Getting on the US OTC Market the easy way

One of the major drivers of the American economy is the process of capital formation, fostering innovation and new enterprises. Entrepreneurs and other such business owners aim to raise capital for the process of growing their business and create jobs through various means. Every business regardless of the nature or size would ordinarily hope to go public by conducting an Initial Public Offering (IPO) and getting listed on an exchange. This is particularly true for small companies as they aim to build liquidity and visibility, and ultimately, long term shareholder value.

However, the increased costs and more stringent regulations associated with Securities and Exchange Commission (SEC) reporting has led to an increase in the number of private companies opting for the listing on the OTC Market’s OTC Pinks. The Rule 15c2-11 (“SEC Rule 15c2-11”) of the Securities Exchange Act of 1934 popularly known as the Exchange Act is one of the loopholes exploited by private companies seeking to go public without an SEC registration statement by a sponsoring market maker submitting a Form 211 with the Financial Industry Regulatory Authority (“FINRA”).

This allows them to be quoted on OTC Markets Pink Sheets quotation system. However, there are requirements to be met in order to go public, with the Pink Sheets offering several listing options and providing a method for companies to comply with the adequate public information requirement of Rule 15c-211, without filing reports with the SEC. Providing the information required by Rule 15c-211 will enable market makers to publish quotes in a company’s securities.

Requirements for a private company to go public

Below are the requirements to use the Form 211 and subsequently go public.

• The private company must have a minimum of 25 non-affiliate shareholders who paid cash consideration for their shares at least 12 months prior to the Form 211 filing date;
• The company must have up to 1 million shares outstanding, with a minimum of free 250,000 trading shares;
• The private company must never have been a shell company; and
• The private company must have its current public information available.

The Role of the Market Maker | Submitting Form 211

In order to use Rule 15c-211 to go public, the private company must locate a sponsoring market maker to submit the Form 211 application to FINRA on its behalf.  The sponsoring market maker is required to publish quotations for the company’s securities for at least 30 days.

Market Maker Fees in Form 211 Going Public Transactions

The market maker chosen by the company to file the Form 211 cannot accept payment for services rendered.

15c-211 Disclosures | Going Public Transactions

The disclosures required in Form 211 are as follows:

• Detailed description of the issuer’s business, products/services offered, assets and sources of revenue;
• Description of the company’s facilities including the location, square footage and whether owned or leased;
• Identification of officers, directors and holders of more than 5% of the company’s securities;
• Certificate of Incorporation and bylaws including any amendments;
• Current transfer agent generated shareholder list, indicating name and address of each shareholder, the number of shares owned, date of share ownership, and whether the shares are restricted, control, or free trading;
• Description of the company’s free-trading shareholder base, including a description of exemptions from registration under the Securities Act;
• Agreements creating restrictions, liens or encumbrances on, or relating to, the transfer or voting of shares;
• Agreements evidencing stock rights, warrants or options;
• All stock purchase or asset purchase agreements for last five (5) years;
• Disclosure of whether the company has entered into any discussions or negotiations concerning a potential merger or acquisition candidate;
• Merger and/or consolidation agreements;
• Partnership and/or joint venture agreements;
• Unaudited financial statements for the last 2 fiscal years and interim periods;
• Details of all private offerings including who solicited investors, how they were known to the solicitor, and how many individuals were solicited, and whom did not purchase;
• One full copy of the subscription agreement executed by each investor and copies of all checks from the subscribers or other proof of payment;
• Copies of Form D filed with the SEC;
• Description of all relationships among and between every shareholder and the issuer, its officers and directors, and other shareholders;
• A statement indicating whether any person or entity has control, written or otherwise, of the sale, transfer, disposition, voting or any other aspect of the shares listed on the shareholders list other than the shareholder;
• Whether any officer or director of the issuer had any regulatory action taken against him/her by the SEC, NASDAQ, NYSE or other securities-related regulatory agency and whether any officer or director of the issuer has been convicted of any felony charges within the last 5 years;
• A detailed business plan, which includes a detailed chronological account of each and every step the issuer has taken in furtherance of its stated objective since inception;
• A description of the steps the Company plans to take during the next year in furtherance of its business plan, including the activities in which the Company plans to engage, the names of the persons who will conduct these activities, and the expected dates of these activities;
• A description of any future financing plan;
• Any material agreements or letters of intent entered into by the Company;
• Schedule of all material patents, trademarks, trade names, service marks, and copyrights; and
• Legal opinion from company‘s securities lawyer as to tradability of the free trading shares.

Going Public on the OTC Pinks | Rule 144

Private companies that intend to public using 15c2-11 rely on the safe harbor of Rule 144 of the Securities Act of 1933 (the “Securities Act”) for creating their free trading shareholder base. However, it is worth noting that it is not available for companies that have been a shell company, or “blank check company” at some point. A registration statement is required to be filed by such a company with the SEC in order to go public without a reverse merger.

Thanks to IPO experts like IPO-Angels, businesses that want to get listed do not have to go through the stress and time-consuming process alone, as the IPO consultant helps businesses through the process, allowing them to focus on other important aspects of their operations.

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