For an Adobe Acrobat (pdf) version of this paper, click here (approx. 30K)
Copyright 2006, Enable IPC Corporation. All rights reserved.
To contact us:
25520 Avenue Stanford, Suite 311 Valencia, CA 91355 T: (661) 775-9273 F: (661) 775-9274 Email: info@enableipc.com
sold to the public) it must do so in an organized marketplace where buyers and sellers can converge. These marketplaces may be called “stock exchanges” or “stock markets”. Companies that trade shares of their stocks on an exchange are called “issuers” and also known as “listed” companies.
Stock Markets
In the United States, there are several organized stock markets. The largest and best known are:
• The New York Stock Exchange (NYSE) Operated by the NYSE Group, a corporation; ~2,700 issuers listed; Stringent listing requirements
• NASDAQ Operated by the NASDAQ Stock Market, Inc.; ~3,300 issuers listed; Less stringent listing requirements than NYSE
• American Stock Exchange (AMEX) Operated by its members under an LLC; ~800 listed companies; Moderate listing requirements
With some exceptions, companies that become listed on these are established, profitable firms well beyond the start-up stage. A new company (or a company that has not historically performed well) can also “go public”, but it generally cannot do so on one of the major markets because a new company would probably be unable to meet the listing requirements.
Short History of the OTCBB
Just because a company cannot meet the listing requirements of an organized stock market or exchange does not mean it cannot be publicly traded, however. A company can issue public shares through what is know as the “over-the-counter" (or, OTC) markets. OTC stocks generally trade electronically or by phone through either the “pink sheets” or the “Over-the-Counter Bulletin Board”.
The “pink sheets” (so called because when the securities used to be quoted in hard copy, the color of the paper was pink) is an electronic system that is run by a private company called Pink Sheets, LLC. There are no listing requirements for a company to trade on the pink sheets. And, although companies trading on the pink sheets must have “adequate current information” publicly available, no reports have to be filed with the SEC.
The Over the Counter Bulletin Board (OTCBB) was established in 1990 (as a mandate by the Securities and Exchange Commission [SEC]) as an electronic trading medium that showed real-time quotes, volume, etc., just like an exchange. But, in reality, it is a quotation service for stocks that are not listed on an exchange.
It was a great idea, but there were some problems. The SEC initially did not require companies to file any quarterly or annual reports to trade on the OTCBB. Scam companies traded on the OTCBB as well.
While some rules were put in place to help separate the wheat from the chaff so to speak, by and large the scams were not significantly wiped out until the NASD (who runs the OTCBB) and the SEC did a wise thing in the late 1990s: they required all securities trading on the OTCBB to file quarterly and annual reports with the SEC (just like securities trading on the NASDAQ, American and NYSE) and to comply with securities regulations.
One indication of how well this worked to rid the OTCBB of the cons is the fact that, before the new rules went into effect, over 7,000 securities were trading on the OTCBB. Afterwards, the number went down to just over 3,300,.
About the OTCBB
The reputation of the OTCBB is not completely intact; it is still a medium that offers risky securities that portend huge profits or complete losses, and there are still some schemes out there (e.g., "pump and dumps", biased reporting, and others). But, it serves its purpose well. It provides a liquid market and a methodology for people that believe in the potential of a company to invest and get out (hopefully) when they want.
The OTCBB is operated by NASDAQ and the National Association of Securities and Dealers (NASD) who oversee the system. At this writing, there are around 3,300 securities listed on the OTCBB. The only listing requirements, as we stated earlier, are that the company must be fully reporting with the SEC; in other words, it must comply with all the SEC’s reporting requirements of companies on any other exchange.
Since the requirements are not as stringent, the securities listed tend to be riskier investments. In fact, many (if not most) of the main line brokerage houses will not recommend OTCBB stocks to their customers.
OTCBB companies also tend to be volatile in their price and the number of shares traded on a given day can vary widely (some trade millions of shares per day while many others do not trade at all).
But, for the most part investors buy and sell stocks on the OTCBB because they think the companies listed there have the potential to do very well. There are a few that do, indeed, make a lot of money for their investors.
When the companies on the OTCBB are successful, they may become listed on another exchange (such as the Nasdaq or American and, on rare occasions, even the NYSE) and the investors who believed in the company while it was on the OTCBB can do very, very well.
Some Interesting OTCBB Statistics
The following data was put together using statistics from the OTCBB activity reports and have not been double-checked for accuracy. However, we believe they approximate the reality of the state of the OTCBB during the time reported.
In the first 8+ months of 2006, 128 OTCBB securities were promoted to either the NASDAQ, American or New York Stock Exchange. 309 other securities were promoted from other OTC markets (e.g., the pink sheets) to the OTCBB.
On the other hand, during the same period, 262 securities were demoted to the OTCBB from other exchanges (like the NASDAQ, American and New York Stock Exchange). And, 307 additional securities were demoted from the OTCBB to “other OTC” markets, like the pink sheets.
There were other deletions and additions for multiple reasons, including bankruptcies, mergers, listed warrant expirations and other pre-planned terminations. Overall, the number of securities quoted daily on the OTCBB in July 2006 averaged 3,304, compared with 3,245 in July 2005.
What is the State of the OTCBB Today?
The OTCBB continues to be an active system. During July 2006 over 37 billion shares traded in just under 1,000,000 transactions.
Additional data of interest can be found on the OTCBB website. A wealth of data is available there, including companies that have "graduated" to other exchanges, new additions to the OTCBB and other market statistics (click on "Market Statistics" and choose the data you want).
The OTCBB is a valuable resource for investors and small companies alike. While the "boiler rooms" and the pump and dumps still exist, we do not believe they are as prevalent as they once were and savvy investors should be able to tell the difference.
