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2017-12-13 - OTC Rules

OTC Markets Group Policy Mandates Equal Access To Information For All

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Facebook, Twitter, LinkedIn and other social networking sites have irreversibly transformed the ways public companies interact with millions of potential investors. This interaction is difficult to regulate and can easily be abused by anonymous market manipulators who promote fraudulent campaigns that harm market efficiency and defraud investors. The OTC Markets Group issued this new policy to detect and prevent the spread of misleading information that is publicly disseminated to disrupt the efficient pricing of a security.  Since a company whose security is being promoted may not be directly involved or even aware of a promotion campaign for their securities, this policy will help the management of public companies who are obligated to provide accurate disclosure to investors and quickly address any misleading information that could affect the trading market for their securities.

Misleading information can be disclosed electronically, telephonically or by snail mail and can be easily identified because the disclosure:

  • fails to clearly identify the sponsor of the promotion;
  • focuses on a company’s stock rather than its underlying business;
  • uses highly speculative language or relies on grandiose numbers and figures;
  • provides unsupported statements about the stock price or its anticipated trajectory;
  • makes unreasonable claims related to an issuer’s operations;
  • suggests a promise of specific future performance of the stock or profit to investors;
  • omits material information;
  • indicates anonymous paid promotion which can be related to a pump and dump scheme;
  • urges the investor to take immediate action or else miss a great opportunity; and/or
  • fails to provide adequate risk factor disclosure related to the issuer’s security.

The OTC Markets Group monitors websites for potential promotional activity related to securities trading on their markets and will begin publicly identifying securities being promoted starting Q1 2018.  The securities that are the subject of stock promotion will be identified by a “promotion” risk flag next to the stock symbol on the OTC Markets Group websites as well as on market feeds.  After a company is identified with a flag, the OTC Markets Group may request the company to issue a press release to either confirm the information in the promotion is accurate or that it is misleading.  If the information is misleading, the company must make corrections to the claims made in the promotional materials and disclose any recent transactions by insiders or affiliates.  Additional information may be requested from the issuer’s transfer agent and other advisors associated with such transactions.  To avoid a run in with the OTC Markets Group or other regulatory agencies, issuers should read and implement best practices for issuers. Ultimately, the OTC Markets Group may remove a company from the OTCQX or OTCQB at its sole discretion and make referrals to the SEC, FINRA or other regulatory agencies.

Though it remains to be seen how companies will respond to this policy, it is clear that the OTC Markets Group has many resources to deter market manipulators and is not afraid to use them.

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