OTC Securities

Over-the-counter (OTC) securities make up a wide variety of both domestic and foreign securities. OTC securities have historically been more volatile and less liquid than shares trading on a listed exchange. These securities typically have less publicly available information due to differences in reporting standards. Unlike exchange listed equities, there are no minimum listing standards for companies to be quoted on the OTC markets. OTC Markets Group has created three tiers to provide investors transparency around the amount of information that companies make available.

Many OTC companies are small or micro-cap securities, including penny stocks, which generally should be considered speculative investments. Investors should conduct thorough due diligence and understand the unique attributes of these securities before making an investment decision.

For more information, please visit FINRA and The OTC Markets Group.

What are OTC Securities?

Over-the-counter (OTC) securities are securities that are not listed on a major exchange in the United States. There are approximately 10,000 OTC securities that make up a wide array of different companies, including large cap American Depositary Receipts (ADRs), foreign ordinaries, and small and micro-cap growth companies. While some OTC securities report to the Securities and Exchange Commission (SEC), others may follow a different reporting standard or may not file reports to any regulatory body. Shares that have been delisted from a U.S. exchange can begin trading OTC. Conversely, shares that once traded OTC can “graduate” to a listed exchange. The OTC Markets Group has organized these securities into three tiered markets – OTCQX, OTCQB and Pink – based on the quality and quantity of information companies make available.

What are the OTC Tiers?

OTC Markets Group has created three tiers based on the quality and quantity of publicly available information. These tiers are designed to give investors insights to the amount of information that companies make available. Securities can move from one tier to another based on the frequency of financial disclosures. The tiers give no indication of the investment merits of the company and shouldn’t be construed as a recommendation. For additional information on the eligibility requirements, including corporate governance standards, please visit OTC Markets.

OTCQX -This is considered the highest tier of OTC Markets securities concerning the amount of available information. In order to be eligible for the OTCQX tier, the firms must be current on all regulatory disclosures, maintain audited financials and cannot be a penny stock, a shell corporation or be in bankruptcy.

• OTCQX International

  • Maintain a listing on a Qualified Foreign Exchange or be an SEC Registered Company
  • Be incorporated outside of the U.S.
  • Not a Shell Company or a Blank-Check Company
  • Follow the International, SEC or Regulation A Reporting Standard

• OTCQX U.S.

  • Not be a Shell Company, Blank Check Company, Penny Stock or be subject to any Bankruptcy or reorganization proceedings

  • Follow the SEC, Regulation A or OTC Markets’ Alternative Reporting Standard

  • Audited annual financial reports in accordance with U.S. GAAP

• OTCQX U.S. Banks

  • Must be a U.S. bank, U.S. bank holding company, U.S. thrift, U.S. thrift holding company or U.S. financial institution that is regulated by a U.S. Bank Regulator

  • Follow the U.S. Bank or SEC Reporting Standard

OTCQB -This tier is designed for early stage or growth companies. Companies must have a minimum bid price of $0.01. These companies must be current in their regulatory reporting and have audited annual financials in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Similar to OTCQX, these companies cannot be in bankruptcy.

• OTCQB

  • Must have at least 50 Beneficial Shareholders, each owning at least 100 shares

  • Have a freely traded Public Float of at least 10% of the total issued and outstanding of that security

  • Must follow SEC, Regulation A, U.S. Bank, International or Alternative Reporting Standard

Pink Market -This tier is also known as the Open Market. There are no minimum financial standards and can include a wide variety of companies including foreign companies, penny stocks, shell companies and other firms that choose not to disclose financial information. Within the Pink market, firms are classified as showing Current Information, Limited Information or No Information.

• Pink Current Information

  • Issues must be current in reporting to the SEC, a U.S. Bank Regulator, Foreign Qualified Exchange or OTC Markets’ Alternative Reporting Standard.

• Pink Limited Information

  • Issuers in this category have been delinquent in filing financial disclosures for less than six months.

• Pink No Information

  • If the issue is delinquent in filing financial reports for greater than six months, they are categorized as “No Information”.

Grey Market - All other securities that are traded over-the-counter are on the Grey Market. Grey Market securities are not quoted by broker dealers due to a lack of investor interest, lack of financial information or lack of regulatory compliance. OTC Markets Group does not maintain a relationship with Grey Market Securities. Securities that become suspended move to the Grey Market after 4 days without published quotes.

NOTE: Current quote and volume information are not available for Grey Market securities. Please use caution when placing orders in these securities.

What are Microcap Securities?

While definitions vary, microcap securities generally consist of companies with a market capitalization of less than $500 million. Microcaps can be listed on a national exchange but most are traded in the OTC market. These companies tend to have low stock prices but can trade at any price. Microcap companies that are not listed on a national exchange and have a share price of less than $5 are considered Penny Stocks. Microcap securities can be quoted on any OTC Market Tier. For more information, please read the SEC’s Microcap Stock: A Guide for Investors

Microcap equities typically have some attributes that make them different from other equities.

Lack of Public Information

• The biggest difference between a microcap stock and other stocks is the amount of publicly available information about the company. Most large public companies file reports with the SEC that any investor can get for free from the SEC's website. Professional stock analysts regularly research and write about larger public companies, and it's easy to find their stock prices on the Internet or in newspapers and other publications. In contrast, information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices in the market will be based on full and complete information about the company.

No Minimum Listing Standards

• Companies that trade their stocks on exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies quoted on OTC Markets generally do not have to meet any minimum standards, although companies quoted in OTC Market’s OTCQX and OTCQB marketplace are subject to initial and ongoing requirements.

Risk

• While all investments involve risk, microcap stocks are among the most risky. Many microcap companies are new and have no proven track record. Some of these companies have no assets, operations, or revenues. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to microcap stocks involves the low volumes of trades. Because many microcap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock.

NOTE: Due to the lack of publicly available information and the illiquid nature of these securities, microcap stocks may be the target of fraud or other manipulative schemes. For more detailed information, please visit the SEC’s website on Microcap Fraud.

What are ADRs and Foreign Securities?

Investors have the ability to invest in foreign companies in two main ways in the OTC market.

An ADR (American Depositary Receipt) is a receipt for shares of foreign-based companies that entitles the receipt holder to all dividends and capital gains. ADRs allow U.S. investors to buy shares of foreign-based corporations’ securities on U.S. exchanges. Many of the ADRs that are quoted on the OTC markets are unsponsored. For unsponsored ADRs, the depositary bank established the ADR with or without the consent of the company. Unsponsored ADR programs may not provide shareholders with all the benefits of direct ownership, including voting rights that are often granted to sponsored ADR shareholders. The ticker symbols consist of five letters and end with the letter “Y”.

There are a number of foreign companies whose shares trade in U.S. dollars on the OTC markets. These shares are referred to as F shares. U.S. broker-dealers continuously price F shares in accordance with local market share price movements and available liquidity. While trades are executed in U.S. dollars by U.S. broker-dealers, the shares are settled, cleared and custodied in the local market or, under certain conditions, in the U.S. (Canadian or DTC eligible F Shares). The ticker symbols consist of five letters and end with an “F”.

Learn more about Schwab Global Investing Services.

Learn more about ADRs and F Shares at OTC Markets.

What is the Caveat Emptor Designation?

OTC Markets Group designates certain securities as ‘Caveat Emptor’ and places a skull and crossbones icon next to the stock symbol to inform investors that there may be a reason to exercise additional care and perform thorough due diligence before making an investment in that security.

The Caveat Emptor Designation may be assigned when OTC Markets Group becomes aware of one or more of the following:

• Promotion – The security is the subject of stock promotion that may be misleading or manipulative. Promotional activities may include news releases, spam email, and newsletters, whether they are published by the issuer or a third party.
• Investigation of Fraud or Other Criminal Activities – There is an investigation or other indication of fraudulent or other criminal activity involving the company, its securities or insiders.
• Suspension/Halt – A regulatory authority or an exchange has halted or suspended trading for public interest concerns (i.e. not a news or earnings halt).
• Undisclosed Corporate Actions – The security or company is the subject of a corporate action, such as a reverse merger, stock split, or name change, without adequate current information being publicly available.
• Other Public Interest Concern – OTC Markets Group may determine that there is a public interest concern regarding the security. Such concerns may include but are not limited to promotion, spam or disruptive corporate actions even when adequate current information is available.

Learn more about the Caveat Emptor Designation at OTC Markets.

Trading Experience

Due to the unique nature of OTC securities, there may be differences in the trading experience.

• Most OTC securities are not marginable.
• Due to the manual nature of the marketplace, notice of executions and outs may take longer than expected.
• Certain securities may require cleared cash up-front for purchases.
• Foreign securities may be charged a $50 foreign transaction fee as well as the standard commission. Please consider contacting Schwab Global Investing Services at 1-800-992-4685 for updated quotes and to review your trade routing options.