The OTCQB, also known as “The Venture Market,” represents the middle tier of the over-the-counter market for U.S. stocks. Established in 2010, it mainly includes early-stage and developing U.S. and international companies that are not yet eligible for the higher-tier OTCQX but are less speculative than the lowest-tier Pink Sheets.
The OTCQB took over from the Financial Industry Regulatory Authority (FINRA)-operated OTC Bulletin Board (OTCBB) as the primary market for trading OTC securities that report to a U.S. regulator. Without a minimum financial standard requirement, the OTCQB often includes shell companies, penny stocks, and small foreign issuers.
Key Takeaways
- The OTCQB is the mid-tier OTC equity market, listing primarily early-stage and developing companies in the U.S. and international markets.
- Companies on the OTCQB must meet certain minimum reporting standards, pass a bid test, and undergo annual verification.
- The other OTC tiers are the highest quality OTCQX and the most speculative Pink Sheets.
Understanding the OTCQB
The over-the-counter (OTC) market is a decentralized market where securities not listed on major exchanges are traded directly by a network of dealers. Unlike the NYSE, which provides an order matchmaking service, these dealers maintain inventories of securities to facilitate buy and sell orders.
The OTCQB marketplace operates through OTC Link, an inter-dealer quotation and trading system developed by OTC Markets Group. OTC Link is registered with the Securities and Exchange Commission (SEC) as a broker-dealer and as an alternative trading system (ATS). This system enables broker-dealers to post and disseminate their quotes and negotiate trades through electronic messaging, effectively replacing FINRA’s OTCBB quotation-only system.
All broker-dealers trading OTCQB, OTCQX, and OTC Pink securities must be FINRA members, registered with the SEC, and subject to state securities regulations. Similar to exchange-traded securities, investors trading OTC securities are protected from unethical broker-dealers by SEC/FINRA rules such as best execution, limit order protection, firm quotes, and short position disclosure.
Rules of the OTCQB
To be eligible for OTCQB, companies must keep their reporting current, undergo annual verification and certification, meet a $0.01 bid test, avoid bankruptcy, have at least 50 beneficial shareholders (each owning at least 100 shares), and maintain a public float exceeding 10% of total shares outstanding. Some flexibility is allowed regarding the latter requirement.
Companies listed on the OTCQB report to a U.S. regulator (such as the SEC or FDIC) and adhere to standards to enhance transparency, excluding those likely to be involved with stock promoters and other questionable operators. The annual listing fee for the OTCQB market is $15,600, with a one-time application fee of $5,000.
Special Considerations
While OTCQB stocks have many protections similar to larger, more established stocks, they are still considered speculative penny stocks. There is no guarantee that stocks trading in the OTC market are of higher quality than those on different OTC tiers or marketplaces. Therefore, traders should conduct thorough due diligence before investing their capital.
Related Terms: OTCQX, Pink Sheets, OTC Bulletin Board, OTC Market, Broker-Dealer.
References
- OTC Markets Group Inc. “OTCQX & OTCQB”.
- Financial Industry Regulatory Authority. “FINRA Announces Closure of the OTC Bulletin Board”.
- OTC Markets Group Inc. “OTCQB”.
- OTC Markets Group Inc. “OTC Link ATS: Overview”.
- OTC Markets Group Inc. “OTC Link Services”.
- OTC Markets Group Inc. “Registration of Trader / OTC Dealer User”.
- Congressional Research Service. “Regulation Best Interest (Reg BI): The SEC’s Rule for Broker-Dealers”. Pages 1-2, 7-8.
- OTC Markets Group Inc. “Fee Schedule & Payment Instructions”.
