SEC APPROVES RULE REQUIRING OTCBB COMPANIES TO FILE WITH THE SEC
The National Association of Securities Dealers, Inc. (NASD), announced on January 6, 1999 that the Securities and Exchange Commission (SEC) has approved the NASD's proposed OTC Bulletin Board Eligibility Rule. This rule permits only those companies that report their current financial information to the SEC, banking, or insurance regulators to be quoted on the OTC Bulletin Board (OTCBB), offering investors more and better information about OTCBB stocks.
Under the new rule, Market Makers will not be permitted to quote OTCBB-traded securities unless the issuer has filed periodic reports with the appropriate regulatory agency. The filing requirement protects investors by ensuring that they have access to companies' current financial information when considering investments in OTCBB-traded securities.
"Thorough and accurate information is the foundation of sound investment decisions," said Frank G. Zarb, NASD Chairman and Chief Executive Officer. "By requiring the half of all OTCBB companies that currently do not provide publicly-available financial reports to join the half that do, we will take a major step toward improving the quality of the microcap market. We are pleased that the SEC has approved our proposal to effectively eliminate non-reporting companies from the OTC Bulletin Board."
Under the new rule, any domestic company that does not file periodic financial reports with the SEC, or with banking or insurance regulators, will be eliminated from the OTCBB after a phase-in period. In April 1998, the SEC required all foreign securities on the OTCBB to be fully registered with the SEC in order to remain quoted.
The new requirement applies immediately to any company first quoted on the OTCBB after January 4, 1999. Securities already quoted on the OTCBB as of January 4, 1999, will have until at least July 1999 to comply with the new requirements. The rule will be phased in over a 12 month period beginning in July 1999 and continuing through June 2000 in alphabetical increments based upon the company¹s name as of January 4, 1999. In June 2000, the rule will apply to all companies on the OTCBB.
The filing requirement also means that these companies are subject to greater regulatory oversight by the SEC and other regulatory authorities. The OTC Bulletin Board is a quotation service that displays real-time quotes, last-sale prices, and volume information in domestic and certain foreign securities. Eligible securities include national, regional, and foreign equity issues; and warrants, units, and American Depositary Receipts (ADRs) not listed on any other U.S. national securities market or exchange. Although the OTCBB is operated by the NASD, it is unlike The Nasdaq Stock Market or other listed markets where individual companies apply for listing and must meet and maintain strict listing standards; individual brokerage firms, or Market Makers initiate quotations for specific securities on the OTC Bulletin Board. Currently, approximately 6,500 securities are quoted on the OTCBB.
Although the NASD press release doesn't mention what will happen to companies that are no longer eligible to be quoted on the OTCBB, it is likely that these companies will be quoted on the NQB Pink Sheets. It is currently much more difficult to get stock quotes for Pink Sheet stocks than OTCBB stocks.
The SmallCap Investor believes the new filing requirement for OTCBB companies is great news for microcap investors. First, many low-quality companies will wind up on the more obscure Pink Sheets, where fewer investors will find them. Second, many other low-quality companies will choose to file with the SEC. Investors who bother to read the SEC filings should now be able to make better investment decisions (unless, of course, a company lies in its SEC filings). And third, many of the better OTCBB companies that do not currently currently file will begin to file. Clearly, the more information available on these higher-quality OTCBB companies, the better.
The major negative: Some relatively strong, but very small, start-up companies may not be able to qualify for OTCBB quotations in their earliest stages. Not only would these potentially fine investment opportunities become more difficult for investors to discover, but these companies could experience added difficulties in raising funds. However, this situation should prove uncommon. The majority of companies facing this problem will be poor investments that should be avoided anyway. Another potential negative of the new rule is that some higher-quality OTCBB companies that disdain self-promotion and are loath to make company information available to the public will move to the Pink Sheets, likely adding to investors' difficulty in finding these companies.
Overall, however, the positives of this new rule far outweigh the negatives. As a result, investors will be able to conduct more informed decisions on OTCBB stocks and, hopefully, enjoy increased success when investing in them.
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