Over-the-Counter (OTC) Securities Disclosure

Effective Date: August 2, 2021

What are Over-the-Counter Securities?

Over-the-counter (OTC) securities are securities that are not listed on a major exchange in the United States, such as the NYSE or NASDAQ, and are instead traded via a broker-dealer network. Generally, smaller companies may not meet the requirements to be listed on a formal exchange trade OTC because they do not trade enough shares, their shares do not trade above a minimum price, or they may not want to pay the listing fees of major exchanges.

You should consider the following points prior to engaging in trading in OTC securities: 

How do OTC Securities Trade?

  • OTC Bulletin Board. The OTCBB is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many OTC equity securities that are not listed on a national securities exchange. Under the OTCBB’s eligibility rule, companies that want to have their securities quoted on the OTCBB must seek sponsorship by a market maker firm that is a registered broker-dealer as well as file current financial reports with the SEC or with their banking or insurance regulator. The OTCBB operated by the Financial Industry Regulatory Authority (FINRA). The OTCBB is not part of The Nasdaq Stock Market. 

  • OTC Link LLC OTC Link is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in exchange-listed securities, OTC equity securities, foreign equity securities and certain corporate debt securities. In addition to publishing quotes, OTC Link provides, among other things, broker-dealer subscribers the ability to send and receive trade messages, allowing them to negotiate trades. OTC Link is registered with the SEC as a broker-dealer and as an Alternative Trading System, and is a member of FINRA.

     

    OTC Link organizes OTC securities into three marketplaces based, in part, on the quality and quantity of available information. 

OTCQB

Includes the securities of companies that are current in their reporting to the SEC or a U.S. bank, thrift or insurance regulator;

OTCQX

Reserved for the securities of companies that are current in their reporting to the SEC or a U.S. bank, thrift or insurance regulator, or, in the case of companies that are not required to report to the SEC, meet and remain current in their reporting obligations to OTC Link under its proprietary Alternative Reporting Standard; meet certain eligibility requirements; have audited financial statements; and partner with a third-party securities attorney or investment bank that reviews disclosure and acts as a professional advisor


OTC Pink

An open marketplace for a broad spectrum of equity securities, with no financial standards or reporting requirements.


Grey Market

All other securities that are traded over-the-counter are on the Grey Market. Grey Market securities are not quoted by broker-dealers due to a lack of investor interest, lack of financial information, or lack of regulatory compliance.

 

Eligible Securities, Order Types & Other Conditions

  • Limit Orders Only. Only limit orders are accepted in OTC Securities. DriveWealth may impose maximum trade size limitations in OTC transactions, which may be further limited by your Introducing Firm.

  • Whole Shares Only. At this time, DriveWealth only supports whole share orders in OTC Securities. Notional-based and fractional orders are not supported for buy transactions.

  • Eligible Securities. DriveWealth supports a limited number of OTC securities. If a security becomes delisted and falls to the OTC markets, DriveWealth will continue to support liquidations in the security but may refuse or limit the ability to increase your existing position. OTC security availability may vary based on your Introducing Firm. 

  • Market Hours Only. OTC securities are not available for Extended Hours Trading.

  • No Transfers. ACATs, free deliveries and other transfers associated with OTC securities are not permitted. 

  • Additional Fees May Apply. There may be additional steps and fees when trading OTC securities because trades must be made through market makers who carry an inventory of securities to facilitate trading.

Important Considerations for OTC Securities

Trading in OTC securities may not be suitable for all investors. All investments involve risk, but OTC securities are among the riskiest and are not generally appropriate for individuals with a low risk tolerance. Potential risks may include, but are not limited to: lack of publicly available information, no minimum listing standards, lower liquidity, higher volatility, and business risk.

  • Lack of Publicly Available Information: Most large public companies file reports with the SEC that any investor can get for free from the SEC's website. Professional stock analysts regularly research and write about larger public companies, and it's easy to find their stock prices on the internet or in newspapers and other publications. In contrast, information about OTC security companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices in the market will be based on full and complete information about the company.

  • No Minimum Listing Standards.  Companies that trade their stocks on exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies on the OTCBB or OTC Link generally do not have to meet any minimum standards, although companies quoted in OTC Link’s OTCQX marketplace are subject to initial and ongoing requirements and companies quoted in the OTCQB marketplace must be SEC reporting companies.

  • Lower Liquidity. Generally, the more demand for a security, the greater the liquidity for that security.  Liquidity makes it easier for investors to buy or sell securities and they are better able to receive a competitive price for stock bought or sold.  OTC securities may be illiquid and infrequently traded, which may mean that they are more difficult to sell and price accurately. DriveWealth does not guarantee that there will be any market in an OTC security.

  • Higher Volatility. OTC securities may experience greater price fluctuation and wider spreads due to lack of liquidity and other factors. An order in an OTC security may not execute or may execute at a substantially different price.

  • Business Risk. Many OTC security companies are new and have no proven track record. Some of these companies have no assets, operations, or revenues. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to OTC Securities involves the low volumes of trades. Because many OTC Securities trade in low volumes, any size of trade can have a large percentage impact on the price of the stock. 

Additional information about the risks associated with OTC securities is available from the SEC at: Microcap Stocks: A Guide for Investors.