Blue Sky Compliance Data – Exemption Types & Data Transparency

Data Transparency is not simply about making more data available; it is about helping users, both business and technical, better understand a data set and use that information to improve processes and products across an organization.  This concept of “transparency” was a guiding factor in our development of the Blue Sky Compliance product. After analyzing our new data set and identifying additional areas for automation and process improvement, our latest blog delves deeper into  Exemption Type data and examines how users can leverage this data point to reduce complexity and increase automation.

Exemption Type data is a proprietary means by which OTC Markets categorizes the hundreds of rules across 54 jurisdictions which constitute the universe of Blue Sky rules for secondary trading.  We have further distilled these rules into 12 primary types for OTC equities.  Consequently, securities may qualify for multiple exemptions for a particular jurisdiction– this information is noted both in our data files and within Canari (our web-based Compliance tool).  This data provides compliance personnel with a straightforward and simple way to understand why an exemption is in place and whether multiple exemptions exist. 

Exemption Types

The following is an overview of the 12 Exemption Types. Ranked by their prevalence, they collectively constitute a high-level classification scheme for blue sky exemptions. 

• Manual Exemption – This covers 39.75% of all exemptions for OTC equities.  The manual exemption is a disclosure-based exemption focused on the inclusion of issuer data in a specified manual.

• Non-Issuer Transaction Exemption – This is a blanket exemption for all non-issuer (broker-dealer) transactions.  The following 5 states utilize this exemption type: New York, Pennsylvania, Delaware, Louisiana and Maryland.

• SEC Reporting Exemption – This is an exemption for SEC-Reporting issuers that are current in their disclosure.   The 3^rd most common exemption for OTC equities with 21.63%.

• OTCQX/OTCQB Exemption – This exempts securities trading on either the OTCQX or OTCQB markets.  Currently 37 states recognize this disclosure-based exemption, as the same ‘manual’ information is made available on OTCMarkets.com.

• FTSE/Foreign Margin Exemption – Exempts the constituents of the FTSE All World index, and in some cases, the ADRs of those securities.  Effective in 27 jurisdictions, it is the most common exemption for foreign issuers.

• TSX/TSXV Exemption – Exempts securities listed on the TSX or TSX Venture Exchange.  Currently, 22 States have an exemption for TSX securities. Only 2 states, Missouri and Wisconsin, have an exemption for TSX Venture securities.

• Foreign Issuer Exemption – This exemption is often a combination of ‘manual’ disclosure plus a financial test (e.g. Net Tangible Assets, Revenue).  For example, Montana requires Net Tangible Assets greater than 25 million and average revenue for the past 2 years to be greater than 5 million.

• Bank Exemption – This is an exemption for banks not organized as Bank Holding Companies.  Most jurisdictions include such an exemption.  There are 12 securities which have an exemption for all 54 jurisdictions – all these securities represent banks which are not organized as a bank holding company.

• OTCQX Exemption – An exemption for  securities trading on the OTCQX Market only.  This exemption applies to Idaho, Kansas, Vermont and Virginia.  

• Bank Holding Company Exemption – A bank-specific exemption which applies solely to Bank Holding Companies.  This exemption is not as common as the Bank Exemption with < 1% of all OTC equity exemptions. 

• 15c2-11 Exemption –  A Tennessee-specific exemption relating to the provisions of SEC Rule 15c2-11.

• Reg A Exemption – Exemption for SEC-Reporting issuers using the Regulation A reporting standard. 

Leveraging Data

After examining the list above, it is clear to see how compliance analysts may use this data to quickly understand how securities are exempt and focus their due diligence efforts accordingly. This data also lends itself to implementing automation logic based on comfort with certain exemption types but not others.  For example, the FTSE-based exemption focuses on a discrete, known list of ~2000 of the world’s largest public issuers.  Securities receiving this type of exemption might warrant a less rigorous compliance review than an SEC-Reporting Exemption which is only disclosure-based.  

Alternatively, logic could be put in place to denote securities that receive multiple exemption types for a jurisdiction.  Currently, ~20% of all security-jurisdictions exemptions have multiple exemption types.  This use case can then be correlated to some financial (Assets/Revenue) or trading data (Price/Market Cap) to triage workflow and prioritize the efforts of compliance analysts.

The following is an example of exemption data for Tencent (TCEHY) displayed in our Canari Compliance application:

Conclusion

By providing business users with applicable and actionable data, compliance processes can be streamlined, and automation can be effectively implemented. This process will take time and may be somewhat iterative, but the end result will drive significantly more business value over the long run. 

For more information on the analyses presented, or on the Blue Sky Compliance data product, please email marketdata@otcmarkets.com.

Note: All Data references as of October 30, 2020