Championing more equitable markets

September of 2021 marked an important milestone for OTC Markets, as amended Securities Exchange Act Rule 15c2-11, which modernized the requirements for public quoting in OTC stocks and bonds, became effective.  Based on these changes and our new role as a Qualified Interdealer Quotation System, OTC Markets assumed greater responsibility, serving as a trusted information source for broker-dealers in monitoring ongoing issuer disclosure and compliance.

Underscoring a decade of enhanced regulation that began in 2012 when OTC Link ATS was established as a FINRA member broker-dealer and SEC-registered ATS, this pivotal moment continued the trajectory of increasing oversight in our markets and validating our status as regulated market operator.  Akin to our national securities exchange counterparts, we’ve earned regulatory recognition for the crucial role we play in driving investor transparency and increasing price efficiency across the financial markets’ ecosystem.

A new door to the Public markets has opened

As our markets have advanced and grown, a new door to the public markets has opened, that has expanded the breadth of U.S. and global companies that choose to trade on OTC Markets.  Many thrive with us over the long term, while others progress through our market tiers to ready themselves for a national exchange listing.  Our markets are right-sized to accommodate the needs of companies at their infancy and through maturation—with standards to support a diverse range of industry leaders and market innovators.  Collectively, the OTC market provides companies with a gateway to become public and the ability to direct list or IPO, establish themselves as good corporate citizens, and develop themselves in the same manner as their counterparts that trade on national exchanges.

We believe now is the time that qualified OTC-traded companies, supported by established public markets and guided by strong corporate governance principles, should be given ample opportunity to earn the same access to capital and regulatory privileges granted to exchange-listed securities.  Companies should be treated equally based on their merits, irrespective of the commercial venue on which they have chosen to trade.  These building blocks will strengthen the foundation of capital formation.

Driving Equal Treatment through Regulatory Modernizations

We continue to advocate on behalf of our companies and advance the narrative for common-sense legislative amendments to expand access to capital and reflect the evolution of the OTC Markets. Below are just a few examples of proposed solutions and regulatory modernizations that would keep pace with changes in market structure.

  • Create an efficient path for OTCQX companies to offer Employee Stock Ownership Plans (ESOPs) so their employees can share in the company’s success
  • Allow qualified OTCQX securities to be eligible for margin treatment to increase shareholder value and support capital formation
  • Expand Reg A+ so that seasoned public companies can conduct at-the-market (ATM) offerings to efficiently access capital and close the arbitrage between private offerings and market prices
  • Gain preemption under state securities laws for secondary transactions in OTC securities of companies that make current information publicly available if there is not a reasonable state exemption
  • Ensure that the Main Street Growth Act legislation (H.R. 2899), intended to help venture stage companies, equally includes both exchange and OTC markets

There is historical precedence for this type of shift to a more level playing field.  Mirroring a point in time, this evolution is similar to when Nasdaq emerged as world’s first electronic stock market with an innovative trading system that connected OTC market makers across the country.  A decentralized network, where scrappy brokers competed for every trade, and opportunistic investment banks could bring entrepreneurial companies public, became the home to tech mavens including Cisco Systems, Intel Corp., and Microsoft Corp.  Some of the earliest  pioneers, Nasdaq’s top-tier companies,  were in fact the beneficiaries of margin eligibility, access to capital, and Blue Sky preemption.  These benefits were not available to all Nasdaq listed companies, only the ones that specifically established and qualified.   For example, every security on Nasdaq was not automatically margin eligible, just established companies with significant assets, revenues, and liquidity.  These types of regulatory recognitions are the aspirational building blocks for today’s public companies that will allow them to climb the ladder of success.

America has benefited by way of competition from the OTC markets in trading issuers that can qualify for national securities exchanges.  By challenging the status quo and offering a greater choice of trading partners, the once upstart Nasdaq OTC network upended an antiquated centralized NYSE model and its monopoly on trading.  Today, this relay continues with OTC Markets now carrying that torch.  A regulated and data-driven market operator supporting a formidable network of broker-dealers, connected by technology–committed to the tenets of increasing transparency, market efficiency, and investor protection.

Public companies should be treated equally

Public companies that provide the same level of disclosure and meet comparable regulatory requirements should be treated equally, regardless of where they trade. Companies are free to choose their listing or trading destination based on value, just as broker-dealers seek best execution in the market, and investors benefit from the choice of broker-dealers and diverse business models when buying and selling stocks.  Public companies should be measured and regulated on their merits, not by the commercial trading venue on which they choose to display their ticker symbol. By removing outdated restrictions and providing fundamental legislative building blocks, we can give qualified OTC companies the ability to maximize the benefits of being public.

OTC Markets Group continues to champion the regulatory modernizations that increase the benefits of being a public company and expand access to capital. Legislators should be inclusive of, and seek to support, all qualified companies and non-exchange traded securities as they seek to improve market efficiency.  Healthy competition is fundamental to capital markets and all companies deserve an equal opportunity to demonstrate value and accelerate the next wave of innovation.

Check out other blog posts on market structure and learn more about OTC Markets Group.

R. Cromwell Coulson is President, CEO and a Director of OTC Markets Group, responsible for the company’s overall growth and strategic direction. Since leading the acquisition of OTC Markets’ predecessor business in 1997, Cromwell has transformed the company from a privately-held publisher of broker-dealer quotations into a publicly-traded company operating three public markets for 12,000 securities that trade nearly $445 billion in dollar volume annually. Cromwell is a strong advocate of improving capital formation, supporting a diverse ecosystem of broker-dealers, and empowering investors with increased disclosure and transparency. He has testified before Congress and spoken on these and other issues at numerous industry conferences. Cromwell is currently the Co-chair of the STANY Market Structure Committee and a former Chair (2017-2018) of the FINRA Market Regulation Committee that advises FINRA on rulemaking and trading issues. Prior to OTC Markets, Cromwell was an institutional trader and portfolio manager at Carr Securities Corporation. He holds an OPM from Harvard Business School and received his BBA from Southern Methodist University.

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