Over-the-Counter Securities

How do equity securities of U.S. companies trade over the counter?

While you may often hear about securities that are listed and trade on national securities exchanges like Nasdaq and the New York Stock Exchange, securities can also trade off-exchange, in the over-the-counter (“OTC”) market. A variety of off-exchange trading venues, such as Alternative Trading Systems  or ATSs, for example, offer trading in both exchange-listed and OTC securities. A company’s securities may trade on OTC venues for various reasons, including when a company is unable or unwilling to meet national securities exchange listing requirements, such as the threshold for the number of publicly traded shares or the minimum price per share. 

What do companies need to consider about the OTC market?

Step 1: Do the securities have restrictions?

Generally, depending on how the securities are sold initially, the securities may be deemed restricted. This can include securities purchased from the company or in a secondary transaction from an affiliate of the company. Restricted securities are defined in Rule 144(a)(3) under the Securities Act to include, for example, securities issued in many Regulation D offerings.  Restricted securities are not freely tradeable and typically bear a “restrictive” legend that notes the resale limitations of the securities. To the extent the securities to be resold bear a restrictive legend, the investor will need to follow procedures required by the issuer or its transfer agent to have the restrictive legend removed from the securities. 

See more information about which securities are considered restricted in this Building Block.

Step 2: What federal pathways are available to smaller business investors to resell their securities, including restricted securities?

Section 5 of the Securities Act requires offers and sales of securities to be registered under the federal securities laws, unless an exemption from registration is available. There are several federal exemptions available for small business investors to sell their securities in a private secondary transaction. See more information about the federal pathways used by investors to sell securities in this Building Block.

When investors resell their securities in the OTC market, they typically rely on Section 4(a)(1) of the Securities Act, which exempts transactions by any person other than an issuer, underwriter, or dealer. 

Rule 144 under the Securities Act provides a “safe harbor” under Section 4(a)(1). If the conditions of that rule are met, an investor may resell restricted securities without registration in reliance on Section 4(a)(1). 

To ensure compliance with federal securities laws, resales of restricted securities in the OTC market are typically conducted in compliance with Rule 144. Before quoting a security or executing a trade for a customer in the OTC market, a broker-dealer may require its customer to provide certain information to assess whether Rule 144 and Section 4(a)(1), or another exemption from registration, may be available for the customer’s resale. 

Even if a resale offering is exempt from registration at the federal level, it may need to be registered or meet an exemption under state securities laws. In addition, state securities regulators have authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees.

Step 3: What other considerations should companies be aware of for their securities to be traded in the OTC market?

Each venue may have its own eligibility requirements for displaying and accessing quotes on its system. In addition, broker-dealers often play an integral role in facilitating trading of OTC securities. Except for a few limited exceptions, Rule 15c2-11 requires information about a company to be current and publicly available for broker-dealers to quote that company’s securities in a type of off-exchange venue called a “quotation medium.” The publicly available information can include filings made under established reporting standards, such as the reporting requirements under Regulation A, the Exchange Act, or Regulation Crowdfunding. Whether information about the company is current and publicly available can affect an OTC security’s liquidity.

Have suggestions on additional educational resources? Email smallbusiness@sec.gov.

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