How were OTC securities placed five years ago?
Around the past five years, brokers all over the nation have tightened compliance to the point where no one is allowed to deposit share certificates into their brokerage accounts, even if they can show that they paid for them. Take into account the demand from a secondary brokerage as follows:
• The shareholder must submit all paperwork pertaining to the purchase and ownership of any investment (right, this is justified).
• A tradability opinion written by legal counsel from a firm with at least 10 attorneys is required from the shareholder; as a result, the opinion letter will almost probably cost $5,000 or more.
• Since only around 25% of OTC securities and their transfer agents have this capability, the issuer of the shares must be eligible for DTC.
• The shareholder’s trading account must include at least $50,000 in blue-chip stocks or cash.
Brokerages were also obligated to keep a penny ($0.01) for each share of stock sold throughout the three-day settlement period, even if the price was as low as $0.0001. We believe this almost guaranteed that smaller brokerages would not allow account holders to trade in penny stocks, regardless of the parameters, as FINRA is a self-policing organization made up of the representatives of the large brokerages, which derive the majority of their trading revenue from the OTC markets. This criterion was irrelevant because the larger brokerages had sufficient capital reserves.
These terms and conditions would be acceptable to several brokerage firms:
-Ameritrade DTC
-E*Trade
-Scottrade
-Only if you had an account with Charles Schwab and had over $150,000 in it.
-Merrill Lynch: If you had several other accounts with them for banking and a balance
-Digital Brokers (IB)
-Glendale
-Scottsdale or Alpine, none of which I would have suggested unless it had been my only choice.
This meant that small investors who purchased shares worth less than $25,000 were left stuck with them and were unable to recover the funds they donated to developing organizations, which is really just another way of saying “Sure Out of Luck.” Then something extraordinary occurred.
Regulation A+ and crowdfunding
Regulation CF for crowdfunding and Regulation A+, which provided enterprises with a more straightforward path to Securities and Exchange Commission (SEC) mandatory reporting, every six months rather than every three months, and a streamlined structure, made capital formation easier. However, because the secondary market was not fully addressed by the J.O.B.S. Act, capital harvesting remained constrained (Upgraded Crowdfunding). Despite the fact that various Reg CF platforms, such StartEngine.com and Microventures.com, have begun to provide them, there are still no secondary markets available. The answer was for a company to advance through capital formation using Regulation CF and then Regulation A+ in order to acquire a trading symbol that would permit that secondary trading and allow all of those left behind Regulation CF and Regulation A+ investors to harvest the valuable capital they had invested.
How OTC securities are currently trading
Today’s compliance requirements are even more onerous, making it almost impossible for investors and founders to recoup their investment in OTC securities. Currently, only Glendale will accept deposits of shares from investors or founders provided you have an account with $150,000 in cash or blue chips. The security must also meet the DTC qualification requirements and have up-to-date information on OTCMarkets.com. Yes, an opinion from a firm with more than 20 attorneys will set you back at least $10,000.
So how should we conduct ourselves in the open markets? Here are some of our thoughts:
• Only utilize top-tier Regulation CF and Regulation A+ platforms for investments, such StartEngine.com or Fundable.com, as they have built-in procedures for a secondary market.
• Verify that the company you invest in has current OTC Markets information and sufficient funding to continue reporting for at least two years, enabling investors to appropriately harvest their investment.
• Make sure the company you invest in has access to the OTC Markets and the resources to keep reporting for at least two years, which is long enough for a shareholder to reasonably expect to receive a return on their investment.
• To ensure that businesses seeking financing choose a path that will provide them time to improve their administrative capabilities and be ready for the public markets, check out our strategy on our Crowdfunding Consulting page.
