Understanding OTCQX Marketplace

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Why Join OTCQX Marketplace? …

Why Join OTCQX Marketplace?
OTCQX International allows publicly traded foreign companies to efficiently and economically distribute disclosure to U.S. investors and increase trading in their securities through the U.S. broker-dealers.

International companies may qualify for an exemption to burdensome U.S. securities regulations
under an exemption found in The Securities Exchange Act - Rule 12g3-2(b).

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  • 1. Understanding Foreign Company Exemptions With OTCQX InternationalWhy Join OTCQX Marketplace?OTCQX International allows publicly traded foreign companies to efficiently and economicallydistribute disclosure to U.S. investors and increase trading in their securities through the U.S.broker-dealers.International companies may qualify for an exemption to burdensome U.S. securities regulationsunder an exemption found in The Securities Exchange Act - Rule 12g3-2(b). Once exempt, theinternational company need not file periodic reports under the Securities Exchange Act. Furtherexemptions apply to the Sarbanes-Oxley Act and certain governance requirements of TheNasdaq Stock Market and the New York Stock Exchange.International companies are allowed these exemptions because the Securities ExchangeCommission understands these international companies are regulated under foreign jurisdictions.The SEC considers it significant that OTCQX International is an “inter-dealer quotation system”rather than a “national securities exchange” for U.S. regulatory purposes.An issuer typically can establish an OTCQX International quotation in 12 weeks or less if theyalready have an over-the-counter sponsored American Depository Receipt program (“ADR”).To be quoted on OTCQX International, a foreign issuer must have a minimum US$ 2 million intotal assets at the end of its most recent annual or quarterly fiscal period and also must satisfyone of the following minimums during its most recent fiscal year: (1) US$ 2 million in revenues; (2) US$ 1 million in net tangible assets; (3) US$ 500,000 in net income; or (4) US$ 5 million in global market capitalization.Qualifying Foreign Stock Exchange ListingA foreign issuer must have been listed on one of more than 60 Qualifying Foreign StockExchange for at least the preceding 40 days to qualify for OTCQX International.A Rule 12g3-2(b) exemption issuer must publish electronically certain information in English thatit makes public to shareholders under home country requirements. The issuer must also post thisinformation for the preceding 24 months within 90 days after their application was submitted toOTCQX International.Appointment of a “PAL”OTCQX International Issuers must have a sponsor known as a Principal American Liaison(“PAL”). William Cavalier has completed this process and is pre-qualified to act as a PAL forOTCQX International issuers.The PAL assists the issuer in the following manner:  determines whether the issuer meets OTCQX International eligibility requirements  assists the issuer in completing the application process  the PAL provides a letter to OTC Markets Group confirming that the issuer is in compliance with the requirements of Rule 12g3-2(b) and other applicable OTCQX International requirements.  On an ongoing basis, the PAL provides advice concerning compliance with Rule 12g3- 2(b) and the OTCQX rules. William Cavalier - Attorney at Law wsc@williamcavalier.com / 469-767-8643 2012 All Rights Reserved
  • 2. Understanding Foreign Company Exemptions With OTCQX International  The PAL conducts an annual review to confirm that the issuer is in compliance with these requirements and to provide a confirming letter to the OTC Markets Group.DTC Eligible SecurityOTCQX International requires securities must be eligible for deposit with the Depository TrustCompany (“DTC”) which acts as a clearinghouse for settling securities trades.The shares of most foreign issuers trade in the United States via DTC-eligible AmericanDepository Receipts (“ADR”). ADRs are issued by a depositary bank.Proprietary Priced QuotationsThe issuer must have proprietary priced quotations of its securities published by a U.S. marketmaker in OTC Link, which is an electronic inter-dealer quotation system operated by OTCMarkets Group that provides price quotations for securities issued by OTCQX issuers.Inclusion in a Recognized Securities ManualThe issuer must provide disclosure on an ongoing basis in a securities manual published byStandard and Poor’s or Mergent (formerly known as Moody’s). By providing disclosure in arecognized securities manual, secondary trading is automatically permitted in up to 38 U.S.states. Exemptions in other states usually can be obtained through an application process whichis not required for establishing or maintaining an OTCQX International quotation.Satisfying the Rule 12g3-2(b) ExemptionIn order to satisfy the Rule 12g3-2(b) exemption, the issuer must meet four requirements:  It must be a “foreign private issuer,” which is defined as a non-governmental issuer that is organized under the laws of a country other than the United States, unless: (1) U.S. residents own more than 50 percent of its outstanding voting securities; and (2) either (a) the majority of its executive officers or directors are U.S. citizens or residents or (b) more than 50 percent of its assets are located in the United States or c) its business is administered principally in the United States.  The issuer is not a Securities Exchange Act registrant.  The issuer maintains a listing of its securities on one or more non-U.S. exchanges that, either singly or together, constitute the primary trading market for its securities.Although there is no “bright-line” test for determining when information is material, informationgenerally is considered to be material to an investment decision if there is a substantial likelihoodthat a reasonable investor would consider it important in decidingwhether to purchase or sell a security.Rule 12g3-2(b) issuers still may be held liable for fraudulent statements contained in their Rule12g3-2(b) disclosure under Section 10(b) of the Securities Exchange Act and Rule 10b-5thereunder. William Cavalier - Attorney at Law wsc@williamcavalier.com / 469-767-8643 2012 All Rights Reserved
  • 3. Understanding Foreign Company Exemptions With OTCQX InternationalMaintaining an OTCQX International QuotationLike other quotation platforms, OTCQX International requires issuers to satisfy various ongoingquantitative and qualitative maintenance requirements.An OTCQX International issuer must continue to satisfy the financial standards, proprietary pricedquotation and Qualifying Foreign Stock Exchange requirementsapplicable to an initial quotation. It also must comply with home country securities laws, as well asany applicable U.S. federal and state securities laws, including Rule 12g3-2(b), and must post its Rule 12g3-2(b) information through the OTC Disclosure and NewsService.The quoted issuer also must continue to retain the services of a PAL, and, on an annual basis, itmust provide a letter to the PAL confirming that it continues to satisfy the requirements of theapplicable OTCQX International tier, that it is in compliance with Rule 12g3-2(b) and that it hasposted its Rule 12g3-2(b) information through the OTC Disclosure and News Service. On anannual basis, the PAL also must furnish acompliance letter relating to the issuer to OTC Markets Group.There is an annual fee of US$ 15,000 to maintain an OTCQX International quotation.Other Common Topics of Interest For Foreign Issuers Considering US QuotationRaising Capital in the United StatesRule 12g3-2(b) issuers often wish to raise capital in the United States, typically as a tranche in aprimarily non-U.S. offering. A Rule 12g3-2(b) issuer can privately raise capital in the UnitedStates without triggering the transaction registration requirements of the Securities Act or theongoing reporting requirements of the Securities Exchange Act. In some cases, the U.S. trancheis structured as an exempt Rule 144A offering, in which investors are limited to qualifiedinstitutional buyers, which generally are institutional investors with US$ 100 million or more inassets under management. The Rule 144A exemption requires the issuer to make available uponrequest to investors and prospective purchasers specified reasonably current information aboutthe issuer. The information published under Rule 12g3-2(b) satisfies this requirement.There are other U.S. private placement exemptions that can be used while still maintaining a Rule12g3-2(b) exemption. In addition, a Rule 12g3-2(b) issuer always has the flexibility to conduct apublic offering in the United States, although that would trigger the registration and reportingrequirements of the Securities Act and the SecuritiesExchange Act.Terminating an OTCQX QuotationAn OTCQX International company may withdraw its securities from OTCQX quotation at anytime, upon 24 hours written notice to OTC Markets Group or downgrade to alower-tier quotation. William Cavalier - Attorney at Law wsc@williamcavalier.com / 469-767-8643 2012 All Rights Reserved
  • 4. Understanding Foreign Company Exemptions With OTCQX InternationalExposure to U.S. Securities Fraud ClaimsAlthough Rule 12g3-2(b) issuers are not subject to all of the liability provisions of the federalsecurities laws because they are not Securities Exchange Act registrants, they are subject toSection 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder,which prohibit the use of manipulative and deceptive practices in securities transactions. Foreignprivate issuers establishing a U.S. listing or quotation historically have been concerned aboutpotential exposure to fraud claims brought under the U.S. federal securities laws by both U.S. andforeign plaintiffs, irrespective of the location of the transactions in the securities.In an important 2010 U.S. Supreme Court case that overturned almost 40 years of judicialinterpretations, the court held that Section 10(b) applied only to transactions in securities listed ona domestic stock exchange or domestic transactions in other securities. The effect of this casewas to scale back the extraterritorial application of the anti-fraud provisions of the federalsecurities laws.In early 2012, the Second Circuit Court of Appeals, an important U.S. court for federal securitieslaw jurisprudence, addressed what constitutes a domestic transaction in securities not listed on aU.S. exchange. Consistent with the earlier Supreme Court case, the Court of Appeals concludedthat a domestic transaction requires either that the parties become irrevocably bound to completethe transaction in the United States or that title to the securities at issue be transferred in theUnited States.…William Cavalier - ServicesWilliam Cavalier has been approved by the OTC Markets Group to act as an AttorneyDesignated Advisor for Disclosure/Principal American Liaison (DAD/PAL) for OTCQXcompanies. Mr. Cavalier is also a licensed investment banker with Independent InvestmentBankers in Austin, Texas, As an investment banker to middle market and publiccompanies Mr. Cavalier raises capital for natural resource projects through private jointventures and Rule 144A offerings.DisclaimerThis information has been prepared by EJ Grace LLC for general informational purposesonly. It is by no means complete and does not constitute legal advice. This generalinformation is presented without any representation or warranty as to its accuracy,completeness or timeliness. William Cavalier - Attorney at Law wsc@williamcavalier.com / 469-767-8643 2012 All Rights Reserved