Why Retail Investors Will No Longer be Able to Invest in Certain Securities

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

A new SEC rule may end up changing who can invest in certain securities.  

After an amendment to the SEC’s Exchange Act Rule 15c2-11 in September, companies that trade on the OTC Market will be held to stricter disclosure standards that prohibit broker-dealers from publicly quoting securities that fail to maintain current information.  

The amendments, which are intended to protect investors by restricting public market activity in companies with limited or out-of-date information, stand to push many securities that trade on the Pink Market into the unregulated Grey Market.  

The SEC is currently considering a proposal for an “Expert Market” that would provide brokers with a transparent, regulated platform to view pricing information in securities that are no longer eligible for public quoting.   

What Is The Expert Market 

OTC Markets has established different tiered markets, with companies eligible to trade on certain tiers based on disclosures, financial standards and corporate governance.  

OTC Markets Group currently operates an expert market for a small number of companies.  Under the SEC’s proposal, the Expert Market would operate as a distinct market tier and would include many securities no longer be eligible for public quoting under the new SEC regulations and would be limited to only eligible investors who meet the “qualified expert” criteria.  

Under the proposal, quotations in Expert Market stocks would only be available to institutional investors like hedge funds, investment banks, broker-dealers, and accredited investors.  

The key difference is that, unlike the Pink Market, only qualified experts would have access to quotes in expert market securities. This limited access ensures that the intention of the new ruling — to strengthen protections for retail investors in the OTC market and deter “fictitious” quoting — is upheld.  

In effect, the Expert Market would offer an alternative to the Grey Market, by providing brokers with a transparent, regulated platform to quote securities that don’t meet the financial standards or disclosure requirements for public quoting.   

 Without this alternative, the Grey Market makes it difficult for broker-dealers to satisfy best-execution requirements for securities that no longer qualify for the Pink Market. Moreover, qualified experts would lose access to transparent price discovery for securities that can no longer be publicly quoted. The Expert Market proposal is still pending approval by the SEC.   

How the Expert Market fits Within the OTC Markets 

Currently, the roughly 11,000 securities quoted on OTC Link ATS are divided into three tiers. The OTCQX is the top-tier market, featuring securities that meet the highest eligibility and disclosure standards. The second tier is OTCQB, for venture stage companies and the third tier is the Pink Market. The Pink market is designed for a wide spectrum of securities and includes dark and delinquent companies that would be most impacted by the amended SEC ruling.   

If companies on the Pink Market are not in compliance with the new regulations in time, they risk losing their public market. While the SEC set September 28 as the compliance date, OTC Markets Group has given these Pink Market securities until June 30 to review the new guidelines and provide the necessary information to ensure they meet the new standards in time. 

For investors, that September deadline is when you will see the non-compliant securities drop out of the Pink Market. 

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.

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