Over-the-counter (OTC) securities refer to securities that are not listed on a nationally recognized stock exchange. OTC markets provide a broker-dealer network for OTC securities to trade. Unlike a traditional stock exchange, OTC markets are decentralized. Broker-dealers initiate the listing of new securities on the OTC markets, rather than the companies themselves. There are currently over 12,000 securities that trade on the OTC markets. OTC securities can include stocks, bonds and derivatives.

OTC markets provide liquidity for the securities of many types of companies, including those of small-cap companies, large-cap companies in financial distress, American Depositary Receipts (ADRs) of foreign companies, and certain companies that may not meet the listing requirements for trading on the New York Stock Exchange (NYSE) or Nasdaq.

Securities that trade on OTC markets are subject to significantly less rigorous requirements as compared to securities trading on NYSE or Nasdaq. The companies whose securities trade on OTC markets may lack publicly available business or financial information, creating larger potential risks for investors.

The OTC Markets Group, a third-party organization that provides pricing and liquidity information on OTC securities, categories OTC companies into three tiers: OTCQX, OTCQB and OTC Pink.

OTCQX is considered the highest tier of the OTC markets. Companies in this category are more established companies and must maintain updated regulatory disclosures and audited financial statements. Companies in the OTCQX category cannot be shell companies or be in bankruptcy. They also cannot be penny stocks. There is an application and application fee associated with listing on the OTCQX. The OCTQX’s minimum financial standards include at least $6 million in average revenues for the previous 3 years and a market capitalization of at least $10 million.

The second highest tier, OTCQB, is intended for development stage companies. Companies in this category must also maintain updated regulatory disclosures and audited financial statements. OTCQB companies must have a minimum bid price of $0.01. They also must have at least 50 beneficial shareholders that each own at least 100 shares. Similar to the OCTQX, there is an application and application fee associated with listing on the OTCQB.

OTC Pink is the lowest tier marketplace for broker-dealers to trade on the OTC markets. There are no minimum financial standards and this tier allows penny stocks, shell companies and companies in bankruptcy to trade.

All broker-dealers that trade OTC securities are registered Financial Industry Regulatory Authority (FINRA) members. FINRA enforces various rules pertaining to the pricing and trading of OTC securities. They are also registered as broker-dealers with the Securities and Exchange Commission and subject to state securities laws.

In order to get securities traded on the OTC markets, a broker-dealer must submit a Form 211 with FINRA. The Form 211 is used for initiating or resuming quotations of securities in the OTC markets. The Form 211 must be approved by FINRA. Broker-dealers must also comply with Exchange Act Rule 15c2-11 prior to displaying quotes for OTC securities. The rule requires public disclosure of certain financial and other information about a private company prior to publishing quotations for that company’s securities.