An Investor’s Guide: Common Issues with Company Disclosure 

It is important to understand that the officers and directors of public companies are responsible for providing accurate and complete investor disclosure. 

Ensuring that investors have access to material information so they can make informed investment decisions is critical to efficient market pricing and a cornerstone of federal and state securities laws.   

One of our roles at OTC Markets Group is to provide a tailored platform for companies to demonstrate compliance with U.S. securities regulations and assure their disclosure is publicly available.  To accomplish this objective, we consolidate disclosure filed with the SEC, banking regulators and non-U.S. exchanges. For companies that do not provide ongoing disclosure through a securities regulator, we offer the Alternative Reporting Standard (ARS). It provides a disclosure framework and a service that allows companies to publish their reports directly with OTC Markets to make information available to the market in a direct and consistent manner. 

Our website, www.otcmarkets.com, provides investors with a baseline of information for all companies that trade on our markets, providing the ability for investors to make informed decisions when they evaluate non-SEC reporting companies alongside companies that follow other reporting standards.  

We encourage investors to analyze company disclosures, check other information sources and do their own due diligence in researching companies and the people involved before making any investment.  Because documents published under the Alternative Reporting Standards are available for all to see, investors often have questions regarding how the information disclosed affects a company’s tier designation.    

Below is an overview of our procedures and some of the common reasons why reports published on our platform do not qualify a company to move up to the Pink Limited or Pink Current Information tiers – even when a company has filed a recent financial report. It is our policy to only communicate with issuers and their securities counsel regarding their specific disclosure materials. 

 

The Disclosure Process  

For broker-dealers to publicly publish their price quotations, a public company must fully provide basic investor information per SEC Rule 15c2-11 and our ARS disclosure guidelines.  In our role as a Qualified Interdealer Quotation System, we monitor ongoing company disclosure and identify for broker-dealers which securities have made the required information publicly available. 

Simply publishing a report does not automatically result in a tier/status change for a given security. Rather, once a report is published, an analyst will first process it to confirm the availability of information required under SEC Rule 15c2-11  standards. For companies utilizing the Alternative Reporting Standard, we confirm that the requirements of the Pink Basic Disclosure Guidelines for the Current Information and Limited Information tiers are met. 

When our analysts identify incomplete company disclosure, errors, or inconsistencies within company disclosures, we notify the company and work with them to submit the amended disclosures.    

OTC Markets does not conduct merit reviews.  Our automated processes and analyst procedures are designed to monitor that a baseline of required information is publicly available in a consistent format. Importantly, companies that do not wish to undertake this process to qualify for the Pink Current or Pink Limited designation under the Alternative Reporting Standard always have the option to register their securities and become SEC Reporting, or have their securities quoted on the Expert Market.   

For reference, more information about this process can be found here. 

 

Incomplete Disclosure 

With over 11,000 companies trading on our markets – the details matter.  One of the most common issues we see is incomplete information.  Investors should look at whether the company has posted all the required information in their Disclosure Statement.  We include a fillable form on our website to help guide companies through this process.    

Common examples include not publishing the names of beneficial owners, controlling corporate shareholders, or convertible noteholders. Companies often overlook this requirement, yet this level of detail is an essential part of understanding who has a controlling interest in the company.  

OTC Markets also frequently identifies incomplete share issuance history and failure to report all convertible notes issued or outstanding during the required period. This information is important for an investor, as is including a change in a security’s total shares outstanding and understanding potential dilution risks.   

 

Mislabeled Information and Inconsistencies 

Quite often, we receive reports that are labeled incorrectly (e.g., “Management Discussion” instead of “Quarterly Report”). Or, when uploading, a company might publish a report with an incorrect period end date that is inconsistent with the actual reporting period. While these may appear to be insignificant errors – we need the company to adjust the report – so that our systems can process it correctly and so that investors can find what they are looking for.  Imagine how challenging it would be to analyze information on thousands of securities if everything was labeled differently.   

Companies are also required to list the correct reporting periods on the title page.  Investors should look for clearly labeled reports with corresponding time periods that match.  If this information is missing or inaccurate, it cannot be properly displayed.  

Incomplete Financial Reports  

To meet the minimum information standards for Rule 15c2-11 and to qualify for Pink Limited or Pink Current, companies must publish financial statements for the Fiscal Year-End within the past 16 months. OTC Markets Group requires financial reports to be prepared according to U.S. GAAP or International Financial Reporting Standards (IFRS); they are not required to be audited.  Financial Reports must include each of the following: Balance Sheet, Statement of Income, Statement of Cash Flows, Statement of Retained Earnings (Statement of Changes in Stockholders’ Equity), Notes to Financial Statements and an Audit Letter if the financials have been audited. 

Companies will sometimes publish financial reports that are missing required financial statements, have missing or inadequate notes, or have significant errors (e.g., unbalanced Balance Sheet). These deficiencies mean that the security will continue to trade on the Expert Market or will not qualify to move to Pink Current Information tier until the issue is rectified.   

 

The Attorney Letter 

To qualify for the Current Information tier, companies must make the following information publicly available on a timely basis (90 days after fiscal year-end for Annual Reports; 45 days after each fiscal quarter end for Quarterly Reports).   

  • Financial Statements: Two most recent Annual Reports and any subsequent Quarterly Reports   
  • Disclosure Statement: Most recent Annual Report and any subsequent Quarterly Reports
  • Audit opinion letter or an Attorney Letter covering all the requirements of the Attorney Letter Guidelines (non-audited companies) 

The Attorney Letter is an alternative to having audited annual financial statements. To remain in the Current Information tier, companies must post a new Attorney Letter within 120 days of their fiscal year-end.  

The purpose of the Attorney Letter is to confirm that an attorney, who is permitted to practice before the SEC, has examined the company’s disclosure and determined that the information constitutes adequate current information and complies with the Guidelines. However, publishing an Attorney Letter does not guarantee that a company will move to the Current Information tier. Attorneys must follow a detailed set of guidelines when preparing these letters, and the letters are often not in accordance with those guidelines. We will work with the attorneys if they have questions about the guidelines, but it is ultimately their responsibility to review the content of the disclosures. There are certain legal and other service providers we have prohibited for not meeting their professional responsibilities.  Access the list of Prohibited Service Providers  

If you are interested in learning more about our reporting standards, we encourage investors to visit the Information for Pink Companies section of our website.  A summary of many of the frequently asked questions we receive can also be found in our 15c2-11 Resource Center. 

Lisabeth (Liz) Heese joined OTC Markets Group in 2004 as the Executive Vice President of Issuer and Information Services. Since then she has built a team responsible for: collecting and maintaining market data for over 5,000 issuers; development, sales and support of issuer-related products and services; and, monitoring issuer compliance with Company policies and procedures. Prior to joining OTC Markets, Liz spent 11 years at NASDAQ, serving as a Product Manager in the Trading and Market Services Division. Liz received a BA degree from American University.

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