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Foreign listed companies may be surprised to discover that their shares are being traded in the United States without their direct involvement. This can occur through unsponsored quotations on the OTCQX Market. We address how this happens and how to deal with it.
In the ordinary course of business, a European company would elect to become listed on its domestic stock exchange. Its shares would be traded domestically in its local currency via the local stock exchange. The company may at any given time on or after its IPO elect to have its shares traded in the U.S. by filing an application for admission to trading with the OTC Markets Group with a view to obtain a U.S. ticker symbol and to be admitted to OTCQX or OTCQB for emerging growth companies. However, some European companie may discover that their shares are being traded actively in the U.S. in USD via the "over the counter" markets as F-shares (meaning foreign shares) without their involvement.
What are Unsponsored F-Shares on OTCQX?
Unsponsored F-shares represent ordinary shares of a non-U.S. listed company that are traded "over-the-counter" (OTC) in the United States. The shares are not listed on a U.S. stock exchange and setlement takes place on the local stock exchange of the company. OTC markets operate outside of the traditional stock exchanges like the New York Stock Exchange or Nasdaq. With the OTCQX market operated by the OTC Markets Group being a premium tier for established listed companies that meet the stringent criteria for admission to trading, the foreign shares are effectively traded in the United States with settlement in their home country. The "unsponsored" element means the company has not taken the initiative to actively have these shares traded in the United States, but U.S. market makers see enough U.S. investor interest and make them tradable on the OTCQX.
Why Should This Matter to the Company?
Unsponsored quotations offer both opportunities and certain risks. The upside of an unsolicited QTCQX quotation is enhanced exposure to U.S. investors due to market activity, correspondingly improving liquidity in the local market due to the ease of how the shares can be bought and sold. However, there are less positive considerations to bear in mind for the company:
Less Control: The company and the company's investor relations office will have limited influence over how the shares are traded on the OTCQX market. For the issuer's investor relations team, having control of the time and manner of information distribution is key. Since the company is not actively involved in the quotation process, the investor relations officer has limited control over how the company's information is disseminated and presented to U.S. investors.
Information Gap: U.S. investors might not receive regular updates from the company, which could negatively affect share valuation. They have to rely on market makers and third-party data providers to ensure accurate and timely information is available, which can be challenging to monitor and manage. With the added exposure, the information gap in the U.S. is further exacerbated and could negatively impact U.S. market perception. This effect is often further enhanced, where positive information in the local business media is not transmitted to the United States due to language barriers, e.g. positive news in the Danish business media in Danish will not necessarily find distribution to English-language media in North America.
Potential for misinformation: Without active engagement, there is a risk of outdated or inaccurate information circulating in the market, potentially impacting investor perception and decision-making. The company will therefore become more vulnerable without the ability to manage the information distribution in the U.S. in a more comprehensive manner.
Difficulty reaching U.S. investors: Unsponsored quotations may not attract the same level of attention from U.S. investors as sponsored programs or full U.S. listings. This can make it harder for the investor relations officer to connect with and build relationships with potential investors in the United States. With less investor interest, there might be fewer opportunities for the investor relations officer to engage with investors through roadshows, conferences, or other investor relations activities. Moreover, some U.S. analysts may be less likely to cover companies with unsponsored quotations, leading to less research and information being available to investors.
Potential for lower liquidity: Unsponsored quotations may sometimes result in lower trading volumes and liquidity compared to sponsored quotations. This can make it less attractive for potential investors to buy and sell shares, due to diminished liquidity as opposed to the higher liquidity in sponsored quotations. Moreover, lower liquidity may also contribute to increased price volatility, making the stock even less attractive to some investors.
In essence, while an unsponsored OTCQX quotation is a positive sign of U.S. investor interest and market activity, the potential downsides of an unsponsored OTCQX quotation pose serious challenges for the issuer and the investor relations office. Some investors might perceive unsponsored quotations as being less prestigious or credible compared to sponsored quotations or full U.S. listings. This could potentially impact the company's brand image and investor confidence.
How to Take Charge of Unsponsored OTCQX Quotations?
However, with the good news of market interest, there is an easy way to take charge of the situation for investor relations. Here is how the issuer can be proactive:
Investigate: Check the OTC Markets website to see if your company has unsponsored F-shares. If your company has not sponsored an OTCQX quatation and is listed, then a U.S.-based market maker is actively trading your shares and fulfilling U.S. investor demand for your shares. The shares will be traded as F-shares (foreign shares listed on a foreign stock exchange) and there will only be very limited information available.
Evaluate: Carefully assess the advantages and disadvantages set out above. Consider possible benefits of greater U.S. investor interest against the reduced control and potential costs. If the company plans to raise further capital in the U.S. or to attract U.S. mid-market and retail investors, then this is an opportunity to address the U.S. market head-on and to engage.
Take Action:
If you decide to embrace the listing: Contact OTC Markets to explore sponsored listing options. This allows for greater control over information and will enhance the issuer's profile compared to unsponsored listings.
If you decide to discourage the listing: While delisting unsponsored shares is not always a straightforward strategy, you can take certain steps to make it less appealing for investors. Consult legal counsel for options like limiting information on OTC Markets or potentially pursuing FINRA arbitration (Financial Industry Regulatory Authority).
Remember, unsponsored F-share listings can lack transparency for investors. By being proactive, you can safeguard your company's reputation and ensure U.S. investors have a more informed understanding of your business. Do not get blindsided and take charge of those unsponsored quotations by engaging the market directly.
What Tools are Available to Embrace the OTCQX Quotation?
Once the issuer has met to requirements for admisssion to trading on OTCQX, the OTC Markets Group provides a suite of tools and services designed to help foreign companies distribute their news to U.S. investors and the broader financial community:
OTC Disclosure & News Service: OTC Markets offers a wide array of disclosure and news services to make life easier for investor relations teams.
Centralised platform: The OTC Disclosure & News Service allows companies to submit their news releases, financial reports, and other disclosures electronically. OTC Markets then disseminates this information widely through various domestic channels in the United States.
Broad distribution network: The news service reaches a wide U.S.-based audience, including investors, market data distributors (like Bloomberg and Refinitiv), investment databases, media outlets, market makers and broker-dealers. By using this service, foreign companies can ensure their news is readily accessible to U.S. investors and financial professionals.
Integration with PR Newswire: OTC Markets Group and PR Newswire have a strategic partnership designed to help companies quoted on OTC markets enhance their visibility and reach a broader audience.
Enhanced reach: Once submitted, the news is automatically disseminated through PR Newswire's extensive network of media outlets, journalists, investors, websites, and databases. This integration eliminates the need for companies to separately submit their news to PR Newswire, streamlining the distribution process and saving time.
Simplified workflow: Companies can submit their news via PR Newswire through their OTCIQ.com account, streamlining the distribution process. OTCIQ is a cost-effective and simple but comprehensive market intelligence and investor relations platform provided by the OTC Markets Group and serves as a central hub for OTCQX quoted companies to manage their investor relations, comply with disclosure requirements, and connect with investors.
Visibility and Awareness Campaigns: In addition to a range of media and social media promotions and virtual investor conferences, OTC Markets Group offers a number of tools to raise the profile of the foreign issuer in the United States.
Market Open ceremonies: OTC Markets hosts Market Open ceremonies for quoted companies, providing a platform for them to raise their profile and share their story with a wider audience in the United States.
CEO interviews and podcasts: OTC Markets conducts interviews and podcasts with company executives, providing another avenue for them to communicate with investors and share their insights.
By leveraging these tools and services, foreign companies can effectively distribute their news to U.S. investors, enhance their visibility in the market, and build stronger relationships with the U.S. investment community.
What is the Rule 12g3-2(b) Exemption for Foreign Issuers?
OTC Markets helps foreign companies leverage the SEC's Rule 12g3-2(b) exemption, which allows them to use their home country reporting standards for their U.S. disclosures, as long as the information is publicly available in English. This simplifies the reporting process and reduces compliance burdens. SEC Rule 12g3-2(b) provides an exemption from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 for certain foreign private issuers. In simpler terms, it allows eligible foreign companies to have their securities traded in the U.S. over-the-counter (OTC) market by being quoted on OTCQX without having to register with the SEC, which can be a costly and time-consuming process. To qualify for the exemption, a foreign private issuer must meet certain conditions, including:
Non-U.S. Primary Trading Market: The company's primary trading market must be outside the United States.
Information Access: The company must make its home-country disclosure documents publicly available in English on its website or through an electronic information delivery system.
No other SEC Reporting Obligations: The company must not be subject to SEC reporting obligations for any other class of its securities.
The benefits for the European stock exchange-listed issuer include reduced costs, as it avoids the expenses associated with an SEC registration. it also eliminates the need to prepare and file SEC registration statements and ongoing reports.
The majority of foreign companies quoted on the OTCQX Best Market rely on the Rule 12g3-2(b) exemption to trade their securities in the U.S. as an add-on to their domestic listing in Europe. They remain listed and regulated on their home stock exchange in their home jurisdiction, all the wile being traded in the United States. By way of an example, a German company listed on the Frankfurt Stock Exchange wants to make its shares accessible to U.S. investors. By applying the Rule 12g3-2(b) exemption and obtaining an OTCQX quotation, the company can have its shares traded in the U.S. without being obliged to register with the SEC. It simply needs to ensure its financial reports and other disclosures are available in English and be in good standing in its home jurisdiction where it is regulated.
In essence, the Rule 12g3-2(b) exemption provides an easy and cost-effective pathway for foreign companies to access the U.S. market through OTCQX, increasing their visibility and investor reach while minimizing regulatory burdens without a dual-listing or an ADR. The company can list locally and still trade globally, remaining regulated by its home country regulator and stock exchange.
Who can I contact to move this forward?
If you want to know more or want to obtain US market entry via an OTCQX quotation, please contact any of Michael Rosenberg or Andreas Tamasauskas at Carsted Rosenberg to discuss how we can move your transaction forward. As an OTCQX Sponsor, we are here to help you.
To learn more about the OTCQX Market, contact Joe Coveney at jcoveney@otcmarkets.com or Jonathan Dickson at jonathan@otcmarkets.com. To learn more about how OTC Markets Group create better informed and more efficient markets, visit www.otcmarkets.com.
This briefing is intended to provide general information for European and other foreign issuers related to OTCQX or OTCQB markets. It is not intended to provide definitive legal or tax advice. No legal, tax or business decisions should be based solely on its content. The briefing does not necessarily deal with every important topic and is not designed to provide legal or other advice. It shall not be used as a substitute for legal advice and none may be inferred. It is only intended for general information on matters of interest. While we endeavour to represent the information as accurately and correctly as possible, we cannot accept any responsibility for any errors or omissions. OTCQX, OTCQB and Pink and all associated trademarks are all registered trademarks of the OTC Markets Group Inc. More information on the trademarks and registered rights, including terms of use, can be found here.