The SEC Rolls Out Changes to Over-The-Counter Marketplaces

The SEC Rolls Out Changes to Over-The-Counter Marketplaces

Amendments to Securities & Exchange Commission (SEC) Rule 15c2-11 went into effect on September 28th of this year, impacting which over-the-counter (OTC) companies can be traded by individual investors. The rule change states that companies that have not published current financial information may not be eligible to be traded publicly. Instead, they will be shifted to the OTC Market Group’s “Expert Market”, where only certain qualified “expert” investors can trade them.

Before unpacking what this all means for filers and investors, here are some important terms and definitions: 

Over-the-counter (OTC)

Over-the-counter refers to the process of selling securities through a broker-dealer network instead of a national, centralized exchange like the New York Stock Exchange or NASDAQ. OTC securities are sold through a decentralized network of broker-dealers. Companies traded in the OTC market do not have to meet any minimum financial standards or apply to an exchange for listing.

Expert Market

Stocks deemed ineligible to be publicly traded will now be traded on the Expert Market, where only qualified experts such as brokers, institutions, and those who qualify as accredited investors can buy them. Similar designations are already used by the SEC to limit who can invest in Regulation Crowdfunding, Regulation A, and Regulation D campaigns.

SEC Rule 15c2-11

Rule 15c2-11 governs the sale of securities not listed on national securities exchanges (i.e.over-the-counter securities). The rule was originally adopted in 1971 and has been amended multiple times since its inception.


OTC companies must now ensure that they have filed current financial information with the SEC. Companies that fail to do so and do not meet any exemption under the rule will lose the ability to be traded publicly and will be shifted to the Expert Market. Any quarterly or annual reports that were missed in the past must be filed, and companies must maintain their filing obligations or they face being moved to the expert marketplace. Companies can reapply for listing on OTC markets by submitting any missing reports with the SEC and then filing a Form 211 with the Financial Industry Regulatory Authority (FINRA).

Potential benefits:

The amendments are meant to protect investors from losing money in the less regulated OTC marketplace. The rule states that “the amendments are designed to modernize the Rule, promote investor protection, and curb incidents of fraud and manipulation by, among other things: requiring information about issuers to be current and publicly available for broker-dealers to quote their securities in the OTC market;”. While there are plenty of legitimate OTC stocks out there like Bayer, Hertz, and Volkswagen, the lack of financial transparency obligations that OTC companies face has allowed a high amount of fraudulent activity to exist, scamming investors out of millions of dollars per year. A paper published by the SEC in 2016 titled “Outcomes of Investing in OTC Stocks” concluded that OTC stocks “generate negative and volatile returns, are frequently targeted by alleged market manipulation schemes, and rarely transition to an exchange.

Concerns and Reactions: 

Some have complained that the rule could give an edge to professional “expert” investors, who can trade certain OTC stocks that are not open to the general public. There are over 12,000 companies traded in the OTC market, and the amendment could drastically limit the number of those available to the public. Moreover, individual investors, not experts, are already the primary entities engaged in OTC markets. 

In addition to concerns about fairness, the rule change has already caused instability in the OTC marketplace. The implementation of the change caused the share price of some OTC companies to fluctuate wildly as companies’ designations changed. Companies deemed ineligible for public trading based on the new policy have shot down in price. Ineligible companies that then fulfill the requirements to become eligible again saw their prices shoot right back up. In some cases companies have lost, regained, and then lost their public eligibility again, generating huge back-and-forth price swings as well as confusion in the markets. Individuals who already own stock in companies that are now not allowed to trade publicly can only sell shares, not buy them. Subsequently, share prices of many such companies crashed, causing individual investors to lose money. Such a crash in share prices could offer an opportunity to buy into companies at potentially discounted prices, although that opportunity is now only open to Expert Market participants. 

Whether you are already current in your company’s financial reporting obligations or not, TransformTM can help you out. Our intuitive software makes filings easy, contact us to see how we can improve your reporting process.