Today, FINRA issued three Regulatory Notices requesting comments on proposed changes to various rules relating to financing transactions.

Regulatory Notice 17-14 requests comment on all of FINRA’s existing rules, operations and administrative processes that address the capital-raising activities of its member firms, including recent additions regarding capital acquisition brokers and funding portals.

Regulatory Notice 17-15 requests comment on proposed amendments to modernize, simplify and clarify FINRA Rule 5110, the Corporate Financing Rule, which affects all public offerings.

Regulatory Notice 17-16 clarifies the application of FINRA’s research rules to desk commentary by sales and trading and principal trading personnel and solicits comments on a proposal to create a limited safe harbor for eligible desk commentary that may rise to the level of a research report.

Comments on the Notices are requested by May 30, 2017.  See:

The final report from the forum held in November 2016 was recently published.  The recommendations of the forum often provide the Securities and Exchange Commission with insights regarding measures that could promote capital formation.  The report identifies as its three highest priority recommendations the following:

  • Maintaining the monetary thresholds that are part of the accredited investor definition but expanding the categories of qualifications for accredited investor status along the lines discussed in the Commission’s report on the accredited investor standard;
  • Moving forward with the Commission’s proposed amendments to the definition of smaller reporting company; and
  • Leading a joint effort with FINRA and NASAA to implement the principles advanced by the American Bar Association’s Task Force on Private Placement Brokers for a framework for finders and limited intermediary registration.

The full report can be accessed here:

On March 28, 2017, the U.S. District Court for the District of Salt Lake City granted the SEC’s request for a preliminary injunction in SEC v. Traffic Monsoon, LLC.  The SEC’s complaint was brought in connection with Traffic Monsoon’s operation as a web traffic exchange, in which it sold several different products designed to deliver “clicks” or “visits” to the websites of its customers, which the SEC alleged violated Exchange Act Section 10(b) and Rule 10b-5.  In its argument against the SEC’s request for a preliminary injunction, Traffic Monsoon relied on Morrison v. Nat’l Australia Bank Ltd. to assert that Exchange Act Sections 10(b) and Section 17 do not authorize a U.S. district court to enjoin activity related to foreign transactions, claiming that approximately 90% of Traffic Monsoon’s customers purchased products over the internet while located outside the United States.  In Morrison, the Supreme Court replaced the longstanding “conduct and effects test” with the “transactional test,” holding that Section 10(b) and Rule 10b-5 could be applied only in connection with the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States.

In Traffic Monsoon, the defendants claimed that notwithstanding the passage of Section 929P(b) of the Dodd-Frank Act, which reinstated the conduct and effects test that had been repudiated in Morrison, the SEC lacked jurisdiction in Traffic Monsoon in accordance with Morrison’s transactional test.  Section 929P(b) clarified, among other things, that U.S. district courts have jurisdiction over Exchange Act Section 10(b) and Section 17(a) actions brought by the SEC if the conduct and effects test has been satisfied.  However, the Traffic Monsoon court disagreed with the defendants’ claim, holding that the legal context in which Section 929P(b) was drafted, legislative history and express purpose of Section 929P(b) all point to a congressional intent that Section 10(b) and Section 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.  Using the conducts and effects test, the Traffic Monsoon court found that the SEC had jurisdiction to bring an injunction against the defendants, given that Traffic Monsoon was conceived and created in the United States, along with the promotion of its products.  This decision is notable because it represents the first time that a U.S. district court has affirmatively held that Section 929P(b) supersedes Morrison.  More importantly, it functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under U.S. securities laws, even if other U.S. district courts have continued to use Morrison’s transactional test.

A copy of the Traffic Monsoon decision is available at:–opinion.pdf.

Thursday, April 20, 2017
1:00 p.m. – 2:00 p.m. EDT

During this session, we will review the benefits and accommodations available to foreign private issuers, or non-U.S. domiciled companies, that choose to access the U.S. capital markets. We will discuss assessing status as a foreign private issuer, the initial and ongoing disclosure requirements for foreign private issuers, liability considerations, and related topics. The speakers also will address important recent developments significant to foreign private issuers, including:

  • Recent Staff guidance regarding the foreign private issuer definition;
  • Areas of focus for SEC comments, including the use of non-GAAP measures;
  • Corporate governance developments;
  • Exhibits, HTML and XBRL for foreign private issuers and IFRS filers; and
  • Areas of likely SEC focus, including potential rollback of certain specialized disclosure requirements, the disclosure effectiveness initiative and related matters.


For more information, or to register, please click here.

Please contact for a promotional code for 25% off tuition.

The following post was originally posted on the OTC Markets Blog.

The SEC recently published a paper on OTC equity securities on their website. While I am always happy to see more research around OTC equities, I am surprised by the paper’s overly negative and misinformed conclusions about the growth in OTC dollar volumes.

Moreover, I am concerned that these flawed conclusions, drawn from outdated research and a study of a small group of securities subject to investigative requests by the SEC or FINRA, will be used to develop new regulations that harm capital formation.  Regulatory action based on this skewed sample could negatively impact the vast majority of companies that trade successfully on the OTC Markets.

The OTC Markets are More Transparent Today

The SEC’s paper, “Outcomes of Investing in OTC Stocks,” by Joshua White, does not address the improvements in transparency and technology made over the past several years.  Instead, it focuses on negative outcomes for investors of Pink companies that provide no information to the market.

Academic studies show that more transparent companies that meet higher market standards have more liquidity and lower share volatility.  We have long recognized this to be true.  In fact, our mission is to provide investors with the information necessary to intelligently analyze, value and trade 10,000 U.S. and global securities through the broker of their choice.

We have done this by organizing these OTC equities into three tiered markets – OTCQX, OTCQB and Pink – based on the quality and quantity of information the companies make available.  OTCQX and OTCQB require companies to make current information available.  Within the Pink market, we further divide companies into those that provide “Current Information,” Limited Information” or “No Information.”

This segmentation has been instrumental in driving disclosure by more OTC companies and in providing sufficient information to investors when a company is NOT making adequate current information available, so they can perform additional due diligence or choose not to invest.

And it’s working.  Contrary to the paper’s portrayal, OTC trading volumes are no longer concentrated in opaque issuers.  In 2016, OTCQX, OTCQB and Pink companies with current financial disclosure comprised almost 99% of the total dollar volume of securities on our markets.  In comparison, the dollar volumes in Pink Limited Information and Pink No Information companies that provide delayed or no information to investors have declined 35% and 89%, respectively, since 2014.

We are pleased to see the author acknowledge that securities on OTCQX, our top market with the highest financial and disclosure requirements, deliver positive median holding period and daily returns for investors.  This demonstrates that the data-driven standards we have implemented for OTCQX – such as the prohibition of penny stocks, shells and bankrupt companies, material news disclosure requirements and common sense corporate governance – have addressed many of the problems mentioned in earlier studies.

OTCQX Index Performance in 2016


Shortcomings of the SEC’s paper

#1: The paper relies on incomplete data that is inherently negatively biased. 

The claim that OTC securities generate negative returns on average is based on an analysis of sample Electronic Blue Sheet (EBS) data that is gathered by the SEC and FINRA as part of investigations into possible federal securities law violations, so it’s no surprise investors lose money when trading these lower quality securities.

Furthermore, the EBS data set the author uses comprises 514 out of 8,900 stock symbols, representing less than 6% of all securities traded on our markets and a mere 1% of the dollar volume of all OTC securities.

The paper also does not mention that the majority of dollar volume in Pink securities in recent years has been in ADRs and F-shares of foreign companies that are listed in good standing on a qualified foreign stock exchange.   In fact, of the $200 billion in total dollar volume in 2015 cited in the paper, 88% was in ADRs and F-shares.

#2: The study does not reflect changes to our market structure in 2014.

The paper points to the increase in the number of Pink market securities (which have “no SEC registration or reporting requirements”) since 2012 to imply that the overall quality and transparency of our markets is declining.  The fact is the growth of the number of securities on the Pink market is due in large part to the introduction of higher OTCQB Venture Market standards in 2014.

We introduced the new OTCQB standards in part to require more disclosure from SEC reporting companies, precisely because a small minority of SEC reporting companies are the largest source of investor losses related to SEC microcap trading suspensions.  Existing OTCQB companies that did not or chose not to meet the new and improved standards, which include management background checks, an annual CEO/CFO certification and a minimum $0.01 bid price, were downgraded to the Pink market where broker-dealers can put the appropriate risk controls around them.  As validation for the success of these efforts, SEC reporting companies that chose not to meet the OTCQB standards have seen reduced trading volumes – a fact which merits only a footnote in the paper.

So, while a surface-level analysis of the growth of the Pink market might generate concerns, the fact is this is a result of a growth in the number of Pink ADRs and foreign shares and our increased market standards for SEC reporting companies.

 #3:  The paper erroneously concludes that OTC Markets is not successful at graduating companies to an exchange.

The number of companies we graduate is an important contribution to financial markets and a benchmark for success, but it should be analyzed in context of the graduation numbers of other global junior markets.  Last year, in a time when the IPO market was effectively closed, 44 companies graduated from our markets to an exchange.  In comparison, 16 companies graduated from TSX Venture Exchange to the Toronto Stock Exchange and only five companies graduated from London’s AIM market to the London Stock Exchange.

While OTC Markets Group celebrates our graduates, the fact is many OTC companies simply don’t want the regulatory burden and cost of a national exchange listing.  These include: ADRs and F-shares of international companies already listed on a foreign exchange, small community banks, closely-held companies and financially-distressed and bankrupt companies.

#4: Manipulative stock promotion is an industry-wide problem that is not limited to companies that do not provide disclosure to investors.

The paper considers OTC stock promotion data obtained from the website to claim that OTC stocks “are frequent targets of alleged market manipulation,” yet fails to mention that Nasdaq and NYSE MKT stocks are also listed on that site. In 2016, only one third of the dollar volume of promoted securities, was in OTC equities.  The lion’s share, or $11.3, billion, was in Nasdaq and NYSE MKT-listed securities. The vast majority of the promoted securities in 2016 were SEC-registered companies that were current in their reporting.  A minority of current SEC-reporting companies are the largest source of questionable activity in our markets.

The paper does highlight the principle that buying any anonymously promoted security, NASDAQ or OTC, for long term investment returns is a bad idea.

We strongly believe public companies should immediately address any fraudulent promotion in their securities, and our OTCQX Rules require that they “act promptly to dispel unfounded rumors which result in unusual market activity or price variations.”

We continuously monitor the market and may require companies subject to stock promotion to provide additional information to the marketplace regarding shareholdings of officers, directors and control persons, as well as company share structure, and issuance history. Securities undergoing extreme promotion are publicly identified with our Caveat Emptor (skull and crossbones) symbol to further alert investors to heightened risk.

We consistently review data and gather feedback from market participants on our promotion rules and policies, and look for ways to use our disclosure and data-driven standards to expose and reduce the market impact of fraudulent promotion.


The OTC markets offer a range of opportunities for investors and an efficient, transparent and less burdensome public markets for companies, from the largest ADR global champions to the smallest entrepreneurial ventures.  A study based on biased EBS and stock promotion data does not provide a true picture.  To make blanket statements about the characteristics and performance of all OTC stocks and the quality of our markets based on an incomplete examination of our markets does a disservice to the thousands of venture stage, established and international companies that trade here.

We would like to see a more thoughtful approach by regulators that uses the vast amounts of data available today to identify bad actors and accelerate thoughtful enforcement and regulatory changes.  Allowing highly visible, fraudulent promotion campaigns to flourish in any market impedes the capital formation process and tars all small companies.

About OTC Markets Group Inc.

OTC Markets Group Inc. (OTCQX: OTCM) operates the OTCQX® Best Market, the OTCQB® Venture Market, and the Pink® Open Market for 10,000 U.S. and global securities.  Through OTC Link® ATS, we connect a diverse network of broker-dealers that provide liquidity and execution services.  We enable investors to easily trade through the broker of their choice and empower companies to improve the quality of information available for investors.

To learn more about how we create better informed and more efficient markets, visit

Wednesday, April 26, 2017
11:00 a.m. – 12:30 p.m. EDT

After the 2016 decline in the number of U.S. initial public offerings (IPOs), commentators questioned whether the trend toward companies deferring initial public offerings and remaining private longer would be a new norm.  Already this year’s IPO market appears to be rebounding.  During the session, the presenters will discuss:

  • Whether cross-over (or late stage) private rounds still remain an important milestone on the road to the IPO;
  • U.S. IPO activity (sectors, VC- and PE-backed companies, foreign private issuer activity, syndicate structures);
  • Disclosure and governance trends among IPO issuers;
  • Dual track processes and the legal and business considerations;
  • Multiple share classes; and
  • Other developments.


CLE credit is pending for California and New York.

For more information, or to register, please click here.

On March 31, 2017, the SEC Staff published five Compliance and Disclosure Interpretations (C&DIs) relating to Regulation A.  These address an issuer’s ability to use Form 8-A to register securities under the Exchange Act concurrent with completion of a Tier 2 Regulation A offering; the suspension of Tier 2 reporting obligations in the case of a withdrawn offering; the age of required financial statements for a Tier 2 offering; the requirement to file a tax opinion as an exhibit to Form 1-A;  the inclusion of an auditor’s consent to use an audit report included in a Form 1-K annual report as an exhibit to the Form 1-K; and the application of Item 19.D of Guide 5 to Regulation A offering sales materials.

See the full set of C&DIs here:

In a pair of recent speeches, SEC Chief Accountant Wesley R. Bricker emphasized the importance of reinforcing and advancing credible financial reporting through effective audit committees and effective internal control over financial reporting (“ICFR”).  Mr. Bricker highlighted several ways to advance the role and effectiveness of audit committees, including the following:

  • Audit committees should understand the businesses they serve and the impact of the operating environment – the economic, technological, and societal changes – on corporate strategies.
  • Balancing audit committee workload is critical given the need for audit committees to stay current on emerging issues, whether financial, ICFR, or disclosure related through continuing education and other means.
  • Audit committees should consider training and education programs to ensure that their membership has the proper background and stays current as to relevant developments in accounting and financial reporting, including the recently-issued accounting standards relating to revenue recognition, leasing, financial instruments and credit losses.

With respect to ICFR, Mr. Bricker noted that management’s ability to fulfill its financial reporting responsibilities significantly depends on the design and effectiveness of ICFR.  Companies should also be aware that certain areas of ICFR may be impacted by the transition to the new revenue standards and that they should take appropriate steps to ensure the effectiveness of ICFR, including the following:

  • Refreshing other components of internal control over financial reporting, including professional competence.
  • Considering whether the existing controls support the formation and enforcement of sound judgments (regarding the nature of revenue recognition, the economic substance of revenue arrangements, whether to report revenue on a gross or net basis, etc.) or whether changes are necessary.
  • Making sure they have appropriate resources to evaluate revenue arrangements and properly apply the principles of the new standards.
  • Considering whether their reporting systems are designed to accurately capture the effects of changes to customer contracts and other information required for compliance with the new standards.
  • Keeping in mind that the effectiveness of any changes to internal controls is predicated on a comprehensive and timely assessment of risks that may arise as a result of applying the new standards. Appropriate identification and assessment of risks may require involvement of management and employees from both the accounting and financial reporting functions and other functional areas of a company.

Mr. Bricker’s speeches are available at: and

The Securities and Exchange Commission (the “SEC”) adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) by Title I of the Jumpstart Our Business Startups (“JOBS”) Act.  For example, under the definition of the term “emerging growth company” the JOBS Act required inflation indexing the annual gross revenue amount.  As well, the final rules address various provisions of the Securities Act and the Exchange Act, as well as Exchange Act periodic and current reports, Regulation S-K and Regulation S-X that did not currently reflect JOBS Act provisions. Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts used in connection with the crowdfunding exemption, and Section 4A(h)(1) states that such dollar amounts shall be adjusted by the SEC not less frequently than once every five years to reflect CPI changes.

See the final rule:

See the SEC press release:


Renaissance Capital reported a strong start to the year in its U.S. IPO Market 1Q 2017 Quarterly Review.  The first quarter of 2017 saw 25 IPOs, which raised $9.9 billion, a jump from 1Q 2016’s eight IPOs raising less than $1 billion.  This was a seven-quarter high for capital raised.   Median deal size also rose to $190 million.

IPOs by SectorsThere was an even distribution of IPO activity across various sectors.  The energy sector made up 20% of 1Q 2017 IPOs, raising $1.5 billion.  The tech sector raised the most capital this quarter, $4.0 billion from its four IPOs.  Biotech IPO activity saw its lowest levels since 4Q 2012 with only three IPOs this quarter.  The tech sector had the largest U.S. IPO since the Alibaba IPO in 2014 with the Snap IPO raising $3.4 billion.

Private equity-backed IPOs accounted for 12 IPOs, raising $5.1 billion in proceeds.  This was the first time in four years that PE-backed IPOs accounted for more capital raised and number of deals than venture capital-backed IPOs.  VC-backed IPOs made up 32% of the first quarter’s IPOs with eight IPOs, raising $4.1 billion in proceeds.

There were 16 IPO withdrawals and 33 new filings during 1Q 2017.  A number of unicorn companies, valued at over $1 billion, were on track for their IPOs but instead opted for M&A exits this quarter.