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FINRA AND THE MARKETPLACE

In recent years the Financial Industry Regulatory Authority (“FINRA”) has evolved from a rather unobtrusive SRO (Self-Regulatory Organization) into a dominant and pervasive securities market gatekeeper with sweeping authority. FINRA currently monitors and regulates the trading of more than 5,000 securities and employs a staff in excess of 3,400 individuals. FINRA is responsible for processing 15c2-11 applications by market makers which result in the issuance of a trading symbol to, and the quotation of, the securities of issuers.  Moreover, issuers with securities that publicly trade on the OTC markets must give FINRA advance notice on corporate actions ranging from reverse splits, name changes, changes of domicile, changing trading symbols and changes in capital structure. FINRA processes these corporate actions and relays the new information to the capital marketplace.  If FINRA does not process a corporate action, it does not relay to the capital marketplace.  Due to the ever-increasing complexity of FINRA compliance, representation by experienced securities counsel is essential for public issuers. In many cases, FINRA requires attorney opinion letters in conjunction with the processing of corporate actions. 

History

FINRA is a self-regulatory organization (“SRO”).  Originally founded in 1939 as the National Association of Securities Dealers (NASD), FINRA’s was designed to regulate and license member brokerage firms, broker-dealers, their sales staffs and the exchange markets. As the scope of their powers grew, it became apparent that this modest SRO was slated to become a significant securities regulator.  On July 26, 2007, the NASD officially became FINRA.     

FINRA AS A GATEKEEPER

Not long ago, the responsibility of enforcing securities regulations fell solely on the shoulders of the Securities & Exchange Commission (SEC). In today’s environment, FINRA has become an equally dominant gatekeeper in establishing and maintaining market transparency while simultaneously processing procedural matters.  FINRA has established the Office of Fraud Detection and Market Intelligence, which monitors the trading activity and press releases of issuers in the marketplace and conducts related investigations. FINRA performs many important functions including being tasked with the responsibility of maintaining an orderly marketplace. FINRA works with the SEC as a front line in the detection and prosecution of issuers when regulatory infractions occur. Although FINRA in and of itself does not possess the legal authority to prosecute issuers, it actively engages in investigations related to market fraud and shares its findings with prosecutorial authorities (i.e., the SEC for civil actions and either Department of Justice of State Attorney for criminal violations).  FINRA maintains a vital role in the enforcement of securities laws by providing prosecutorial bodies with crucial data that substantiates when a violation has occurred.    

CORPORATE ACTIONS AND SYMBOL CHANGES

Effective September 27, 2010, the SEC approved FINRA Rule 6490 (Processing of Company Related Actions).  Rule 6490 requires that corporations whose securities are trading on the over-the-counter market (OTCQX, OTCQB, OTCBB or pinksheets) notify FINRA in a timely manner of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, and name changes.  The Rule grants FINRA discretionary power when processing documents related to the announcements. FINRA requires that the Company complete the Issuer Company-Related Action Notification Form and submit it to FINRA no later than 10 calendar days prior to the record date of the corporate action. In addition to the Form itself, FINRA requires the submittal of numerous supporting documents and historical corporate information.  The historical corporate information must be on either the issuer’s letterhead or that of such issuer’s attorney.  Symbol changes associated with name changes are not automatic and must be specifically requested.  FINRA charges issuers fees for the processing of corporate actions. Late filings (i.e., less than 10 days prior to the effectiveness of the corporate action) are subject to late filing fee penalties, which can be substantial. 

Chart of FINRA Filing Fees

   
 SEA RULE 10b-17 ACTION
Timely SEA Rule 10b-17 Notification$200
Late SEA Rule 10b-17 Notification  Submitted at least 5 calendar days prior to Corporate Action Date$1,000
Late SEA Rule 10b-17 Notification  Submitted at least 1 calendar day prior to Corporate Action Date$2,000
Late SEA Rule 10b-17 Notification Submitted on or after Corporate Action Date$5,000
Other Company-Related ActionFee
Voluntary Symbol Request Change$500
Initial Symbol SetupNo Charge
Symbol DeletionNo Charge
AppealsFee
Action Determination Appeal Fee$4,000 

PROCESSING 15C-211’S

A Form 211 must submitted to the FINRA OTC Compliance Unit by a market maker to initiate or resume quotations in the OTC Markets or any other inter-dealer quotation medium pursuant to SEC Rule 15c2-11.  Notably, it is the market maker that seeks to quote the securities of the issuer that must submit the Form 211 to FINRA and respond to comments.  The essence of the Form 211 is to ensure that the market maker has completed satisfactory due diligence on the issuer to post quotations and make a market in the issuers securities.  There is no standard time to process a 211 and clear the market maker to begin quoting a security on the OTC market. The time it takes to review a 211 may vary significantly depending on many factors, including whether or not FINRA has to request additional information from the market maker that submitted the form and how long it takes the market maker to respond to requests for additional information. The Form 211 review process is considered proprietary and thus, FINRA will only discuss details of the filing or review directly with the firm that submitted the Form 211. In addition to obtaining a copy of a current registration statement (if any) and the issuer’s most recent annual report on Form 10-K and quarterly reports on Form 10-Q, a summary of the information requirements in a Form 211 includes:

  1. The exact name of the issuer and its predecessor (if any);
  2. The address of its principal executive offices;
  3. The state of incorporation, if it is a corporation;
  4. The exact title and class of the security;
  5. The par or stated value of the security;
  6. The number of shares or total amount of the securities outstanding as of the end of the issuer’s most recent fiscal year;
  7. The name and address of the transfer agent;
  8. The nature of the issuer’s business;
  9. The nature of products or services offered;
  10. The nature and extent of the issuer’s facilities;
  11. The name of the chief executive officer and members of the board of directors;
  12. The issuer’s most recent balance sheet and profit and loss and retained earnings statements;
  13. Similar financial information for such part of the 2 preceding fiscal years as the issuer or its predecessor has been in existence;
  14. Whether the broker or dealer or any associated person is affiliated, directly or indirectly with the issuer;
  15. Whether the quotation is being published or submitted on behalf of any other broker or dealer and, if so, the name of such broker or dealer; and
  16. Whether the quotation is being submitted or published directly or indirectly on behalf of the issuer, or any director, officer or any person, directly or indirectly the beneficial owner of more than 10 percent of the outstanding units or shares of any equity security of the issuer and, if so, the name of such person, and the basis for any exemption under the federal securities laws for any sales of such securities on behalf of such person.

FINRA AND DTC

The Depository Trust Company (“DTC”) is a central securities depository in the U.S. which was originally created as a central holding and clearing system to handle the flow of trading securities and the problems with moving physical certificates among trading parties.  DTC is regulated by the SEC, the Federal Reserve System and the New York State Department of Financial Services.  Today, and as noted by the SEC, “…DTC provides clearance, settlement, custodial, underwriting, registration, dividend, and proxy services for a substantial portion of all equities, corporate and municipal debt, exchange traded funds, and money market instruments available for trading in the United States.  In 2010, DTC processed 295,000,000 book entry transfers of securities worth $273.8 trillion.” Like a Form 211 submittal to FINRA, an issuer cannot make direct application to DTC for eligibility.  An application must be submitted and sponsored by a DTC Participant.  A current list of DTC Participants can be found on the DTC website.  So to start, an issuer needs to establish a relationship with one of these participants.  A Participant can submit an application for a new offering or for a security that has already been issued and is already trading on the OTC market.  FINRA and DTC are two separate entities with separate functions; however, they share communication with each other and often work together.  Each time an issuer submits a notice to FINRA of a corporate action, FINRA shares such information with DTC prompting DTC to review the issuer for continued DTC eligibility.  DTC will notify the issuer of the review and request certain updated information, such as a new legal opinion confirming the issuer’s continued eligibility. 

FINRA AND TRADING SUSPENSIONS

Pursuant to FINRA Rule 6440, in circumstances in which it is necessary to protect investors and the public interest, FINRA may direct members to halt trading and quotations in OTC Equity Securities if: (i) such security is an ADR and its principal foreign market has halted trading for regulatory reasons because of public interest concerns other than solely for material news, a regulatory filing deficiency, or operational reasons; (ii) such security is a listed security and the national securities exchange, or foreign securities exchange or market imposes a trading halt in the listed security; or (iii) FINRA determines that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the security or has caused or has the potential to cause major disruption to the marketplace and/or significant uncertainty in the settlement and clearance process. Additionally, trading and quotation in OTC Equity Securities may be halted if ordered by the SEC or pursuant to any other lawful government order.

FINRA ATTORNEYS

As with all regulatory processes, the assistance of an experienced attorney is vital.  In the case of a FINRA request for the processing of a corporate action, the assistance of qualified counsel can make the difference of a delay that can stretch for months, or even the refusal by FINRA to process the action at all.  Although a Form 211 is submitted by a market maker, such market maker works closely with securities counsel in completing the application and putting together all the required supporting documentation.  Moreover, FINRA generally requires a legal opinion regarding tradability as part of the application process. 

Inquiries of a technical nature are always encouraged. Contact us now.

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NASDAQ Capital Market Listing Requirements

5505. Initial Listing of Primary Equity Securities

A Company applying to list its Primary Equity Security on the Capital Market must meet all of the requirements set forth in Rule 5505(a) and at least one of the Standards in Rule 5505(b).

(a) Initial Listing Requirements for Primary Equity Securities:

(1) (A) Minimum bid price of $4 per share; or

(B) Minimum closing price of $3 per share, if the Company meets the requirements of the Equity or Net Income Standards under Rules 5505(b)(1) or (b)(3), or of $2 per share, if the Company meets the requirements of the Market Value of Listed Securities Standard under Rule 5505(b)(2), provided that in either case the Company must also demonstrate that it has net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2 million, if the issuer has been in continuous operation for at least three years; or net tangible assets in excess of $5 million, if the issuer has been in continuous operation for less than three years; or average revenue of at least $6 million for the last three years. A security must meet the applicable closing price requirement for at least five consecutive business days prior to approval.

For purposes of this paragraph (B), net tangible assets or average revenues must be demonstrated on the Company’s most recently filed audited financial statements filed with, and satisfying the requirements of, the Commission or Other Regulatory Authority, and which are dated less than 15 months prior to the date of listing.

(2) At least 1,000,000 Unrestricted Publicly Held Shares;

(3) (i) At least 300 Round Lot Holders; and (ii) at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500; provided that (ii) shall not apply to a Company whose business plan is to complete one or more acquisitions, as described in IM-5101-2;

(4) At least three registered and active Market Makers;

(5) If the security is trading in the U.S. over-the-counter as of the date of application, such security must have a minimum average daily trading volume of 2,000 shares over the 30 trading day period prior to listing (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days, unless such security is listed on the Exchange in connection with a firm commitment underwritten public offering of at least $4 million; and

(6) In the case of ADRs, at least 400,000 issued.

(b) Initial Listing Standards for Primary Equity Securities:

(1) Equity Standard

(A) Stockholders’ equity of at least $5 million;

(B) Market Value of Unrestricted Publicly Held Shares of at least $15 million; and

(C) Two year operating history.

(2) Market Value of Listed Securities Standard

(A) Market Value of Listed Securities of at least $50 million (current publicly traded Companies must meet this requirement and the price requirement for 90 consecutive trading days prior to applying for listing if qualifying to list only under the Market Value of Listed Securities Standard);

(B) Stockholders’ equity of at least $4 million; and

(C) Market Value of Unrestricted Publicly Held Shares of at least $15 million.

(3) Net Income Standard

(A) Net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years;

(B) Stockholders’ equity of at least $4 million; and

(C) Market Value of Unrestricted Publicly Held Shares of at least $5 million.

NASDAQ Global Market Listing Requirements

Initial Listing Requirements and Standards for Primary Equity Securities

A Company applying to list its Primary Equity Security on the Global Market shall meet all of the requirements set forth in Rule 5405(a) and at least one of the Standards in Rule 5405(b).

(a) Initial Listing Requirements for Primary Equity Securities:

(1) Minimum bid price of at least $4 per share;

(2) At least 1,100,000 Unrestricted Publicly Held Shares;

(3) (i) At least 400 Round Lot Holders; and (ii) at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500; provided that (ii) shall not apply to a Company whose business plan is to complete one or more acquisitions, as described in IM-5101-2;

(4) If the security is trading in the U.S. over-the-counter market as of the date of application, such security must have a minimum average daily trading volume of 2,000 shares over the 30 trading day period prior to listing (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days, unless such security is listed on the Exchange in connection with a firm commitment underwritten public offering of at least $4 million; and

(5) In the case of ADRs, at least 400,000 issued.

(b) Initial Listing Standards for Primary Equity Securities:

(1) Income Standard

(A) Annual income from continuing operations before income taxes of at least $1,000,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years;

(B) Stockholders’ equity of at least $15 million;

(C) Market Value of Unrestricted Publicly Held Shares of at least $8 million; and

(D) At least three registered and active Market Makers.

(2) Equity Standard

(A) Stockholders’ equity of at least $30 million;

(B) Two-year operating history;

(C) Market Value of Unrestricted Publicly Held Shares of at least $18 million; and

(D) At least three registered and active Market Makers.

(3) Market Value Standard

A Company listed under this paragraph does not also need to be in compliance with the quantitative criteria for initial listing in the Rule 5500 series.

(A) Market Value of Listed Securities of $75 million (current publicly traded Companies must meet this requirement and the $4 bid price requirement for 90 consecutive trading days prior to applying for listing if qualifying to list only under the Market Value Standard);

(B) Market Value of Unrestricted Publicly Held Shares of at least $20 million; and

(C) At least four registered and active Market Makers.

(4) Total Assets/Total Revenue Standard

A Company listed under this paragraph does not also need to be in compliance with the quantitative criteria for initial listing in the Rule 5500 series.

(A) Total assets and total revenue of $75 million each for the most recently completed fiscal year or two of the three most recently completed fiscal years;

(B) Market Value of Unrestricted Publicly Held Shares of at least $20 million; and

(C) At least four registered and active Market Makers.

NASDAQ Global Select Listing Requirements

Initial Listing Requirements for Primary Equity Securities

For inclusion in the Global Select Market, a Company must meet all requirements in Rule 5315(e), all applicable requirements of Rules 5315(f)(1), 5315(f)(2) and 5315(f)(3) and all applicable requirements in the Listing Rules.

However, if a Company is a closed end management investment company registered under the Investment Company Act of 1940, it must meet all requirements in Rule 5315(e), all applicable requirements in each of Rules 5315(f)(1) and 5315(f)(2), but not requirements of 5315(f)(3).

(c) A closed end management investment company that is listed concurrently with other closed end management investment companies that have a common investment adviser or whose investment advisers are “affiliated persons” as defined in the Investment Company Act of 1940 (a “Fund Family”) shall be eligible if:

(1) the total Market Value of Unrestricted Publicly Held Shares in such Fund Family is at least $220 million;

(2) the average Market Value of Unrestricted Publicly Held Shares for all funds in the Fund Family is $50 million; and

(3) each fund in the Fund Family has a Market Value of Unrestricted Publicly Held Shares of at least $35 million.

(d) A business development company as defined in Section 2 of the Investment Company Act of 1940 must meet all requirements in Rule 5315(e), and all applicable requirements in each of Rules 5315(f)(1) and 5315(f)(2), but not the requirements in 5315(f)(3). In lieu of meeting Rule 5315(f)(3), a business development company must have a Market Value of Listed Securities of at least $80 million.

(e) The Primary Equity Security shall meet all of the following:

(1) If the Company is not listed on the NGM, a bid price of at least $4 per share;

(2) At least 1,250,000 Unrestricted Publicly Held Shares;

(3) Market Makers

A Company that meets the requirements of the NGM Income Standard ( Rule 5405(b)(1)) or the NGM Equity Standard ( Rule 5405(b)(2)) shall have at least three registered and active Market Makers. Otherwise, a Company shall have at least four registered and active Market Makers;

(4) If the security is trading in the U.S. over-the-counter market as of the date of application, such security must have a minimum average daily trading volume of 2,000 shares over the 30 trading day period prior to listing (including trading volume of the underlying security on the primary market with respect to an ADR), with trading occurring on more than half of those 30 days, unless such security is listed on the Exchange in connection with a firm commitment underwritten public offering of at least $4 million; and

(5) In the case of ADRs, at least 400,000 issued.

(f)

(1) Ownership Requirement

The Primary Equity Security shall meet no less than one of the following:

(A) At least 550 Total Holders and an average monthly trading volume over the prior 12 months of at least 1,100,000 shares per month; or

(B) At least 2,200 Total Holders; or

(C) (i) A minimum of 450 Round Lot Holders; and (ii) at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500; provided that (ii) shall not apply to a Company whose business plan is to complete one or more acquisitions, as described in IM-5101-2.

(2) Market Value Requirement

The Unrestricted Publicly Held Shares shall meet one of the following:

(A) A Market Value of at least $110 million; or

(B) A Market Value of at least $100 million, if the Company has stockholders’ equity of at least $110 million; or

(C) A Market Value of at least $45 million in the case of: (i) a Company listing in connection with its initial public offering; and (ii) a Company that is affiliated with, or a spin-off from, another Company listed on the Global Select Market; or

(D) A Market Value of at least $70 million in the case of a closed end management investment company registered under the Investment Company Act of 1940.

(3) Valuation Requirement

A Company, other than a closed end management investment company, shall meet the requirements of sub-paragraph (A), (B), (C), or (D) below:

(A) (i) Aggregate income from continuing operations before income taxes of at least $11 million over the prior three fiscal years, (ii) positive income from continuing operations before income taxes in each of the prior three fiscal years, and (iii) at least $2.2 million income from continuing operations before income taxes in each of the two most recent fiscal years; or

(B) (i) Aggregate cash flows of at least $27.5 million over the prior three fiscal years, (ii) positive cash flows in each of the prior three fiscal years, and (iii) average market capitalization of at least $550 million over the prior 12 months and total revenue of at least $110 million in the previous fiscal year; or

(C) (i) Average market capitalization of at least $850 million over the prior 12 months, and (ii) total revenue of at least $90 million in the previous fiscal year; or

(D) (i) Market capitalization of at least $160 million, (ii) total assets of at least $80 million, and (iii) stockholders’ equity of at least $55 million.

NYSE American Listing Requirements

Companies must meet minimum listing requirements that include a specific financial liquidity and corporate governance criteria. NYSE American also maintains the right to deny an application if they believe it is necessary to protect investors, even if all of the technical requirements have been met. Typically, the NYSE American would reject an application for the nature of the company’s business, regulatory history and future projections, and reputation of management. As one of the most prestigious exchanges to be listed on, the NYSE American affords its patron companies many opportunities not found elsewhere. To gain an initial listing, companies must meet one of the following standards: (variations for Standard 1, 2, 3 ,4a , 4b) Standard 1 :
  1. Pre-tax income of at least $750,000
  2. Market Value of Public Float of at least $3 Millions
  3. Stockholders Equity of $4Million
  4. Minimum Price of 3$
Standard 2 :
    1. Market Value of Public Float of at least $15 Million
    2. Stockholders Equity of $4Million
    3. Minimum Price of 3$
    4. Operating History of 2 years
Standard 3 :
    1. Market Cap of at least $50 Million
    2. Market Value of Public Float of $15 Million
    3. Stockholders Equity of $4 Million
    4. Minimum Price of 2$
Standard 4 (a) (b) :
    1. Market Cap (a) $75 Million
    2. Total Assets and Total Revenue (b) of $75 Million
    3. Market Value (a/b) of $20 Million
    4. Minimum Price (a/b) of $3
Companies are also required to meet one of the following standards: Public Sharelholder of  (option 1)800, (options 2)400,  (option 3) 400 Public Float of (option 1) 500,000, (options 2) 1,000,000 or (option 3) 500,000 or Daily Trading Volume 6 months prior (option 3 ) 2000 shares

NYSE ARCA Listing Requirements

The NYSE ARCA caters to small, medium, and large cap companies, as well as Exchange-Traded Products (ETPs). The ETPs that the exchange supports includes: Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange Traded Vehicles (ETVs). They NYSE ARCA currently represents over 90% of all ETPs traded in the U.S.

The listing standards for the NYSE ARCA are as follows:

Basic Listing Standards

  • At least 500,000 publicly held shares and a market value of at least $3,000,000.
  • At least 800 public beneficial holders if the issuer has at least 500,000 and less than 1,000,000 shares publicly held, or a minimum of 400 public beneficial holders if the issuer has either:
    • At least 1,000,000 shares publicly held; or
    • At least 500,000 shares publicly held and average daily trading volume in excess of 2,000 shares for the six months preceding the date of application.
  • Net worth of at least $4,000,000.
  • Pre-tax income from continuing operations of at least $750,000 in the last fiscal year or two of the last three fiscal years.
  • The maintenance of at least $5 per share closing bid price for a majority of business days for the most recent six-month period prior to the date of application by the issuer. To meet this price requirement, the bid closing price must be at or above $5 per share at the time of application.

Alternative Listing Standards

  • At least 1,000,000 publicly held shares and a market value of at least $15,000,000.
  • At least 400 public beneficial holders.
  • Net worth of at least $12,000,000.
  • The maintenance of at least $3 per share closing bid price for a majority of business days for the most recent six-month period prior to the date of application by the issuer. To meet this price requirement, the bid price must close at or above $3 per share at the time of application.
  • An operating history of at least three continuous years.

OTC PINK Listing Requirements

Requirements to use Form 211 | Going Public OTC Pink Sheets

In general, a private company can go public if:

  • The private company has at least 25 non-affiliate shareholders who paid cash consideration for their shares at least 12 months prior to the Form 211 filing date;
  • The private company must have at least 1 million shares outstanding, of which at least 250,000 are free trading shares;
  • The private company must never have been a shell company; and
  • The private company has current public information available.

OTCQB Listing Requirements

Eligibility Standards

To be considered for admission to OTCQB, a Company shall meet all the following conditions:

1) Audited Financials. Audited annual financial statements must be prepared in accordance with U.S. GAAP or, for International Reporting Companies or Alternative Reporting Companies listed on a Qualified Foreign Exchange, IFRS or an IFRS equivalent

2) Current Disclosure: Make current disclosure available pursuant to one of the qualified listed reporting standards: 

3) Bid Price of $0.01. Have a primary class of securities with proprietary priced quotations published by a Market Maker in OTC Link ATS with a closing bid price of at least $0.01 a) on each of the 30 consecutive calendar days immediately preceding the Company’s application for OTCQB

4) An exemption from Section 1.1(3) of these OTCQB Standards may be granted by OTC Markets Group in its sole and absolute discretion. Have at least 50 Beneficial Shareholders, each owning at least 100 shares.

5) Have a freely traded Public Float of at least 10% of the total shares issued and outstanding of the class of security to be traded on OTCQB., exemption may be granted by OTC Markets Group in its sole and absolute discretion.

6) Not be subject to any Bankruptcy or reorganization proceedings.

7) Be duly organized, validly existing and in good standing under the laws of each jurisdiction in which the Company is organized or does business.

8) Transfer Agent. A company incorporated in the U.S. or Canada must retain a transfer agent that participates in the Transfer Agent Verified Shares Program.

Corporate Governance (Required for Alternative Reporting Standard Only).

  • Have a board of directors that includes at least two Independent Directors; and
  • Have an Audit Committee, a majority of the members of which are Independent Directors. 
  • At least two members of the Board of Directors and a majority of the members of the Audit Committee must satisfy the independence requirement within the later of 90 days after the Company begins trading on OTCQB or the time of the Company’s next shareholder meeting.

Financial Reporting Requirements: a. SEC Reporting Companies must have filed all reports required to be filed on EDGAR. b. Regulation A Reporting Companies must have filed all reports required to be filed on EDGAR.

NYSE LISTING REQUIREMENTS

Have at Least 400 Shareholders

To qualify for NYSE listing, a company must have at least 400 shareholders who own more than 100 shares of stock, have at least 1.1 million shares of publicly traded stock and have a market value of public shares of at least $40 million. The stock price must be at least $4 a share. Initial public offerings, spin-offs from existing companies or affiliates need a market value of at least $100 million.

Meet the Basic Earnings Standard

In order to order to get listed on the NYSE, a company also must be profitable and it has to meet one of two basic earnings standards. The first is aggregate pre-tax income of $10 million for the previous three years, with at least $2 million in each of the two most recent years. An alternate is $200 million in global market capitalization. In each case, the company still has to meet the shareholding threshold.

Global Considerations

The NYSE has stricter standards for worldwide trading. The $4 share price and $100 million market value apply, but a company must have at least 2.5 million shares outstanding and 5,000 public shareholders. In the case of a non-American company whose home market does not have “registered” shareholders, the NYSE requires that a member brokerage firm attest to the depth of market and liquidity of the company’s stock.

File an Application

Assuming as company meets the required standard, getting listed on the NYSE is simply a case of filing an application with an agreement to meet NYSE guidelines and requirements. That also must include the articles of incorporation, company by-laws and resolutions, and information on the organization, including contact details for key executives and affirmation that none has a felony conviction. NYSE also requires a letter from security underwriters that the company meets listing standards.

NYSE Can Reject Unsuitable Companies

The NYSE has broad discretion in listing companies and will list only shares it deems suitable for the market’s auction trading process, in which buy and sell orders are matched on the exchange floor. It can apply more stringent criteria, even if a company meets the basic securities and financial criteria. A company that is accepted for listing can expect trading of shares to start in four to six weeks.

OTCQX Listing Requirements

The OTCQX listing requirements necessitates that a company meets the following:
  • A transfer agent that participates in the Transfer Agent Verified Shares Program.
  • Comply with SEC Reporting (Exchange Act reporting standard or Regulation A), International Reporting, Bank Reporting, or OTC Alternative Reporting Guidelines.
  • Audited financial statements that comply with US GAAP (for International and Alternative Reporting Companies listed on a Qualified Foreign Exchange, a valid auditing opinion) with a Balance Sheet dated within 15 months by a PCAOB auditor.
  • Have proprietary quotes by at least one Market Maker in OTC Link ATS (companies filing Form 211 shall have 3 business days to meet this requirement)
  • Have a minimum bid price of $0.25 per share and $10 million market capitalization on each day for the first 30 consecutive calendar days preceding Application Day. (exemptions for companies submitting Form 211 applications)
  • Have on-going operations and not be a shell company.
  • Not going through bankruptcy or reorganization.
  • Have at least 50 round-lot beneficial shareholders (each owning at least 100 shares).
  • Have a freely traded Public Float of 10% or more of total outstanding shares.
  • Obtain an OTCQX Sponsor
  • For International Reporting, comply with OTCQX Rules and publish required disclosures in English, as specified in 12g3-2(b).
  • Publish Annual reports, call reports and other disclosures required by bank regulators.

Corporate Governance requirements:

  • Have a board of directors with 2 independent directors
  • Have an audit committee with the majority being independent director

    • For further information view our page on OTCQX Requirements and application process.

    Going Public vs. Reverse Merger

    Going Public Via Reverse Merger

    A reverse merger transaction is one in which a private operating entity merges with a public shell company, resulting in the private operating company becoming public. Generally, the shareholders of the private operating company will exchange their ownership in the private company for a majority stake in the public shell company. A “shell company” is an entity that has no or nominal operations and no assets or assets consisting solely of cash and cash equivalents. A reverse merger is an alternative method of going public (as opposed to an IPO, DPO or private placement followed by the registration process).

    A reverse merger is often structured as a reverse triangular merger. In that case, the public shell forms a new subsidiary which new subsidiary merges with the private operating business. At the closing, the private company shareholders still exchange their ownership for shares in the public company and the private operating business becomes a wholly owned subsidiary of the public company. The primary benefit of the reverse triangular merger is the ease of shareholder consents. That is because the sole shareholder of the acquiring entity is the public company. The directors of the public company can approve the transaction on behalf of the acquiring subsidiary, avoiding the necessity of meeting the proxy requirements of the Securities Exchange Act of 1934.

    The advantages of a reverse merger revolve around time. A reverse merger transaction can be completed very quickly and efficiently. The disadvantages of a reverse merger generally revolve around undisclosed prior issues or liabilities with the public shell, including issues that could affect DTC eligibility. This primary disadvantage can be addressed by hiring competent securities counsel to assist with the due diligence process. Another disadvantage involves cost; a reverse merger transaction, although substantially quicker than an IPO, can cost substantially more. In addition to legal and accounting fees, a private entity must purchase the public shell itself.

    Like any transaction involving the sale of securities, the issuance of securities to the private company shareholders must either be registered under Section 5 of the Securities Act or by subject to an available exemption from registration. Generally, shell companies rely on Section 4(2) or Rule 506 of Regulation D under the Securities Act for such exemption.

    A reverse merger is a going public transaction but not a capital raising transaction.  Generally companies completing a reverse merger simultaneously complete a private placement transaction for fund raising.

    Finra and DTC

    FINRA and DTC

    For companies going public on the OTC Markets, following the effectiveness of the S-1 registration statement, the company will need to engage the services of a market maker to file a 15c2-11 application with FINRA to obtain permission to quote and trade the stock and to receive a trading symbol. FINRA is the self-regulatory body which overseas trading on the over-the-counter market. On the most basic level, FINRA issues trading symbols to company’s trading on the over-the-counter market (including the Pink Sheets, OTCQB and OTCQX).

    The Depository Trust Company (DTC) provides the clearing and settlement services for all the electronic trading of securities in the United States. Over the past year, DTC eligibility has become a concern for many OTC issuers. The DTC has become active in reviewing the securities of issuers and requiring that an issuer be able to prove, to the DTC’s satisfaction, that all shares trading electronically are indeed legally entitled to do so. This includes shares that may have been issued in a predecessor company many years before and for which records may not be available.

    Obtaining and maintaining eligibility is of the utmost importance for the smooth trading of an issuer’s float in the secondary market. Moreover, DTC eligibility is a prerequisite for OTC issuers’ shareholders to deposit securities with their brokers and have such securities be placed in street name.

    Anthony L.G. stays current with all DTC issuer requirements to assist clients in avoiding unnecessary disruptions to their stocks trading activity and to remove DTC chills and locks whenever possible.

    Listing on a National Exchange

    Listing on a National Exchange

    There are currently registered stock exchanges in the United States, however, the most common exchanges for small cap and middle market companies are the NYSE including the NYSE American and NASDAQ.  Both exchanges have quantitative and qualitative listing standards and ongoing corporate governance requirements for listed companies.  For a complete list of NYSE American listing requirements see my blog on the topic HERE and for a complete list of NASDAQ listing requirements see by blog HERE.  The attorneys at Anthony L.G. assist companies with the preparation for and application process to list on an exchange as well as compliance with ongoing listing requirements.

    Private Placement

    Private Placement Followed by Registration of Securities

    A public company, by definition, has public shareholders. Reverse mergers, IPO’s and DPO’s all result in a public shareholder base. Another option for a company going public directly is to complete a private placement; selling shares to unaffiliated third parties and then filing an S-1 resale registration statement as to those shares. Each of these options results in an unaffiliated public shareholder base. Simply stated, all of these aforementioned processes result in a company going public.

    The S-1 resale registration statement filed on behalf of selling shareholders contains substantially the same required information as an S-1 registration statement filed on behalf of the company itself.

    The main benefit to a private company going public through the filing of an S-1 Registration Statement as opposed to a reverse merger is that the company does not have to be concerned about undisclosed, potential or contingent liabilities.  Moreover, the SEC rules relating to shell companies (such as Rule 144 and Rule 145) prevent the operating company’s shareholders from selling stock using the Rule 144 exemption for twelve months following the completion of the merger. Furthermore, companies completing a reverse merger may face reputational challenges.  Finally, if not completed correctly, the newly merged entity may face trading difficulties with either or both FINRA and DTC.

    S1 Regulations

    There are four primary regulations governing the preparation and filing of Form S-1:

    (i) Regulation C – contains the general requirements for preparing and filing the Form S-1. Included within Regulation C are regulations and procedures related to (a) the treatment of confidential information; (b) amending a registration statement prior to effectiveness; (c) procedures to file a post-effective amendment; and (d) the “Plain English” rule

    (ii) Regulation S-T – requires that all registration statements, exhibits and documents be electronically filed through the SEC’s EDGAR system and must include interactive data using the XBRL process.

    (iv) Regulation S-K – sets forth, in detail, all the disclosure requirements for all the sections of the S-1. Regulation S-K is the who, what, where, when and how requirements to complete the S-1.

    (v) Regulation S-X – sets forth the requirements with respect to the form and content of financial statements to be filed with the SEC. Regulation S-X includes general rules applicable to the preparation of all financial statements and specific rules pertaining to particular industries and types of businesses.

    Both the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”) provide remedies to investors in the IPO and DPO process. The basic premise of such liability is that either an investor was not given an opportunity to review investment disclosure documents prior to making the investment, or such disclosure documents contained inaccurate information or failed to contain material information. The bottom line is that if an officer or director signs a registration statement which is filed with the SEC and which contains misstatements or fails to contain material information, they may be subject to liability on two fronts – from the SEC in an enforcement proceeding, and from individuals and entities in a private civil claim.

    Your Going Public Transaction with Us

    In an initial public offering (IPO), a company goes public directly by filing an S-1 registration statement for the public sale of its stock. That sale of stock can be by the company using an underwriter, which is known as an IPO. Alternatively, many issuers are choosing to self-underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). But of course, the process is highly regulated and without experienced legal counsel can be difficult, expensive and time-consuming.

    Pursuant to Section 5 of the Securities Act of 1933, as amended (“Securities Act”), it is unlawful to “offer” or “sell” securities without a valid effective registration statement, unless an exemption is available. Companies desiring to offer and sell securities to the public must file with the SEC and provide prospective investors all material information concerning the company and the securities offered. The Securities Act sets forth in-depth rules on what constitutes material information, and on what forms and in what format that material information must be disclosed.

    Rule 404(a) of the Securities Act sets forth the basic requirements for a registration statement. Rule 404(a) reads in part:

    “A registration statement shall consist of the facing sheet of the applicable form; a prospectus containing the information called for by Part 1 of such form; the information, list of exhibits, undertakings and signatures required to be set forth in Part II of such form; financial statements and schedules; exhibits; any other information or documents filed as part of the registration statement; and all documents or information incorporated by reference in the foregoing.”

    Over the years the SEC has created and eliminated various registration forms. Currently all domestic issuers must use either form S-1 or S-3. Form S-3 is limited to larger filers with a minimum of $75 million in non-affiliate public float, among other requirements. All other issuers must use form S-1.