Defining the OTC Market and the Pink Sheets

The OTC, or "Over-the-Counter", market is not an organized marketplace or exchange. OTC is a catchall phrase for any market in an equity security that is not listed on a US exchange or on the Nasdaq Stock Market. OTC securities are issued by companies that either choose not to list, or are unable to meet the standards for listing, on NASDAQ or a US stock exchange.

OTC equity securities can be quoted on the Pink Sheets Electronic Quotation Service, and/or, if the securities are registered with the SEC and their issuers are current in their reporting obligation, on the OTC Bulletin Board. Some OTC securities are not quoted on either the Pink Sheets or the OTC Bulletin Board; these securities are sometimes referred to as gray market or "Other-OTC" securities. Because Other-OTC securities are not quoted on any quotation service, bid and ask quotations for these securities are not available. However, FINRA rules require its members to report transactions in all OTC equity securities to Nasdaq, so last sale and volume information is available for all OTC securities, including those categorized as "Other OTC." The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for OTC securities in real time. Pink Sheets is neither a Securities and Exchange Commission (SEC) Registered Stock Exchange nor a Broker-Dealer.

Quotation of OTC securities on the Pink Sheets is subject to Rule 15c2-11. The issuer of the securities may not apply to list or quote securities on the Pink Sheets. It is a market maker that determines whether to quote an OTC security and initiates quotation by submitting a Form 211 to the FINRA. It is possible for a market maker to quote securities in the Pink Sheets without the knowledge or permission of the issuer of the securities.

Stock markets (including NASDAQ and the registered exchanges, such as NYSE or AMEX) have specific quantitative and qualitative listing and maintenance standards, which are stringently monitored and enforced. Companies listed on a stock market have reporting obligations to the market, and an on-going regulatory relationship exists between the market and its listed companies. OTC quotation services (Pink Sheets and OTCBB) facilitate quotation of unlisted securities. As such, any regulatory relationship between an OTC quotation service and the issuers may be relatively limited or non-existent. Many OTC issuers are not subject to SEC registration requirements and therefore do not make regular filings of financial information and other corporate events with the SEC. Because the Pink Sheets is not an issuer listing service and has no "listing requirements," OTC issuers are not required to provide financial information to the Pink Sheets, though some do so on a voluntary basis.

Investing in OTC Securities

The OTC market presents investment opportunities for intelligent, informed investors, but also has a high degree of risk. Many OTC issuers are small companies with limited operating histories or are economically distressed. Investments in legitimate OTC companies can often lead to the complete loss of the investment. Investors should avoid the OTC market unless they can afford a complete loss of their investment. Investors should never purchase any security without first evaluating the fundamentals of the company and carefully reviewing the financial statements, management background and other data. Investors who purchase securities based on a "hot tip" or the advice of chat room touts will often be disappointed. Unsophisticated or passive investors should completely avoid the OTC markets.

Many OTC securities are relatively illiquid, or "thinly traded," which can enhance volatility in the share price and make it difficult to sell an equity position at a later date. Investors should always be wary of any sign of fraud or manipulation. Don't believe everything that you hear or read. And if it sounds too good to be true, it probably isn't true. To learn more, visit our Investor Protection Information page.

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