Given the competitive atmosphere surrounding stock exchanges these days, it’s no surprise that Nasdaq plans a new tier of service boasting high governance standards. But when even the freewheeling Pink Sheets gets in on the act—well, then you know it’s a craze.
Both trading networks—worlds apart in the clientele they serve, and seldom uttered in the same breath—have recently announced plans for new levels of service designed to attract higher quality companies. Nasdaq, home to 3,000 listed companies, unveiled its Nasdaq Global Select Market six weeks ago. The Pink Sheets, meanwhile, which has long been an quotation listing service for thousands of over-the-counter stocks that don’t even need to file financial statements, debuted its new OTCQX quotation service this week as a way for OTC stocks to add some polish to their reputation.
Littenberg
Those enhancements are happening against a backdrop of new pressures for exchanges to increase their membership and drive up revenues, largely because the exchanges are “demutualizing” into for-profit operations. “Whether it is Nasdaq or the Pink Sheets, all of this stuff is being done to enhance their market share and attractiveness,” says Michael Littenberg, partner with law firm Schulte Roth & Zabel.
Exactly how those changes will affect corporate compliance is yet unclear. “There are a lot of different ways that companies are approaching compliance and governance issues,” says Chris Myers, a lawyer with the firm Holland & Knight. “Some are making real commitments, some paper commitments.”
Life On The Nasdaq
The Nasdaq Global Select Market is intended to lure companies currently listed on the New York Stock Exchange (Nasdaq’s chief rival) because it purports to have financial and liquidity requirements higher than those of any other exchange. The other two tiers will be the Nasdaq Global Market and the Nasdaq Capital Market, now called the Nasdaq Capital Market and the Nasdaq Small Cap Market, respectively. The exchange hopes to implement the new tiers July 1.
Nasdaq officials claim that more than 1,000 of the companies currently listed there qualify for the Global Select tier, as do more than two-thirds of NYSE listed companies. They also caution that corporate governance standards—which are guided primarily by the Sarbanes-Oxley Act—won’t be any different. “Unless you de-register, you are subject to SOX requirements,” says Michael Emen, senior vice president of listing qualifications at Nasdaq.
Compliance with listing standards, however, will be different. For example, one portion of Global Select’s liquidity test will require a company to have a market capitalization of at least $100 million; current standards for Nasdaq’s National Market range from $8 million to $20 million. The NYSE has a market cap requirement of $100 million, plus other thresholds for trading volume and shares outstanding.
On the financial side, Nasdaq’s most stringent requirement calls for $1 million in income from continuing operations before income taxes in the latest fiscal year or in two of the last three fiscal years. In addition, all companies must have a stock price of at least $5. In contrast, the NYSE requires pretax earnings over the last three years must be $10 million, with a minimum of $2 million in each of the two most recent years.
Nasdaq will also have tougher requirements for the number of shareholders, minimum stock price for new issues, and average trading volume, among other obligations. And, as with all markets, initial listing standards will be tougher than continuing listing standards, Emen cautions.
Polishing The Pink Sheets
Meanwhile, this week the Pink Sheets introduced OTCQX, a new tiered listing service for OTC securities in the U.S. markets. Cromwell Coulson, chief executive officer of Pink Sheets Corp., styled the service as a way for small companies and those listed on overseas exchanges to list in the United States without the burden of regulatory filings or Sarbanes-Oxley compliance.
The Pink Sheets is neither a registered stock exchange nor a broker-dealer. Rather, it is considered a non-exclusive securities information processor and an inter-dealer quotation system, largely exempt from federal securities laws. The OTCQX, Coulson says, is a way to let OTC-traded companies that do publish financial statements disseminate them and distinguish themselves as “quality operating companies,” without the daunting task of listing on a registered exchange and falling under Sarbanes-Oxley requirements. Coulson says there are probably 2,000 companies in the Pink Sheets and OTC Bulletin Board universe that could qualify.
EXCERPT
Below is an excerpt from the Pink Sheets' announcement of OCTQX, outlining the new tier's governance standards.
Every OTCQX-listed company must also have a Designated Advisor for Disclosure ("DAD") to assist them in providing adequate current information and advise the issuer on meeting the requirements for inclusion in the tier. The DAD, modeled after the highly successful Nominated Advisor (NOMAD) of the London Stock Exchange's AIM market, relies upon the securities attorneys and investment bankers who normally serve as the primary capital markets advisors to OTC companies.
The DAD requirement introduces to U.S. investors the protections of a professional "gatekeeper" for secondary market disclosure. The DAD for an OTCQX-listed company will be required to participate in the preparation of the company's disclosure statements and prevent issuers with inadequate or questionable disclosure from joining OTCQX. This third party independent review by securities market professionals should enhance investor confidence in OTCQX-listed securities.
Every OTCQX-listed company will be required to meet defined standards, including:
Ongoing quarterly and annual financial reports posted on OTCQX.com, a premier web disclosure portal for qualifying OTC securities
Interim material event disclosure of any information that may affect the share price
Annual audit
Management disclosure and annual management certification
100 round lot shareholders
Ongoing operations (no shells, blank check, or special purpose acquisition companies)
Inclusion in the S&P or Mergent Manual, which satisfies the Blue Sky requirements for secondary transactions in many states
"By limiting OTCQX to operating companies with audited financials and professional advice, we believe the OTCQX premium tiers will provide a substantially better home for smaller companies that are currently considering listing on the AIM or OTC Bulletin Board," commented [Pink Sheets Chief Executive Cromwell] Coulson. "Foreign exchange-listed issuers will also find substantial advantages through our expedited disclosure process. The US equity markets remain the broadest and deepest in the world, and OTCQX leverages the Pink Sheets' scalable quotation and trading platform that is used for all OTC stocks with nearly 200 participating broker-dealers."
Source
Pink Sheets Introduces OTCQX (March 16, 2006)
Myers
“Part of what is going on from a global sense is companies are leery about listing in the U.S. due to regulations, Sarbanes-Oxley, the Patriot Act and money laundering laws,” says Myers of Holland & Knight.
Coulson says he is partly targeting the London Stock Exchange’s fast-growing AIM market, which has admitted more than 2,200 companies since it opened in 1995. AIM has no minimum float requirement, no minimum market cap, and no trading record requirement, among other features. He adds that there are many international companies that want access to U.S.-based shareholders but don’t want to go through the burden of Sarbanes-Oxley.
The new listing service will feature two tiers, PremierQX and PrimeQX. PremierQX, the higher tier, targets issuers that are of the size and quality to be listed on a National Stock Exchange, hold annual shareholders' meetings and that have a minimum bid price of $1. PrimeQX is for issuers that are operating companies with audited financials, but too small to list on PremierQX. Pink Sheets is also offering a streamlined admission process to OTCQX for international issuers that are listed on a qualified foreign stock exchange.
Although companies listing on these services don’t need to meet SOX requirements, Coulson does want a series of requirements that he insists are substantial. As such, every OTCQX-listed company must appoint a “designated adviser for disclosure” prior to admission. The DAD, as the adviser will be known, is required to help prepare the company's disclosure statements and prevent issuers with inadequate or questionable disclosure from joining OTCQX.
Although the DAD is only required to conduct one serious review per year, Coulson explains, “It’s a continuous relationship. If they see a questionable statement, the company will be removed from the premium tier.”
Entry to both tiers also requires an annual management affirmation letter; ongoing quarterly and annual financial reports posted on OTCQX.com; disclosure of any interim material events that may affect the stock price; an annual GAAP compliant audit; ongoing operations (that is, no shells, blank check or special purpose acquisition companies); inclusion in the Standard & Poor's Corporation Records or Mergent Manual, which satisfies the Blue Sky requirements for secondary transactions in many states, together with a list of any other states in which the security is Blue Sky compliant and eligible to be sold by brokers in those states; and a DAD Letter upon application and annually thereafter confirming that the issuer has made adequate current information publicly available and meets the tier inclusion requirements.
“It is going to be a process companies are going through,” Coulson says. “But, it is less burdensome than an exchange listing.”
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