Anyone who deals in the less well known and capitalized stock names has, by definition, a more robust risk tolerance than your standard ‘widows and orphans” type investor. For that reason, these hearty high risk/reward types tend to gravitate toward the more speculative stocks. And their hosting Exchanges…
There seems to be some confusion among readers regarding where Bulletin Board (OTCBB) and Pink Sheet (PS) stocks rank in the investment food chain. There are similarities, but also some significant differences. Both take listings by Market Maker subscription (instead of company application as on the big Exchanges) and are competitive quotation driven markets. While both markets are speculative, how a company gets to and stays on the OTCBB or the Pinks provides both the differentiation and ultimately the varying degrees of investment risk.
While OTCBB stocks are regulated and are required to provide financial information by remaining current in their filings with the SEC, Pink Sheet stocks don’t and can be a bit of a wild-west show. The Pink Sheets are basically just a competitive customer/market maker quotation service provided over the Internet and bereft of any reporting requirements. Any filing of financial documents is strictly voluntary. Accomplishing anything approaching due diligence by investors within that realm can be like riding a three legged horse. Pink Sheet investors have to virtually depend solely on the company for information, which could carry an unhealthy amount of bias.
There is one trend, however, that is benefiting and growing listings on the Pink Sheets. Given the prohibitive cost and regulation associated with an ongoing listing on a larger Exchange—Sarbanes Oxley, etc.—more companies have opted to go to the more welcoming Pink Sheets in their formative stages. With $100’s of thousands on the line to comply with an ever growing list of regulatory requirements, the cache of a legitimate Exchange listing may be just to onerous to a smaller company.
The broad difference between the two markets is categorized thusly:
- The OTC Bulletin Board® (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (OTC) equity securities.
- The Pink Sheets are not owned, operated or regulated by The NASDAQ Stock Market, Inc. or indeed any Exchange/regulatory entity. Pink Sheets LLC is a privately owned New York-based company delivering an Electronic Quotation Service, which only provides an Internet-based, real-time quotation service for OTC equities and bonds.
Neither Exchange has listing requirements coming remotely close to their larger brethren. They are, indeed, subscription services as opposed to an issuer-listed exchange such as the NASDAQ, AMEX or NYSE. Basically, if you have the fee and a broker sponsor, you can list on the OTCBB or the Pinks.
The main strength to OTCBB over the Pinks is that if you see an ongoing quotation showing on an OTCBB stock, that means that it is current in its regulatory filings—a necessary component to remaining listed. If the company is late filing, an ‘E’ is attached to the quote symbol until the situation is rectified. If the company fails to file within the 30-60 day grace period, the security will be removed.
And likely moved, unceremoniously, to the unregulated, non-reporting Pink Sheets. Starting to make sense?
Quotation of OTC securities on the Pink Sheets is subject to Rule 15c2-11. The issuer of the security may not apply to list or quote it on the Pink Sheets. It is a market maker that determines whether to quote an OTC security and initiates quotation by submitting a Form 211 to the NASD. Since there are no reporting requirements, it is actually possible for a market maker to quote securities in the Pink Sheets without the knowledge or permission of the issuer of the securities.
While Rule 15c2-11 is also necessary for the OTCBB folks, ongoing SEC filings are required. It’s pretty safe to assume that because of this reporting that the OTCBB companies have a more vested interest in the trading of their stocks as well as keeping shareholders informed.
While the Pink Sheets has been categorized as the ugly stepsister of the market, the OTCBB is more like a second cousin of the NASDAQ. The main differences between the OTCBB and the NASDAQ is that the former:
- does not impose listing standards;
- does not provide automated trade executions;
- does not maintain relationships with quoted issuers; and
- does not have the same obligations for Market Makers.
The OTCBB provides quotes on over 3300 securities through approximately 250 Market Makers. The NASDAQ has no dealings with OTCBB issuers; its role is to establish a fair and orderly market for its customers. Any beefs one may have with an OTCBB company goes through the SEC. The NASD deals with broker/trader conduct.
The Pink Sheets, originally a dealer to dealer telephone market, derived its name from the color of the quotation sheet published and circulated daily for these mostly microcap, formative securities
Up until a few years ago, with the advent of the Internet, there’s a good chance most investors had never heard or dealt in the Pink Sheet world. Since then, its visibility has improved to a point that issues and volumes have increased exponentially. While this may have added to the ‘legitimacy’ of the Pink Sheets, investors need to be very cautious; mainly due to the lack of regulatory filing requirements as well as a pretty much complete dearth of ongoing news and objective information.
Oh, and here are the OTC sites: http://www.otcbb.com and http://www.pinksheets.com Enjoy…