For those readers that are just joining us, be sure to have read Part 1 of our Guide to Penny Stocks as it is foundational for moving onto Part 2. Part 2 of our guide focuses on the various market tiers that companies are classified into.
Since there are marijuana stocks that trade on all three of the market tiers, we believe it is imperative that we go through each one in a detailed manor so that investors can better decipher what it all means.
3 Market Tiers
We just left off Part 1 introducing readers to the three market tiers of the OTC Markets Group (in order of listing requirements from highest to lowest):
This may seem confusing that OTC Markets Group has three tiers to their market. In reality however, this system was put in place to better help investors understand which over-the-counter companies were reporting and sharing high-quality reliable information with its investors. According to the OTC Markets Group website, these tiers are “based on the quality and quantity of information the companies make available.”
First, we will start with the OTCQX tier, which is in the OTC Markets Group’s words “the best market.”
The OTCQX market is home to a lot of major companies that one might not expect to be trading over-the-counter. For instance, American Depository Receipts or ADR’s for Adidas AG are traded on the OTCQX tier under the symbol ‘ADDYY’. Since this company trades at over $75 per share and has nothing to do with marijuana, we will name a few examples of marijuana-related companies that have penny stocks trading on the OTCQX tier.
Marijuana stocks such as Americann Inc. (OTC:ACAN), Terra Tech Corp. (OTC:TRTC), and Zoned Properties, Inc. (OTC:ZDPY) trade on the OTCQX market tier. So what sets these companies that list on the highest tier from those trading on the OTCQB or OTCPink tiers?
According to the OTC Markets Group, for a company to be eligible to list shares on OTCQX, they must first meet high financial standards. Beyond this, companies must follow best practice corporate governance and business ethics. Finally, companies found to be late in their SEC filings will not qualify as it is an OTCQX requirement to be fully in compliance with U.S. securities laws, and be current and up-to-date in their public disclosures. As an additional layer of security for investors, any prospective company must be sponsored by an approved 3rd party advisor before listing on the OTCQX. Empty corporate shells and bankrupt entities are not eligible to list on OTCQX and will not be found in this market tier.
To quote the OTC Markets Group, “the companies found on OTCQX are distinguished by the integrity of their operations and diligence with which they convey their qualifications.”
The next tier down the line is the OTCQB. This is described by OTC Markets Group as their “venture market.” This market tier is where you will find a bulk of the dual-listed foreign domiciled cannabis companies.
Canadian licensed producers such as Aurora Cannabis Inc. (OTC:ACBFF), Aphria Inc. (OTC:APHQF) and OrganiGram Holdings Inc. (OTC:OGRMF) all trade on the OTCQB market tier. In addition to the dual-listed Canadian cannabis companies, you will also find U.S. domiciled marijuana stocks such as American Cannabis Co. (OTC:AMMJ) and Axim Biotechnologies Inc. (OTC:AXIM) on the OTCQB.
So just because these companies are not listed on the OTCQX does not mean that they are bad companies. In most cases the reason for not qualifying for the OTCQX is due purely to financial requirements such as company size. This is what the OTCQB is also a great tier to find growing companies that may soon up-list as they get bigger.
In fact, much like the OTCQX tier, all companies that are listed on OTCQB must be current in their reporting and disclosures. This keeps all of the OTCQB companies accountable and transparent so that investors can properly perform due diligence on a company. Also similar to the OTCQX requirements, bankrupt companies do not qualify for the OTCQB.
One additional requirement to qualify for the OTCQB is a 1-cent bid requirement, which means that the fraudulent investor dilution schemes are kept out. This might leave you wondering where the companies go that do not qualify for OTCQX and OTCQB go.
Last but certainly not least is the OTCPink tier. A lot of confusion surrounds this tier, which spills over into further confusion about the companies that list on it. Reading up to this point may lead you to believe that all of the companies that do not qualify for the higher tiers get their shares listed on OTCPink. This is not entirely true but not entirely wrong, so we wanted to clear up any misconceptions.
First and foremost, we wanted to say that just because there are bad apples on the OTCPink tier, does not mean that all companies listed on this market are bad apples. In fact, there are many good apples on the OTCPink market, and many more companies that have since graduated from OTCPink and are now up-listed to OTCQB, OTCQX, and beyond to national exchanges like NYSE and NASDAQ.
As far as cannabis companies trading on the OTCPink, there are roughly 102 based on our most recent data. These include a handful more dual-listed Canadian cannabis companies like Canopy Growth Corp. (OTC:TWMJF) and Supreme Pharmaceuticals Inc. (OTC:SPRWF) as well as more quality U.S. domiciled marijuana stocks like Medical Marijuana Inc. (OTC:MJNA) and American Green Inc. (OTC:ERBB). So what makes these cannabis companies that list on OTCPink different from those listed on the higher tiers like OTCQX and OTCQB?
The biggest difference between OTCPink versus the other tiers is that OTCPink has no financial requirements, therefore allowing ultra-small and start-up stage companies to list. In many other cases the difference comes down to the fact that some foreign domiciled companies have limited public disclosures, and other companies that are just not providing enough information to their investors. Companies within this tier are even broken down further into categories (current information, limited information, and no information) based on how much information they are making available to investors.
These companies considered to be delinquent or opaque in their operations can still list on OTCPink because it is the loosest of all three tiers in terms of listing requirements. For better or for worse, companies like this are allowed to list on OTCPink, while investors are cautioned by OTC Markets Group to do thorough due diligence and research before making an investment in an OTCPink listed company.
Many are probably wondering by now, if investing in some penny stocks and over-the-counter traded companies take so much research and possess so much potential risk, why is it all worth it?
First we wanted to remind readers that every investment has both upside and downside risk…not just OTC and penny stocks. Second, they are worth further exploration because of the upside opportunities afforded by the price volatility we briefly mentioned in Part 1 (and will go into further in Part 3). Not every investment has the price volatility to provide such massive potential gains over a shortened period of time quite the same way that many OTC and penny stocks can.
Be sure to stay tuned, as we will soon be releasing Part 3 of our guide to penny stocks focusing on the massive potential of penny stocks and how you as an investor can use them to your advantage. Also, don’t forget to connect with The Daily Marijuana Observer via social media using the links to the right of this article.