The SEC Recently Amended Rule 15c2-11.

What Does this Mean and How Does it Affect OTC Businesses?

In September 2020, the Securities and Exchange Commission (SEC) announced an amendment to Exchange Act Rule 15c2-11, which the commission describes as “an important component of the over-the-counter (OTC) market regulatory structure.”

The amendment has not been modified in nearly 30 years. With new changes in technology, access to markets, and OTC trading platforms, the SEC determined it was time to “modernize the rule… including to recognize advances in communications technology.”

Ultimately, this rule change necessitates action from companies trading via pink sheets on the Pink Market. The amendment generally focuses on increasing disclosure standards and ensuring that public information is current. Companies that do not take action by June 30th can expect to lose access to public markets.

Below, we will take a closer look at the recent 15c2-11 Amendment and discuss how it might affect a variety of OTC businesses.

What is the New SEC Disclosure Rule?

Rule 15c2-11 regulates the information that pink sheet companies must disclose in order to be traded by the general public. By omission, the rule also regulates the information that these companies don’t have to disclose to the general public.

In a recent announcement, OTC Markets stated, “The disclosure standards for the ‘Current Information’ and ‘Limited Information’ designations outlined in the Disclosure Guidelines for Alternative Reporting Companies are designed to meet the requirements for Rule 15c2-11.” The organization then goes on to state, “Companies may provide disclosure under either of these designations to OTC Markets Group through the Disclosure and News Service.”

Essentially, the amendment expands disclosure standards, meaning that companies will need to deliver more information in order to continue trading. This information includes standard financial information, along with disclosure of companies’ leadership structure, jurisdiction, and other relevant information.

According to the SEC, “The amended rule enhances disclosure and investor protection in the OTC markets by ensuring that broker-dealers, in their role as professional gatekeepers to this market, do not publish quotations for an issuer’s security when current issuer information is not currently available, subject to certain exceptions.”

Why is the Rule Important?

Reporting standards and disclosures are very important for pink sheet companies. Despite not appearing on major exchanges (NYSE, NASDAQ, etc.), the SEC still establishes and enforces rules. Failing to comply with SEC regulations is one of the most common reasons OTC traded companies lose value (and potentially face penalties).

The new rule is generally recognized as a solution to the lack of current disclosures that occasionally persist in the Pink Market. Without accurate, universally accessible, and current information, investors cannot make accurate investing decisions. Naturally, the consequences of withholding information from prospective investors can be significant.

“The technological advancements that have taken place since the rule was last amended us enable us to require that information in the OTC market can be more timely, enabling investors to make better informed decisions, and reducing fraud in these markets where retail presence is significant and, unfortunately, pump-and-dump and other frauds are too common,” said John Clayton, the current SEC Chairman who had significant oversight in the creation of this new rule.

Who Does the New Rule Affect?

The rule affects all companies that hope to trade and gain exposure via OTC Markets. The rule was announced in September 2020 and will be formally enforced beginning in September 2021. Reporting standards are now stricter, meaning some companies may need to change their current reporting and disclosure practices.

The rule also affects investors. Knowing that they now have more accurate and in-depth information, OTC market traders can now trade with a greater sense of security and confidence. The rule, naturally, will also affect broker-dealers that help facilitate these trades. Overall, the rule will likely make OTC markets safer and more accessible, which may help drive up the broader market’s overall values.

What Should OTC Companies Do to Prepare?

According to Joe Oltmanns, Senior VP of OTC Markets Group, “To ensure our issuer compliance has sufficient time to review your market status, you must subscribe to the OTC Disclosure and News Service by submitting the OTCIQ Order Form by June 30th.”

Confirming that your business is compliant with new disclosure standards will help prevent any interruptions. Companies that do not prepare for the new rule changes will lose access to public markets, beginning on September 28th (2021).

The OTC Markets form includes basic company information (name, address, state of incorporation, etc.), along with a selection of services. These services can include quote listings, as well as OTC Disclosure and News services.

Having access to platforms like OTC Markets can help Pink Market companies increase their exposure, improve branding, and potentially raise additional capital. Currently, there are thousands of pink sheet companies, which creates a competitive marketplace. Improving disclosures and making other appropriate changes will help companies throughout the industry remain competitive and accessible.

Joseph Oltmanns

Senior Vice President
Corporate Services

OTC Markets Group Inc.
300 Vesey Street, 12th Floor
New York, NY 10282
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