Regulation of OTCQX

There are certain standards that companies trading on the OTCQX platform have to meet in order to guarantee improved transparency. The platform excludes companies that have the highest possibility of association with stocks promoters and other illegal operations. These standards include high financial standards, being current in its disclosure, possessing sponsorship from a professional third-party advisor. Listed companies must report to a regulator. It can be the Security and Exchange Commission (SEC) or the Federal Deposit Insurance Corporation (FDIC).

An electronic inter-dealer quotation and OTC Markets Group’s trading system – OTC Link – operate the OTCQX marketplace. It is subject to registration with the SEC as a broker-dealer and an alternative trading system (ATS). The OTC Link makes it possible for broker-dealers to post and disseminate their quotes. Besides, it allows to negotiate trades via the system’s electronic messaging capability.

The OTCQX Marketplace separates superior companies from OTC companies that are financially handicapped, those involved in dubious activities, or both. It also enables investors to take part in the growth of foreign blue chips. Broker-dealers that trade OTCQX and other tiers have to be members of the Financial Industry Regulatory Authority (FINRA). This protects investors trading OTC securities from the unethical and illegal practices of broker-dealers.

Listing Requirements

OTCQX has two tiers of quotation for US-based companies. They are OTCQX International Premier and OTCQX International. In order to be eligible for quoting on the OTCQX International Premier, the companies must:

  • meet all the eligibility requirements for OTCQX International. They include high financial standards, best practice corporate governance, compliance with securities laws of the United States. Besides, there should be a professional third-party sponsorship introduction;
  • have a global revenue of $100 million as of its most recent fiscal year-end. Besides, they must have a global market capitalization of $500 million, aggregate cash flow for its three preceding years $100 million, a minimum cash flow in each of the two preceding years of $25 million or have a revenue of $75 million and a global market capitalization of $750 million.

In order to be eligible to be quoted on the OTCQX International, companies must:

  • have a total of $2 million in assets as of the most recent annual or quarter-end;
  • have $2 million in revenue, $1 million in tangible assets, $500,000 in income, or $5 million in global market capitalization;
  • meet one of the penny stock exemptions under Rule 3a51-1of the Exchange Act. They are a bid price of $5 or more, net tangible assets of about $2 million if the company has been in continuous operation for at least 3 years. Or $500,000 if the company had been in continuous operation for less than that. Besides, the exemptions include an average revenue of at least $6 million for the last three years;
  • not be in bankruptcy or reorganization proceedings;
  • be a part of a recognized Securities Manual or be subject to the reporting requirements of the Exchange Act;
  • list its securities on the Qualifying Foreign Exchange for a minimum of the preceding 40 calendar days. In case the company’s stocks are not listed on a non-US based exchange that is not a Qualified Foreign Exchange, an executive officer, director, and beneficial owner of 10 percent or more of a class of the company’s securities and such other materials as OTC Markets Group deem appropriate to make an informed determination of eligibility;
  • meet one of the following conditions: be eligible to depend on the registration exemption found in Exchange Act Rule 12g-2(b) and be current and complaint in such requirements, or have a class of securities registered under section 12(g) of the Exchange Act and be current in its SEC reporting requirements. Otherwise, if such a company is not qualified to rely on the exemption from registration provided by Exchange Act Rule 12g3-2(b) due to the fact that it does not (I) meet the definition of “foreign private issuer” or (II) maintain a primary trading market in a foreign jurisdiction as set forth in Exchange Act Rule 12g3-2(b)(ii), and is not needed to register under section 12(g), be otherwise current and fully compliant with the obligations of a company relying on the exemption from registration provided by Exchange Act Rule 12g3-2(b).

Conclusion

Although stock trading on OTCQX has many of the same protections as more established and bigger stocks, it is still speculative. Therefore, there is no assurance that any item trading on it will be of higher quality than the stocks trading on other OTC tiers.

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