What it means
The tiers of over-the-counter markets are ranked by how stringent the entry requirements are. OTCQX sits at the top, above the venture tier and the open tier, and is meant for companies with a proven record.
Many of them are established businesses, including overseas firms that want access to US investors without a full exchange listing. To join, a company generally needs to meet higher financial standards, pass a minimum price requirement, not be classed as a penny stock and show that it publishes up-to-date information.
Many must also work with an approved adviser or sponsor who confirms that the company meets the standards. The aim is to give investors a degree of comfort about quality.
For a company, the benefits include increased visibility, easier access to US investors and a lower cost than a full national listing. Some foreign companies use the tier to open up US trading while keeping their main listing at home.
Others use it as a dignified home after leaving an exchange or while they decide whether to list on a national exchange. For investors, the tier makes screening easier.
A company on this tier has been reviewed, and investors can expect clearer reporting than they would find among lower tiers. Even so, trading volumes can be modest, and the shares carry the same market risks as any other.
A finance team should compare the costs and benefits. The fees, advisers and reporting add cost, while the benefit is a broader shareholder base and a fair market for the shares.
It is not a shortcut to a national listing, but it can be a respectable long-term home for the right business. Companies also have to keep meeting the standards after joining.
If a company stops publishing the information it is required to provide, or its price falls below the threshold, it can be moved to a lower tier. That ongoing test is part of what makes the top tier more informative than the open tier.
In practice
Real-world examples.
Example
A mid-sized European engineering company with its main listing at home wants to reach US investors. It qualifies for the top over-the-counter tier and publishes its reports in English. American funds can now buy its shares through their usual brokers, and trading volume in the US grows.
Example
A fund manager restricted to companies with reviewed disclosure standards uses the tier as a screen. She finds a small Australian mining firm with consistent reporting and regular updates. She invests $500,000 after reading its accounts, and she records the tier in her research notes as part of the reasons for her decision.
Example
A US company that moved down from a national exchange to cut costs chooses the top over-the-counter tier because it keeps strong disclosure habits. Shareholders see the move as a sign that the company still takes transparency seriously.
Case study
Seen in the real world.
Highmoor Marine is a fictional shipping services company, and this is an illustrative case. Its shares were listed on a mid-sized overseas exchange, but few American investors could buy them easily.
The CFO estimated that a national US listing would cost several times more each year in fees, compliance and legal work. She instead applied to the top over-the-counter tier, worked with an approved adviser and translated the company's reports into the format expected by US investors.
Within a year, US investors held 12% of the shares, and trading volume had doubled. The CFO reported to her board that the annual cost of the tier, including adviser fees and translation work, was about $90,000 and that the wider investor base had lowered the company's cost of raising new equity. The illustrative lesson is that a well-chosen tier can broaden the shareholder base at a fraction of the cost of a full listing.
Watch out
Common mistakes.
- Treating OTCQX as a national stock exchange, when it is a quotation market with its own rules.
- Assuming that the top tier means low risk, when companies can still be small and thinly traded.
- Thinking admission is automatic, when companies must meet standards and usually work with an approved adviser.
Questions
People also ask.
Who can join OTCQX?
Companies that meet the financial, disclosure and price requirements, which usually means established businesses and some international companies.
How is OTCQX different from OTCQB?
OTCQX has higher entry standards and is aimed at more established companies, while OTCQB is a venture tier for earlier-stage firms.
Why would a company choose it over a national exchange?
Costs and compliance are lower, which suits companies that want US visibility without a full listing, though the trade-off is usually lower trading volume and less index inclusion.
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