"Pink Sheets" - Part I

Thursday, March 1, 2007 - 00:00

Pink Sheets launched OTCQX, a new market tier providing a premier trading, quotation and disclosure venue for securities of the highest quality companies in the United States' over-the-counter markets. The OTCQX premier tier levels require issuers to meet specific standards and ongoing public disclosure obligations. The ultimate aim is to differentiate quality operating companies with audited financials from less transparent issuers who are listed on the Pink Sheets or Over-the-Counter Bulletin Board. Given the current regulatory environment and increased costs associated with Sarbanes-Oxley Act of 2002 ("SOX") compliance, Pink Sheets, LLC seeks to offer a viable alternative to reputable smaller companies and foreign issuers than listing on traditional exchanges.


The Pink Sheets is an electronic quotation system that displays quotes for many over-the-counter ("OTC") securities. Market makers who buy and sell OTC securities utilize the Pink Sheets1 to publish their bid and ask quotation prices. The stocks listed on Pink Sheets typically fall short of size or other requirements for listing on exchanges like Nasdaq or the American Stock Exchange ("AMEX").

Pink Sheets are traditionally considered risky investments because companies quoted on the Pink Sheets are not required to meet any listing requirements. The companies tend to be closely held, extremely small or thinly traded and do not file periodic reports or audited financial statements, making it extremely difficult for investors to obtain reliable, unbiased information.2

The lack of reliable information has led to a reputation for attracting defrauders, including most recently the Internet "pump and dumpers."3 Cromwell Coulson, Chairman and CEO of Pink Sheets, LLC, the privately owned company that provides services, software and financial information for the OTC securities markets, concluded that a new strategy was necessary to combat the market's poor reputation.4 Mr. Coulson believes that the Pink Sheets can be a worthy alternative to the traditional exchanges because it is not subject to the costly and onerous requirements of complying with SOX.5 Therefore, small and emerging quality companies can achieve visibility and liquidity in the capital markets without being bogged down by regulatory burdens.

In November 2006, Pink Sheets, LLC launched OTCQX with the goal of providing small reputable issuers the ability to differentiate themselves from the rest of the OTC market. In an effort to provide more transparency for investors, Pink Sheets will now utilize a categorization system for the securities traded.6 Issuers will be distinguished by their ability and willingness to provide adequate public disclosure in a credible and timely manner.7 Securities will be categorized into one of seven groups based on the level, quality and timeliness of the company's disclosure.

The new categories will be implemented on May 1, 2007. Companies that have substantial operating businesses and provide credible disclosure to the public qualify for the premium tier OTCQX which will launch on March 5, 2007. OTCQX is designed particularly to meet the needs of these companies in the post-SOX world. OTCQX will effectively represent the best companies trading over the counter and approximately 20% of the current Pink Sheet quoted securities will qualify for OTCQX listing. Part I of this article will provide a brief description of the seven categories and where issuers who are not able or willing to meet the standards of OTCQX will be placed. Part II of this article will offer an overview of the application process for admission to the premium tiers of OTCQX.

The New Pink Sheets

The seven categories will range from those that have "substantial operating businesses and provide credible disclosure to the public" to those that have "questionable promotion or other public-interest concerns."8 Issuers that wish to be designated as OTCQX or Emerging Equities List companies are required to submit an application in which they will agree to provide a minimum level of disclosure. The seven categories and their qualifications beginning with the highest level are:9


PremierQX - Issuers that are of size and quality to list on a National Stock Exchange. To be eligible for the premier tier, issuers must have:

a minimum bid price of $1;

hold annual shareholders' meetings;

financial qualifications of a National Stock Exchange;

100 round-lot beneficial holders; and

provide ongoing financial reports.

PrimeQX - same requirements as the PremierQX, except that companies listed in this level trade for less than $1.

2. Emerging Equities List

Issuers qualifying for this category are able to provide credible disclosure, including GAAP audited financials, but may not have sufficient business operations to qualify for OTCQX.

This tier is open to companies with no or nominal assets such as shells, special purpose acquisition companies, and business development companies.

Issuers must provide a letter from an attorney regarding the quality of their disclosure.

Issuers qualifying for this tier will have an Emerging Equity List logo (EE) next to their symbol.

3. Current SEC Filers

Issuers qualifying for this category are current SEC filers, but are not required to provide an attorney letter or management certification.

Pink Sheets will track companies through EDGAR and automatically categorize a company based on their filing status.

4. Adequate Current Information

Issuers qualifying under this tier must conform to Pink Sheets Guidelines for Providing Adequate Current Information,10 including reviewed financials and management certification.

Issuers must also subscribe to the Pink Sheets News Service to make information publicly available.

An audit is not required, but a letter from an attorney regarding the completeness of disclosure is required.

Federal or state regulated banks, insurance companies and companies listed on non-U.S. stock exchanges will only need to supply the information they file with their primary regulator in English and are not required to provide an attorney letter.

5. Limited Information Available

Issuers may fall into this category if they have limited information posted in the last six months, either through SEC's EDGAR system or the Pink Sheets News Service, but may not be current or complete.

A yield sign will be displayed next to their symbol.

6. Public Interest Concern

Companies falling in this category include stocks with unsolicited spam,11 questionable promotion or other public-interest concerns.

A skull and crossbones icon will be displayed next to the symbol to warn investors.

If no current information is available for companies that are the subject of unsolicited spam, their quotes will also be blocked on pinksheets.com.

7. No Information

All other Pink Sheets stocks.

A stop sign will be displayed next to the symbol.

Non-U.S. Issuers

In addition, Pink Sheets strongly encourages non-U.S. issuers to join. The International OTCQX Visa Program offers a streamlined admission process for non-U.S. issuers.12 International OTCQX will be available to non-U.S. issuers who meet certain threshold disclosure requirements.

Similar to the domestic OTCQX system, non-U.S. issuers will be categorized based on quality specifications. Non-U.S. issuers are not required to duplicate the primary listing process.13 However, to be eligible to join International PremierQX, the issuer must, in addition to meeting the qualifications for International PrimeQX, meet the financial requirements of the New York Stock Exchange's Worldwide Listing Standards.14 International PrimeQX requires the issuer be listed on a qualified international stock exchange, such as The London Stock Exchange or Hong Kong Exchange and appoint an advisor, known as a Proposing Advisor for Listing (PAL). Non-U.S. issuers are entitled to use SEC Rule 12g3-2(b),15 the information supplying exemption from SEC reporting requirements and SOX. Non-U.S. issuers are required to post their home-country disclosure in English on www.otcqx.com to provide U.S. investors easy access to their information.


The new category system created by the Pink Sheets should provide greater transparency, creating benefits for investors and issuers, alike. Public investors will be able to make investment decisions based upon enhanced disclosure provided by issuers in the upper tiers of the new category system, while also being able to distinguish between levels of qualities of issuers based upon the categories in which they are placed. Smaller issuers with sound corporate governance practices, healthy financial conditions and transparent disclosure systems will also be rewarded as their membership in more prestigious classes of Pink Sheets should enable them to attract greater investment.

1 The name "Pink Sheets" comes from the color of the paper the bid and ask prices were historically printed on.

2 See "Pink Sheets," at www.sec.gov/answers/pink.htm.

3 These defrauders are able to manipulate and promote shares of stock to unsophisticated investors in places such as Internet chat rooms. Joe Gose, Raising the Bar, Pink Sheets Launching New Tier to Highlight Quality. The PIPEs REPORT (March 15, 2006).

4 Id.

5 The Best of the OTC Market, at www.otcqx.com/docs/OTCQXBrochure.pdf.

6 Pink Sheets Establishes New Categories for All Pink Sheets Traded Securities. Internet Wire (Nov. 6, 2006).

7 Id.

8 Press Release issued by Pink Sheets LLC, dated Nov. 2006.

9 Pink Sheets Establishes New Categories for All Pink Sheets Traded Securities. Comtex (Nov. 6, 2006).

10 Specific disclosure requirements are available on the Pink Sheets website at www.pinksheets.com/otcguide/issuers_index.jsp.

11 Pink Sheets has had problems with securities promoters, spammers and their financiers who flood investors with unsolicited spam emails and faxes promoting OTC securities. See Pink Sheets Proposes New SEC Rule Concerning Stock Promotion Activities, Comtex (Apr. 28, 2006).

12 OTCQX A New Gateway to U.S. Markets, at www.otcqx.com/docs/OTCQXBrochure.pdf.

13 International OTCQX Visa Program, OTCQX A New Gateway to U.S. Markets, available at www.otcqx.com/docs/OTCQXBrochure.pdf.

14 Id. See NYSE Worldwide Listing Standards, available at www.nyse.com/regulation/listed/1147474807398.html.

15 Securities Exchange Act of 1934.

M. Ridgway Barker is Chair of the Corporate Finance & Securities Practice Group of Kelley Drye & Warren LLP. Randi-Jean G. Hedin is a Partner in the Corporate Finance & Securities Practice Group. Acknowledgement is given to Kristen A. Hartofilis, an Associate at Kelley Drye & Warren LLP, for her efforts in the preparation of this article.

Please email the authors at mrbarker@kelleydrye.com or rhedin@kelleydrye.com with questions about this article.