OTC-BB Rule Changes and Internet Stocks
Jan 12,1999
The Over the Counter Bulletin Board. We have all come across companies that appear to have a great business product and show potential. When they are explored further we discover they trade on the OTC-BB. A trading system that has no reporting requirements for companies that are listed there. Some don't even have their addresses listed. All that will soon change.
The National Association of Securities Dealers, Inc. (NASD®), recently announced 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.
These changes are significant as they will provide investors greater information but also provide more visibility for smaller companies that are legit and become fully reporting. This is especially significant for internet stocks where an investor can analyze the potential of a company by analyzing the product online. Additionally with internet stocks the variables used for comparisons include user numbers, revenue growth, content quality and profitability.
Tracking companies like media Metrix and Hot100 provide insight into user numbers, the content quality can be assessed by visiting the sites and now the financial picture will also be disclosed. This could provide an opportunity to discover undervalued internet stocks once they become fully reporting. Many internet stocks are taking the reverse merger route and being listed on the OTC-BB as it is both quicker and cheaper than an IPO. However, investors must always be mindful of the risks associated with the smaller companies and that many start ups are destined to fail.
iSleuth.Com (SLEU) gained 50% yesterday after announcing they would become fully reporting. With many companies not expected to comply with the new requirements it will be interesting to see if all the internet issues that announce they will comply with reporting obligation will be rewarded in the same manner as iSleuth.com.
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 company's 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.
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