OTCQB And OTCQX Rule Changes
Effective October 1, 2020, the OTCQB and OTCQX tiers of OTC Markets have instituted amendments to their rules, including an increase in fees.
The OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink Open Market. The OTC Pink Open Market, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. Companies trading on the OTCQX, OTCQB and OTC Pink Current Information tiers of OTC Markets have the option of reporting directly to OTC Markets under its Alternative Reporting Standards. The Alternative Reporting Standards are more robust for the OTCQB and OTCQX in that they require audited financial statements prepared in accordance with U.S. GAAP and audited by a PCAOB qualified auditor in the same format as would be included in SEC registration statements and reports.
As an aside, companies that report to the SEC under Regulation A and foreign companies that qualify for the SEC reporting exemption under Exchange Act Rule 12g3-2(b) may also qualify for the OTCQX, OTCQB and OTC Pink Current Information tiers of OTC Markets if they otherwise meet the listing qualifications. For more information on OTCQB and OTCQX listing requirements, see HERE, HERE, and HERE.
OTCQB Amendments
Effective October 1, 2020, the OTCQB Standards, Version 3.4, went into effect. To review the last amendments adopted in February 2020, see HERE. The new Version 3.4 modified the prior rules as follows:
Fees. Effective January 1, 2021, the OTCQB annual fee will increase from $12,000 to $14,000 and the application fee will increase from $2,500 to $5,000.
Corporate Governance Requirements. Companies that alternatively report to OTC Markets must meet certain corporate governance requirements to be eligible to trade on the OTCQB. In particular, such companies must have a board of directors that includes at least two independent directors and must have an audit committee the majority of which are independent directors. The new rules provide that trusts, funds, and other similar companies may be exempted from these corporate governance standards. A company wishing to be exempted must apply to OTC Markets in writing and such exemption will be granted in the sole and absolute discretion of OTC Markets.
Application Review/Reasons for Denial. Although OTC Markets has always had broad discretion to deny an application to trade on the OTCQB, the new rules specifically provide that OTC Markets may “[R]efuse the application for any reason, including but not limited to stock promotion, dilution risk, and use of “toxic” financiers if it determines, in its sole and absolute discretion, that the admission of the Company’s securities for trading on OTCQB, would be likely to impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.”
OTCQX Amendments
Effective October 1, 2020, the OTCQX Standards, Version 8.6, went into effect. To review the last amendments adopted in December 2019, see HERE. The new Version 8.6 modified the prior rules as follows:
Fees. Effective January 1, 2021, the OTCQX annual fee will increase from $20,000 to $23,000. The application fee remains unchanged at $5,000.
International Company Upgrade to OTCQX. A Company with a class of securities currently quoted on the OTCQB market that chooses to upgrade to OTCQX may now be exempt from the requirement to select an OTCQX Sponsor or submit a Letter of Introduction.
Sponsor for International Companies. An OTCQX Sponsor who is an attorney or law firm is no longer required to be headquartered in the U.S. or Canada. Instead, each attorney who provides services as an OTCQX Sponsor must be licensed to practice law and in good standing in the U.S. As a reminder, I am a qualified OTCQX Sponsor.
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NYSE, Nasdaq And OTC Markets Offer Relief For Listed Companies Due To COVID-19
In addition to the SEC, the various trading markets, including the Nasdaq, NYSE and OTC Markets are providing relief to trading companies that are facing unprecedented challenges as a result of the worldwide COVID-19 crisis.
NYSE
The NYSE has taken a more formal approach to relief for listed companies. On March 20, 2020 and again on April 6, 2020 the NYSE filed a notice and immediate effectiveness of proposed rule changes to provide relief from the continued listing market cap requirements and certain shareholder approval requirements.
Recognizing the extremely high level of market volatility as a result of the COVID-19 crisis, the NYSE has temporarily suspended until June 30, 2020 its continued listing requirement that companies must maintain an average global market capitalization over a consecutive 30-trading-day period of at least $15 million. Likewise, the NYSE is suspending the requirement that a listed company maintain a minimum trading price of $1.00 or more over a consecutive 30-trading-day period, through June 30, 2020.
The NYSE intends to waive certain shareholder approval requirements for continued listing on the NYSE through June 30, 2020. In particular, in light of the fact that many listed companies will have urgent liquidity needs in the coming months due to lost revenues and maturing debt obligations, the NYSE is proposing to ease shareholder approval requirements to allow capital raises. The big board amendments align the requirements more closely with the NYSE American requirements.
The NYSE big board rules prohibit issuances to related parties if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance subject to a limited exception if the issuances are above a minimum price and no more than 5% of the outstanding common stock. For a review of the NYSE American rule for affiliate issuances, see HERE. The NYSE also requires shareholder approval for private issuances below the minimum price for any transactions relating to 20% or more the outstanding common stock or voting power. For a review of the 20% rule for the NYSE American, see HERE.
Realizing that existing large shareholders and affiliates are often the only willing providers of capital when a company is undergoing difficult times, the rule change allows for the issuance of securities to affiliates that exceed the 1% or 5% limits if completed prior to June 30, 3030 where the securities are sold for cash that meets the minimum price and if the transaction is reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. The waiver cannot be relied upon if the proceeds would be used for an acquisition of stock or assets of another company in which the affiliate has a direct or indirect interest. Furthermore, the waiver does not extend to shareholder approval requirements triggered by the transaction under other rules such as the equity compensation rule or change of control rule. The substantially similar NYSE American rules can be reviewed HERE – equity compensation, and HERE – change of control.
The NYSE has also waived the 20% rule for private placements completed through and including June 30, 2020 where a bona fide financing is made to a single purchaser for cash meeting the minimum price requirement. Again, the waiver does not extend to shareholder approval requirements triggered by the transaction under other rules such as the equity compensation rule or change of control rule.
Nasdaq
The Nasdaq has taken a less formal approach on some of its requirements and a formal rule amendment on others. Although Nasdaq has not suspended its listing requirements, it will give due weight to the realities surrounding the worldwide crisis in both considering listing standards compliance and requests for financial viability waivers, such as under Rule 5635.
Generally, companies newly deficient with the bid price, market value of listed securities, or market value of public float requirements have at least 180 days to regain compliance and may be eligible for additional time. Nasdaq has enacted a temporary rule change such that companies that fall out of compliance with these listing standards related to price through and including June 30, 2020 will have additional time to regain compliance. That is, the non-compliance period will be tolled through June 30, 2020 and not counted in the 180 day period. Companies will still receive notification of non-compliance and will still need to file the appropriate Form 8-K. Companies that no longer satisfy the applicable equity requirement can submit a plan to Nasdaq Listing Qualifications describing how they intend to regain compliance and, under the Listing Rules, Listing Qualifications’ staff can allow them up to six months plus the tolling period, to come back into compliance with the requirement.
The information memorandum confirms that listed companies that avail themselves of the 45-day extension for Exchange Act filings (see HERE) will not be considered deficient under Nasdaq Rule 5250(c) which requires all listed companies to timely file all required SEC periodic financial reports. Companies that are unable to file a periodic report by the relevant due date, but that are not eligible for the relief granted by the SEC, can submit a plan to Nasdaq Listing Qualifications describing how they intend to regain compliance and, under the Listing Rules, Listing Qualifications’ staff can allow them up to six months to file.
As discussed in my blog related to SEC COVID-19 relief (see HERE), the SEC has granted relief where a company is required to comply with Exchange Act Sections 14(a) or 14(c) requiring the furnishing of proxy or information statements to shareholders, and mail delivery is not possible due to the coronavirus and the company has made a good-faith effort to deliver such materials. Nasdaq likewise will not consider a company in non-compliance with Rule 5250(d) requiring companies to make available their annual, quarterly and interim reports to shareholders or Rule 5620(b) requiring companies to solicit proxies and provide proxy statements for all meetings of shareholders when relying on the SEC relief. Nasdaq confirms that it permits virtual shareholder meetings as long as it is permissible under the relevant state law and shareholders have the opportunity to ask questions of management.
The Nasdaq shareholder approval rules generally require companies to obtain approval from shareholders prior to issuing securities in connection with: (i) certain acquisitions of the stock or assets of another company (see HERE); (ii) equity-based compensation of officers, directors, employees or consultants (see HERE); (iii) a change of control (see HERE); and (iv) certain private placements at a price less than the minimum price as defined in Listing Rule 5635(d) (see HERE.
An exception is available for companies in financial distress where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company. To request a financial viability exception, the company must complete a written request including a letter addressing how a delay resulting from seeking shareholder approval would seriously jeopardize its financial viability and how the proposed transaction would benefit the company. The standard is usually difficult to meet; however, Nasdaq has indicated that it will consider the consider the impact of disruptions caused by COVID-19 in its review of any pending or new requests for a financial viability exception. In addition, reliance by the company on a financial viability exception must expressly be approved by the company’s audit committee and the company must obtain Nasdaq’s approval to rely upon the financial viability exception prior to proceeding with the transaction. Under the rule, companies must also provide notice to shareholders at least ten days prior to issuing securities in the exempted transaction.
OTC Markets
OTC Markets Group has provided blanket relief for OTCQB and OTCQX companies with certain deficiencies until June 30, 2020. Until that date, no new compliance deficiency notices will be sent related to bid price, market cap, or market value of public float. Also, any OTCQX or OTCQB company that has already received a compliance notice related to bid price, market cap, or market value of public float with a cure period expiring between March and June will automatically receive an extension until June 30, 2020 to cure their deficiency.
OTC Markets has also extended the implementation date for compliance with the OTCQB rules requiring at least 50 beneficial shareholders and minimum float of 10% or $2 million in market value of public float, respectively, until June 30, 2020. The extension applies only to companies already traded on OTCQB as of May 20, 2018. All other companies were subject to these requirements effective May 20, 2018.
« Disclosures Related To COVID-19 SEC Proposed Rule Changes for Exempt Offerings – Part 2 »
OTCQX Rule Changes
Effective December 12, 2019, the OTC Markets has implemented changes to the initial and continued quotation requirements for companies listed on the OTCQX. The amendments (i) allow certain qualifying companies to use their regular securities counsel for a letter of introduction in place of an OTCQX sponsor; (ii) establish procedures for a company effecting a change of control; (iii) enhance corporate governance requirements, refine the definition of an “independent director,” and provide for a phase in for compliance with these new provisions; (iv) require Canadian companies to utilize a transfer agent participating in the Transfer Agent Verified Shares Program by April 1, 2020, and (iv) require U.S. companies to disclose all convertible debt. The last rule changes were implemented in May, 2019 – see HERE.
Amended Rules for U.S. Companies
OTC Sponsor
An SEC reporting company with a class of securities that has been publicly traded for at least one year may submit a written application to be exempted from the requirement to select an OTCQX sponsor. A company granted this exemption must submit a letter of introduction from their outside securities counsel in lieu of such a letter from an OTC Sponsor. Prior to adopting this rule amendment, only U.S. companies moving from a national exchange or with a separate class of securities trading on a national exchange qualified for the exemption.
A letter of introduction by outside securities counsel must state: (i) the securities counsel is licensed to practice law and in good standing in the U.S. and is not subject to any disciplinary actions within the last five years; (ii) the attorney is not currently subject to any sanctions resulting from disciplinary actions; (iii) the attorney is engaged by the company as its primary disclosure counsel and has assisted in the preparation of its most recent disclosure; (iv) other areas of engagement; (v) when engaged; (vi) that the attorney has reviewed information and made inquiries to satisfy itself that the company is in compliance with Exchange Act 12g3-2(b); (vii) the company is operating and is not a shell company; (viii) company is in good standing in each jurisdiction it conducts business; (ix) all of the company’s outstanding securities have been authorized and issued in accordance with the federal and state securities laws and are fully paid and non-assessable; (x) whether the company has been delisted, removed or suspended from a Qualifying Foreign Stock Exchange; and (xi) if the company is SEC or Regulation A reporting whether it is current in its reporting obligations.
Where outside securities counsel is used as a sponsor, the duties related to a sponsor and for the company to provide information to and seek input from such sponsor extend to the outside securities counsel.
Clarification of Penny Stock Exemption Eligibility Criteria
One of the qualifications to trade on the OTCQX is that a company must be exempt from the penny stock definition under Rule 3a51-1 of the Exchange Act by meeting one of the following criteria: (i) have a bid price of $5 or more as of the close of business on each of the 30 consecutive calendar days immediately preceding the company’s application and, as of the most recent fiscal year-end, have at least one of the following: (a) net income of $500,000; (b) net tangible assets of $1,000,000; (c) revenues of $2,000,000; or (d) total assets of $5,000,000; or (ii) have net tangible assets of $2 million if the company has been in continuous operation for at least three years, or $5,000,000 if the company has been in continuous operation for less than three years, which qualification can be satisfied as of the end of a fiscal period or as a result of an interim capital raise; or (iii) have average revenue of at least $6,000,000 for the last three years. The amended rules clarify that the financial thresholds necessary to qualify for exemption must be based on audited financial reported dated within 15 months prior to the company’s application to the OTCQX.
Convertible Debt Disclosure
All OTCQX companies must now disclose all of their convertible debt arrangements and provide copies of all securities purchase or similar agreements, promissory notes, irrevocable transfer agent instruction letters and related deal documents. Generally, an SEC-reporting company files these documents as exhibits to a Form 8-K when completing the transaction, or with the subsequent Form 10-Q following the deal closure.
Change of Control
An OTCQX company must now promptly notify OTC Markets of a change of control of the company. Within 20 calendar days of the completion of the change of control, the company must submit a new OTCQX application and associated application fee. The OTCQB enacted a similar rule back in July 2017. In addition, OTC Markets may independently determine that a change of control has taken place and, in such case, will notify the company who must then complete the new application. The failure to submit the new application and fee is grounds for removal from the OTCQX.
Like the OTCQB rules, the OTCQX defines a change of control as any events resulting in:
(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becoming the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the company representing fifty percent (50%) or more of the total voting power represented by the company’s then outstanding voting securities;
(ii) The consummation of the sale or disposition by the company of all or substantially all of the company’s assets;
(iii) A change in the composition of the board occurring within a two (2)-year period, as a result of which fewer than a majority of the directors are directors immediately prior to such change; or
(iv) The consummation of a merger or consolidation of the company with any other corporation, other than a merger or consolidation which would result in the voting securities of the company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the company or such surviving entity or its parent outstanding immediately after such merger or consolidation.
Independent Director
The new rules have amended the definition of an independent director to mean: “a Person other than an executive officer or employee of the Company or any other Person having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following Persons shall not be considered independent: (A) a director who is, or at any time during the past three years was, employed by the Company; (B) a director who accepted or has a Family Member who accepted any compensation from the Company in excess of $120,000 during any fiscal year within the three years preceding the determination of independence, other than compensation for board or board committee service; compensation paid to a Family Member who is an employee (other than an executive officer) of the Company; or benefits under a tax-qualified retirement plan, or non-discretionary compensation; or (C) A director who is the Family Member of a Person who is, or at any time during the past three years was, employed by the Company as an executive officer.” (for Nasdaq independence standards, see HERE).
Amended Rules for International Companies
OTC Sponsor
A company with a class of securities that has been publicly traded on a Qualified Foreign Exchange, or that has been SEC reporting for at least one year, may submit a written application to be exempted from the requirement to select an OTCQX sponsor. A company granted this exemption must submit a letter of introduction from their outside securities counsel in lieu of such a letter from an OTC sponsor. Prior to adopting this rule amendment, only international companies moving from the OTCQB to the OTCQX qualified for the exemption. Where outside securities counsel is used as a sponsor, the duties related to a sponsor and for the company to provide information to and seek input from such sponsor extend to the outside securities counsel.
The outside securities counsel sponsor letter is in substantially the same form as required for U.S. companies.
Change of Control
The same provisions as discussed above for U.S. companies also apply for international companies.
Transfer Agent Verified Shares Program
The new rules require Canadian companies to utilize a transfer agent participating in the Transfer Agent Verified Shares Program by April 1, 2020.
Clarification of Penny Stock Exemption Eligibility Criteria
The same provisions as discussed above for U.S. companies also apply for international companies.
Corporate Governance Standards
International companies that are not listed on a Qualified Foreign Stock Exchange must meet additional corporate governance standards including: (i) have at least two independent directors on its board of directors (companies listed prior to the rule change will have until January 1, 2021 to comply); (ii) have an audit committee comprised of a majority of independent directors; (iii) conduct an annual shareholders’ meeting and make annual financial reports available to its shareholders at least 15 calendar days prior to the meeting. Trusts, funds and similar entities may apply for an exemption to these new corporate governance requirements.
A company that fails to meet the requirements must notify OTC Markets immediately upon learning of the event or circumstance that cause the non-compliance and must regain compliance by the earlier of its next annual meeting or one year from the date of the non-compliance.
Application Package
The amended rules add the requirement that a company provide a current shareholder list from its transfer agent as part of its application package. In addition, OTC Markets will now require a background check authorization form as part of its application process.
Initial Disclosure
The amended rules have increased the period for which a company, that is not SEC reporting or Regulation A reporting, must post information on the OTC Website from 24 months to three years, as part of its initial disclosure obligations. All information must be posted in English.
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