Understanding OTC Markets


Public stock investors in the cannabis industry are largely relegated to the over-the-counter marketplace. This is much different from stocks trading on an exchange, and far less expensive for companies to access. Therefore many small, micro-capitalization companies choose to offer shares of their company through this market.

We are believers of free markets and access to efficient forms of capital; from that standpoint, we see OTC as a potential option for companies. However, regulators cannot keep up with the biggest scams, think Enron and Madoff, let alone effectively monitor the thousands of small companies. This gap in oversight creates opportunities for the ill-inclined to pounce, get rich and rob the everyday investor. We see this malfeasance all the time.

However, information is now readily available and the “everyday investor” is waking up to the snake oil salesman. We all have a duty to the markets and ourselves to take the time to become educated and to treat capital as an opportunity, not a lottery ticket. There is a tremendous benefit to self-regulatory organizations (SROs), which offer support where regulations simply can’t keep up. ARCPC is one such organization that encourages legitimate cannabis companies to adopt higher standards of investor reporting.

In our effort to educate, we would like to review the different levels of OTC Markets.


OTC Markets

For one, familiarize yourself with the OTC Markets in general, as a majority of cannabis stocks currently trade here and will continue to do so for some time. The industry and its companies are too small or young to meet exchange listing requirements and fees. Refer to the SEC for more information on listing requirements.

Investors should understand the different marketplaces: OTCQX, OTCQB and OTC Pink. These marketplaces have different levels of requirements from the most stringent (OTCQX) to the least (OTC Pink). Public companies owe their investors transparency, timeliness and audited financials. As a note, the ARCPC requires this criteria for its members.



This is the top tier of the OTC space with the most stringent guidelines. As a result, only 373 out of 9,938 OTC companies meet these standards. Two examples of OTCQX criteria include three-year average revenue of at least $6 million, or net tangible assets of $2 million. Given these guidelines, few-to-no cannabis companies currently meet this criteria. It would be great to see some reach this status at some point but more time is needed.



The QB’s requirements position it in the middle of the OTC’s regulatory landscape. There are several companies that meet the QB status. Two examples of OTCQB criteria: a company must maintain a minimum of one penny per share bid, and it must be current with all SEC filings. We are highly suspect of a company that cannot maintain at least one penny per share. There are many questions to ask such as, what is the company’s share structure? We also expect any public company to be current with all SEC filings.


OTC Pink

This is the lowest tier of the OTC market with the least stringent guidelines. There are many companies that live in this area. We express a high degree of concern with this part of the OTC markets, primarily because it lacks the fundamental qualifications owed to investors as a public company. These companies do not have audited financials, little to no corporate governance, generally late on their filings, etc.

Even OTC Markets note a high degree of concern for this part of the market: “If you find that a company does not provide high quality information, be extra careful and cautious. Investors are strongly advised to thoroughly and carefully research companies before making any investment decisions.”



The OTC Bulletin Board is an electronic quotation system that displays real-time quotes, last-sale prices and volume information for many over-the-counter securities that are not listed on a national securities exchange. Brokers who subscribe to the system can use the OTCBB to look up prices or enter quotes for OTC securities. Under the OTCBB’s eligibility rule, companies that want to have their securities quoted on the OTCBB must file current financial reports with the SEC or with their banking or insurance regulators.



We encourage investors to do their own research. Understanding the fundamental basics of the OTC markets is a good starting point and is also a great way to potentially weed out low quality companies. This is just one step of many when looking at stocks in our sector. Gone are the days of stocks flying 100% per day on a press release. Don’t get the feeling you are going to miss out by not jumping at a press release. Take some time, learn about the company, and understand its relevance in the industry and beyond.

This is an incredibly unique time in history, as regulations are changing around the world with regards to cannabis. We believe that capital is a change agent. The opportunity is in our hands to continue driving growth and evolving for the better. Abusing, manipulating or cheating investors is a step backwards. It is up to the entire investment community to avoid the “quick buck” mindset and focus on building a sustainable industry that will result in long-term capital growth.

Morgan is a Founding Partner and Managing Director of Poseidon Asset Management. He is the Chief Investor of their Cannabis Focused Fund. Morgan previously worked for a privately owned Registered Investment Adviser and earlier was at UBS Financial Services focusing on wealth management. Morgan believes in the potential of the cannabis industry and likes having an active involvement as it develops. You can follow him on Twitter @PoseidonAsset.

Related posts