History of Over the Counter Trading:

A few of the higher-quality Microcap stocks trade on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) (which has been bought by NYSE Euronext) and the National Association of Securities Dealers Automated Quotations (NASDAQ). When a stock cannot qualify to trade on the NYSE, AMEX or NASDAQ, then their trades are carried out over-the-counter. This means they are facilitated by market makers, stock brokerages who make markets in such stocks. Traditionally these were quoted only by the “Pink Sheets”, a company which published prices on pink sheets of paper which it sent to brokers.

In 1990, the SEC asked NASDAQ to create and manage the Over The Counter Bulletin Board (OTCBB) to give smaller companies better access to capital formation. Although there are no quantitative standards which must be met by a company in order for its stock to be quoted on the OTCBB, the company must file reports to the SEC in accordance with their rules. When a company submits its audited quarterly and yearly data to the U. S. government, then you can access its financial data on the SEC’s EDGAR server, right along side General Motors and Microsoft!

Over the last dozen years there have been many ups and downs in the economy and the stock market. In addition, reporting requirements have been increasingly tightened to curtail stock scams. In 1998 NASDAQ tightened its standards for being listed on their NMS and SMC market systems. Until 1999, OTCBB companies were not required to submit data to the government but January 1999 the SEC allowed NASDAQ to require that ALL be reporting companies. Next came the 2000 -2001 crash in Internet companies. During the 2000s, first Regulation D and then the Sarbanes-Oxley Act made reporting requirements more difficult and more costly, especially for small companies. Then came the recession of 2007. Therefore, over the years many stocks have moved from NASDAQ to the OTCBB and from the OTCBB to the Pink Sheets.

History of The OTCBB:

When it was created, the OTCBB quickly grew to list over 6,600 companies! After requiring government filings, in spite of the fact that a number of companies left the OTCBB for the Pink Sheets, there were still about 4,000 companies. After all, When a company submits its audited quarterly and yearly data to the U. S. government, then you can access its financial data on the SEC’s EDGAR server, right along side General Motors and Microsoft. During the early 2000s, each year from 50% to 75% percent of the OTCBB listings changed yearly! Today there is still a big turnover. There are still about 4,000 companies listed.

The OTC Markets:

The OTC Markets began as the Pink Sheets in 1904 when the National Quotation Bureau (NQB) printed an inter-dealer quotation service on pink paper. During the ’70’s, through the ’90’s the NQB owner had no interest in developing more sophisticated methods of electronic quotation. Therefore the Pink Sheets remained a paper quotation service for smaller, shakier, usually illiquid, companies and did not participate in the great economic surge of midcap and smaller listed stocks. NASDAQ, and later the OTCBB, grew immensely to fill the gap!

Then, in 1997 a new owner purchased the NQB and changed its name officially to Pink Sheets in the year 2000. More importantly, he immediately developed electronic products and information services which have greatly facilitated trade and improved the transparency of the OTC markets. Today, not only does this trading platform include pink sheet companies but more brokers trade OTCBB companies on this platform than on NASDAQ’s OTCBB platform!

As the Pink Sheets were a “Wild West” environment consisting of many types of companies, of many sizes, good and bad, active and inactive, the Pink Sheets set about creating market “Tiers” so that investors could distinguish the type of stock they were dealing with. Having done this, The Pink Sheets changed their name to the OTC Markets.

The OTC Market Tiers are:

• OTCQX — Many of the OTCQX companies are large companies, not microcaps! These companies are the equal of those listed on the NYSE, AMEX or NASDAQ. This market is worthy of a separate description (see below).
• OTCQB — These companies are reporting to the SEC. This is basically the same group of companies that you can find on the OTCBB.. There are no qualitative standards to be in this tier; however their financials must be audited in order to report to the SEC. Although you should treat these stocks as speculative, their financial information is available so that you can perform your due dilligence.
• Pink Sheets Current Disclosure — Although the US companies in this group do not report to the SEC, they do report to the Pink Sheets. Their financials do not have to be audited nor do they need to comply with Sarbanes-Oxley rules. A foreign company will qualify for this tier simply by reporting to their own country’s version of the SEC! Therefore, some of these foreign companies are of very high quality and are not microcaps. However, they may be much less liquid trading on the pink tier than trading on an exchange in their own country. Although you should treat these stocks as speculative, their financial information is available so that you can perform your due dilligence.
• Pink Sheets Limited Disclosure — Some of these companies have financial reporting problems, economic distress, or are in bankruptcy but can make the limited information they have publicly available. Others may simply be simply unwilling to meet Pink OTC Markets’ Guidelines for Providing Adequate Current Information.
• Pink Sheets No Information — These companies are either unwilling or unable to provide disclosure to the public markets – either to a regulator, an exchange or Pink OTC Markets.
• Pink Sheets Caveat Emptor — These companies not only have inadequate public disclosure but are being pump and dumped.

The OTCQX:

In 2006 the Pink Sheets launched the OTCQX. This is a premium quotation, trading, and disclosure service for OTC securities which gives strong public companies a vehicle to provide ongoing disclosure. This new market is further divided into several tiers including International OTCQX Visa Program – A streamlined admission process to OTCQX for international issuers that are listed on a qualified foreign stock exchange.

A critical component of the OTCQX is the role of Designated Advisors for Disclosure (DADs), which each issuer must appoint prior to being admitted to OTCQX. The DAD requirement introduces to U.S. investors the protections of a professional “gatekeeper” for secondary market disclosure. The DAD for an OTCQX-listed company is required to participate in the preparation of the company’s disclosure statements and prevent issuers with inadequate or questionable disclosure from joining OTCQX.

The OTCQX has been especially popular with foreign companies wanting to trade in the US but who dislike Sarbanes-Oxley and are more comfortable with the OTCQX requirements, more similar to European systems.