BBX – A BETTER BULLETIN BOARD?
June 11, 2002
The OTC Bulletin Board has afforded companies an air of legitimacy that they have not always deserved. Some have used that listing to imply a relationship with the NASD (as in, “we are now listed on the NASD Bulletin Board,” while others have gone a step further and, inaccurately, claimed to be listed on the Nasdaq Bulletin Board.
Of course, the OTC Bulletin Board is not part of Nasdaq and its listing standards are minimal. Companies need only file regular reports with the Securities and Exchange Commission. Unlike Nasdaq listed companies, they do not have to meet any minimal financial thresholds or pass a “public interest” test. Some of that is about to change.
A year from now the OTC Bulletin Board is likely to be nothing more than a memory. Plans call for it to be phased out, beginning in early 2003, to be replaced by a new trading venue, the Bulletin Board Exchange (BBX). The BBX will facilitate trading; an electronic trading system will allow order negotiation and execution. That marks a dramatic departure from the OTC Bulletin Board, where orders are placed by telephone.
Many of the current OTC Bulletin Board companies will be listed on the BBX, but a large number are likely to be excluded. The BBX will not require companies to maintain a minimum share price, income or assets, but it will impose qualitative listing standards as a firewall against possible scams and abuses.
What will happen to those companies that do not meet the new BBX standards? Most of them are likely to wind up trading on the Pink Sheets, a privately-owned stock quotation service that already provides price information for over-the-counter securities that are not listed on any national securities exchange, or on the OTC Bulletin Board. (See In The Pink). Since the Pink Sheets are privately owned, they do not enjoy the same degree of regulatory oversight as the trading systems run by Nasdaq and the NASD.
Exiling companies to the Pink Sheets could have negative repercussions for investors. Some of those companies currently file regular financial reports with the SEC solely so that they can retain their OTC Bulletin Board listing. Companies banished to the Pink Sheets may stop filing those reports, making it that much harder for investors to obtain credible information.
Despite such concerns, the BBX promises a higher standard of information, and a greater level of shareholder protection. First, however, the new qualitative standards must gain final approval from the SEC. If they do, the BBX will incorporate some key elements of the Nasdaq listing process. Here is a look at the proposed requirements:
Public Interest Standard
The BBX would utilize the public interest standard now imposed by the Nasdaq National Market and the Nasdaq SmallCap Market. That means the BBX will have discretion to deny listing, or delist a company, to protect the public interest. According to the BBX, imposition of this standard will involve a review of directors, officers, and major shareholders for past legal or regulatory issues.
This rule could have a major impact on many of the reverse-mergers that have been in vogue for OTC Bulletin Board companies. Private companies often use reverse-mergers to become public without having to go through SEC scrutiny. Now the BBX will be looking at the background of the officers and directors of the newly merged company. If those individuals do not meet the “public interest” criteria, the company could lose its BBX listing. (See The Shell Game).
That might be good news for regulators, and future investors, but it could prove costly to public investors who bought shares in the BBX company prior to the reverse-merger, and now find themselves holding stock in a delisted company.
This broad standard affords overwhelming discretion to the BBX, which will be invested with the power to determine the public interest. It is unclear at this time whether companies will have an opportunity to appeal from that determination, or what form that appeal might take.
Public Float/Shareholder Requirement
Companies will be required to demonstrate a minimum of 100 round-lot (at least one hundred shares) shareholders and a public float of at least 200,000 shares. This requirement is intended to assure a minimal level of public ownership, and would help to prevent a handful of insiders or promoters from using a BBX listing to dump shares of a thinly-held stock.
Corporate Governance Standards
BBX companies would be required to hold annual shareholder meetings and to solicit proxies in advance of those meetings. This requirement would be consistent with existing Nasdaq standards, as well as SEC regulations and most state corporate laws.
A company will be required to hold an annual meeting within twelve months of the end of the first year after being listed on the BBX. The BBX also is proposing to adopt the Nasdaq standard requiring a quorum of at least one-third of the shareholders at the meeting.
Independent Directors
BBX companies must have at least one independent director. An independent director may not be an officer, director, employee or shareholder of the company. Companies will be given a grace period of one year from initial BBX listing to appoint that independent director.
Audit Committee/Conflicts of Interest
Listed companies will be required to establish an audit committee, a majority of which may not consist of non-independent directors. The Audit Committee would review all related party transactions. Companies would have a twelve month period to create the Audit Committee.
Voting Rights
This is a key provision. The BBX would adopt the Nasdaq rule prohibiting a listed company from disenfranchising existing shareholders. This would prevent companies from issuing a class of super-voting stock that might enable management and its associates from controlling the destiny of the company to the exclusion of the public shareholders. When considered together with several of the other proposed changes, this rule is likely to make it far more difficult for a small group of insiders to give themselves stock, change the company’s business plan, or turn over control through reverse-mergers.
Auditor Peer Review
All issuers would be required to utilize auditors who are subject to peer review consistent with the American Institute of Certified Public Accountants procedures.
Shareholder Approval
This represents a major change for most OTC Bulletin Board companies, and a major benefit to public investors. Shareholder approval will be required for all transactions that involve the grant of stock options to officers and directors; acquisitions; or changes of control. Insiders will continue to steer companies toward acquisitions and reverse-mergers that result in a change of control, but now they will need to get stockholder approval. And, as we already have seen, they will not be able to manipulate that approval by granting themselves shares of super-voting stock.
Distribution of Annual Reports
BBX-listed companies will be required to distribute annual reports and to make quarterly reports available on request.
As they have been proposed, these new rules are calculated to prevent a small group of insiders from controlling, and manipulating, listed companies to the detriment of public investors. They also would assure that investors receive timely, accurate, and credible financial information.
Will they work? Are companies more likely to give up reverse-mergers and dubious acquisitions just because shareholder approval will be required? Or will they just move more carefully and deliberately? Experience suggests that just when one door closes on stock manipulators, they manage to find another door, or a window, or a vent. But the BBX addresses many of the major devices now being employed to manipulate companies and their stock.
It’s a good step.
©2002 Stock Patrol.com. All rights reserved.
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