OTCQB

What Is the OTCQB?

The OTCQB, also called "The Venture Market," is the middle tier of the over-the-counter (OTC) market for U.S. stocks. It was created in 2010 and consists mainly of early-stage and developing U.S. and international companies that are not yet able to qualify for the OTCQX but are not as speculative as the lowest-tier Pink Sheets.

The OTCQB replaced the Financial Industry Regulatory Authority (FINRA)-operated OTC Bulletin Board (OTCBB) as the main market for trading OTC securities that report to a U.S. regulator. As it has no minimum financial standards, the OTCQB often includes shell companies, penny stocks, and small foreign issuers.

Understanding the OTCQB

The over-the-counter or OTC market is a decentralized market where securities not listed on major exchanges are traded directly by a network of dealers. Instead of providing an order matchmaking service like the NYSE, these dealers carry inventories of securities in order to facilitate any buy and sell orders.

The OTCQB marketplace is run 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 also as an alternative trading system (ATS).

OTC Link enables broker-dealers to not only post and disseminate their quotes, but also negotiate trades through the system’s electronic messaging capability. This feature enabled it to effectively replace FINRA’s OTCBB, which was a quotation-only system.

All broker-dealers that trade OTCQB, OTCQX, and OTC Pink securities have to be FINRA members and registered with the SEC; they are also subject to state securities regulations. As with exchange-traded securities, investors trading OTC securities are protected from an unethical broker-dealer’s illegal practices by the same SEC/FINRA rules such as best execution, limit order protection, firm quotes, and short position disclosure.

Rules of the OTCQB

To be eligible, companies must be current in their reporting, undergo annual verification and certification, meet a $0.01 bid test, not be in bankruptcy, have at least 50 beneficial shareholders, each owning at least 100 shares, and a public float in excess of 10% of the total shares outstanding — some flexibility is offered with regard to the latter requirement.

Companies listed here report to a U.S. regulator such as the SEC or FDIC and must follow standards to improve transparency — those who are most likely to be associated with stock promoters and other shady operators will be excluded. The fees for listing on OTCQB markets is $14,000 per annum, with a one-time application fee of $5,000.

Special Considerations

Stocks trading in the OTCQB have many of the same protections as more established, larger stocks. However, they are still mainly considered to be speculative penny stocks.

There is also no guarantee that stocks trading in the OTC market are of higher quality than penny stocks trading on different OTC tiers or even different OTC marketplaces. As such, traders would be well served to implement strong due diligence before committing their capital.