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The
Pink
Sheets is an US based electronic inter-dealer quotation system published by
Pink Sheets LLC a private company. Pink Sheets LLC is not registered with
the SEC.
It provides quotes and last-sale information for over-the-counter securities
not listed on the OTCBB or one of the
other over the counter quote systems (ie. Yellow Sheets for debt; Gray Market
for one off trades). The Pink Sheets frequently appeals to small companies
who want a trading market but do not at present meet the criteria required
for trading on larger exchanges or quote systems -- in terms of
capitalization, number of shareholders, or who desire to avoid the cost or
ongoing compliance requirements associated with being a reporting issuer. The
Pink Sheets also serves as an interim location at which to place shares of
large but financially distressed companies that have been delisted from the
larger exchanges, but do not immediately meet the requirements to list on the
OTCBB.
The
Pink Sheets offers issuers:·
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Visibility in the US investment community, which in theory can increase
an issuer's brand recognition and create demand for its products and
services;
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Market Transparency through the availability of real-time market data,
in the form of competing market-maker quotes and buy and sell prices;
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Efficiency in trading by providing broker-dealers with an electronic way
system for trading OTC securities reducing costs in time and money; and
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Liquidity in terms of the ease with which an issuer’s securities can be
bought or sold in the market without unduly affecting the price of a stock.
A Pink
Sheets quote may also help an issuer raise capital as the quote will provide
private placement investors with a way of selling their investment in the
future. In short, the Pink Sheets is a viable option for issuers who chose
to gain the advantages of going public without incurring the costs of being a
public company.
Since
1999 the Pink Sheets has been steadily improving its profile in the mico-cap,
small-cap and ADR marketplace. It is about to go head to head with the OTC
Bulletin Board in attracting and keeping issuers that have substantial
operating businesses. The Pink Sheets will provide credible disclosure on
these issuers to the public by identifying and quoting them on a new premium
tier called the OTCQX. The Pink Sheets estimates that 20% of its current
issuers meet the requirements necessary to trade on the OTCQX tier. The Pink
Sheets may indeed prove a better option for TSX Venture companies looking to
have a US quote given the changes that have been implemented over the years
and the new changes now underway. Certainly it is worth a look as it is not
the same old barren ground of forgotten and left to die issuers that it once
was ten years ago. One could say the Pink Sheets is even becoming a sexy
place to be with no need to be a US reporting issuer to get the benefits of a
dual quote and the added benefit of the Pink Sheet quote acting as a signal
of your quality to the US marketplace. This article covers the changes
undertaken by the Pink Sheets in the last eight years to make it a better
option for those issuers that wish to provide their shareholders with the
liquidity and transparent disclosure of a US quote system but in a more
flexible regulatory environment that is suitable to the needs of smaller and
foreign issuers.
How Did the Pink Sheets Increase its Profile?
In the
last eight years the Pink Sheets has received a substantial boost in its
profile from two regulatory shifts as well as internal changes implemented by
the management of Pink Sheets LLC.
The
first regulatory shift occurred in 1999 when NASD amended its eligibility
rule 6530 to require all OTC Bulletin Board quoted companies to be reporting
issuers under the Securities and Exchange
Act of 1934. The phase in period for this new eligibility
requirement began in July 1999 and ended in June 2000, and resulted in over
3,000 former OTCBB companies moving over to the Pink Sheets. The second
regulatory shift was initiated by the Federal government in July 2002 and
resulted in the implementation of new SEC and exchange rules. The
Sarbanes-Oxley Act of 2002 (“SOX”)
increased the cost of regulatory compliance of reporting issuers considerably
which resulted in 300 or more companies choosing to move to the Pink Sheets
and over 150 companies to go private in the first two years of its
implementation. Not all of the companies that have moved over to the Pink
Sheets are gems, but a good number of them are solid and legitimate
companies. The Pink Sheets received a positive boost in numbers and profile
as a result of these two regulatory shifts.
The
Pink Sheets also received a boost to its profile by internal changes
implemented by management. The first being the implementation of a real time
electronic quotation service in September 1999. No more one day lags or
paper (the OTCBB still relies on the telephone to complete its trades). The
Pink Sheets real-time Level Two feed was also made available to the public in
May 2001. The next change undertaken was to setup a sophisticated website in
June 2000 that now provides the public with access to quotes, performance
charts, financial and other information about Pink Sheet quoted companies.
These two changes increased the visibility of the Pink Sheet quoted companies
and increased the level of transparency and efficiency of the trades being
conducted on the Pink Sheets.
Management of the Pink Sheets also became active in soliciting the SEC to
expand NASD’s short-interest-reporting rules to include over-the-counter
(OTC) equity securities, including those quoted on Pink Sheets. As a result
of these efforts new short-interest-reporting rules were made effective on
July 3, 2006. The campaign to address the shorting issue in the OTC market
positively increased the profile and legitimacy of the Pink Sheets among
those investors, market participants and issuers participating in this market
segment.
The Pink Sheets and Eligibility Requirements
The
internal changes of the Pink Sheets over the last three years have included
increasing the eligibility requirements for issuers looking to be quoted on
the Pink Sheets. The changes have been a market driven “race to the top” to
stifle the rogues and identify the cream. At one time all that was required
to become quoted on the Pink Sheets was a market maker, 20 stockholders or
more, current unaudited financial statements and a completed Form 15c-211.
The Form 15c-211 was reviewed internally by Pink Sheets LLC. The Pink Sheets
has moved well away from its original “open arms with a few adjustments”
approach to a new bold disclosure system, which it hopes will buy it, and the
securities it quotes, legitimacy with a broader base of the market. The
changes are set out below to give you an idea of how the Pink Sheets has
evolved and is evolving.
On
February 15, 2005, the Pink Sheets made it mandatory for issuers to make
their information publicly available on
http://www.pinksheets.com/pink/index.jsp
if a company was quoted by a market maker on an unsolicited basis. To do
this issuers were required to subscribe to the Pink Sheets News Service (set
up fee $500, annual fee $1500) before they could provide their financial
statements, basic information, and news releases to the Pink Sheets to meet
this new requirement. They were also required to provide a lawyers opinion
letter concerning their stock and information.
On
November 9, 2005, the Pink Sheets made it a requirement for market makers to
file a Form 15c-211 with NASD for clearance of companies for which they
planned on making unsolicited quotes on the Pink Sheets. Prior to this date
only solicited quotes required market makers submit a Form 15c-211 to NASD
for clearance for trades on the Pink Sheets.
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On February 6, 2006, the rules were changed again to limit the publication of
unsolicited quotes to issuers who meet one of the following five conditions:
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The
issuer of the securities is subject to Section 13 or 15(d) of the
Securities and Exchange Act of 1934,
is current in its filing obligations and has other seasoned securities
currently trading on the NYSE, AMEX, NASDAQ, OTCBB or the Pink Sheets;
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The
securities were delisted from NYSE, AMEX, NASDAQ or the OTCBB;
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The
issuer is a bank, savings and loan, or insurance company and is current in
its regulatory filing obligations;
The securities were issued as part of a bankruptcy plan of reorganization;
or
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The
security being quoted is a foreign ordinary, which is listed on a foreign
exchange, or an ADR representing such ordinaries.
The Next Chapter in Growth and Legitimacy for the Pink Sheets
On
March 16, 2006, the Pink Sheets introduced its biggest change yet to the Pink
Sheets and issuer eligibility. These changes will begin being implemented on
May 5, 2007 with a full roll out being completed by August 1, 2007. The
change being introduced is a tier structure with issuers being placed into
one of eight categories. The top tiers are referred to as the “OTCQX”. The
eight categories in theory are based on the level, quality and timeliness of
an issuer's disclosure.. The OTCQX categories require issuers to submit an
application directly to the Pink Sheets and hire a US resident
attorney or US resident investment bank that has registered and paid a
fee to Pink Sheets LLC to be a Designated Advisors for Disclosure (“DAD”) or
Principle American Liaison (“PAL”). The basic categories are as follows:
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OTCQX Premium tiers
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PremierQX - The highest tier
for U.S. companies. Must meet the continuing financial requirements of
Nasdaq Capital Market, provide credible disclosure to the marketplace, and
nominate a DAD.
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PrimeQX - Must have
ongoing business operations, a $0.25 initial bid price, provide credible
disclosure to the marketplace, and nominate a DAD.
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International OTCQX Premium
Tiers
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International PremierQX - The
highest tier for international companies. Must meet the financial
requirements of the NYSE's Worldwide Listing standards, be listed on a
qualified international stock exchange, provide home country disclosure to
U.S. investors in English, and nominate a PAL.
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International PrimeQX - Must be
listed on a qualified international stock exchange, provide home country
disclosure to U.S. investors in English, and nominate a PAL.
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Current Information (icon:
Pink Checkmark) - Must either be registered with the SEC pursuant to
12(g) of the 1934 Act and current in all electronic filings posted on the
SEC's EDGAR system, OR if not registered with the SEC, must meet Pink Sheets
Guidelines for Providing Adequate Current Information and have this
confirmed by quarterly letters from an attorney, all of which must be posted
on the Pink Sheets News Service and displayed on pinksheets.com*. Disclosure
is deemed to be current if it is posted within 120 days of the fiscal year
ended (annual reports) and within 60 days of the quarter ended (quarterly
reports); interim material events should be disclosed on a timely basis.
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Banks and Financial
Institutions - Companies that report to federal or state banking regulators
or to insurance commissions will be placed in the Current Information
category if they post onto Pink Sheets News Service the same information
they supply to their regulator (for example, to the FDIC), in a timely
manner. An attorney letter is not required.
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Foreign Private Issuers - Non-U.S.
companies that do not furnish electronic reports on the SEC's EDGAR system
and that are listed on a qualified international stock exchange will be
placed in the Current Information category if they post onto Pink Sheets
News Service the same disclosure that they supply to their home country
exchange and to their shareholders, in a timely manner. The disclosure must
be in English. No attorney letter is required.
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Limited Information (icon:
Yield Sign) - SEC registered companies must have posted some disclosure
on the SEC's Edgar system within the last six months. Non-SEC reporting
companies must have, at a minimum, quarterly financial reports prepared in
accordance with GAAP, including financial notes, and certifications by the
CEO and CFO, posted either on Pink Sheets News Service or SEC's EDGAR
system.
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No Information (icon: Stop
Sign) - The company does not make disclosure publicly available, or its
available disclosure is older than six months.
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Caveat Emptor/Buyer Beware
(icon: Skull & Crossbones) - There is a public interest concern
associated with this company, which may include a stock spam campaign or
other questions concerning the security or issuer. During a spam campaign,
companies that have not, at a minimum, qualified for the Current Information
category will also have their company's quotes blocked on pinksheets.com.
Is the Pink Sheets Right for You?
Obviously, if you are currently a US reporting issuer and quoted on the OTCBB
the Pink Sheets may not be for you even if you fit in their premium tiers.
You would actually be adding costs by switching to the OTCQX as you would
have to retain a DAD or PAL and subscribe to the Pink Sheets News Service
(set up fee $500, annual fee $1500) in order to post your information on the
Pink Sheets web site.
If, on
the other hand, you are a TSX or TSX Venture listed company you may be
interested in being quoted on the OTCQX premium tier. If so, you would first
file a Rule 12g3-2b package with the SEC to avoid inadvertently triggering US
registration requirements. You would then find a willing market maker, hire
a PAL and subscribe to the Pink Sheets News Service.
If, as
a TSX or TSX Venture listed company you wanted to bypass the yearly cost of a
PAL and the Pink Sheet pink check market/current information category is
sufficient for your needs, you only need to file a Rule 12g3-2B package with
the SEC, find a willing market maker and subscribe to the Pink Sheet News
Service.
Time
will tell how the new Pink Sheet system will work. It used to be that the
Pink Sheets had a nominal cost associated with being quoted as it was driven
by the market makers. Now, US resident lawyers, US resident investment
bankers and the Pink Sheets LLC will all be diving into the pockets of
issuers whose stock is quoted on the Pink Sheets. (The market makers are
barred by NASD rules from taking money from issuers they submit quotes for.)
These costs may indeed improve the quality of the Pink Sheets and the
companies quoted, or just be a new revenue streams for US resident lawyers
and US resident investment bankers with little real value added.
PDF VERSION
April 26, 2007
Venture Law Corporation
618 - 688 West Hastings Street
Vancouver, BC V6B 1P1
Phone: 604-659-9188
Fax: 604-659-9178
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