Understanding Blue Sky Laws

a COMPaNy guiDE

OTC Markets operates within a unique, often complex regulatory environment. While much of the securities industry focuses solely on federal laws and regulation, the companies, broker-dealers, and investors comprising the OTC Market must understand the impact of state “Blue Sky” laws as well.

As companies seek to access retail and High Net Worth investors, Private Wealth Management and Non-Institutional growth, Blue Sky compliance is an important consideration. Solving state compliance issues start with ensuring that broker-dealers can recommend, solicit and advise investors on your company’s stock.

WHAT ARE BLUE SKy LAWS?

Blue Sky laws are state laws that regulate the offering and sale of securities within individual states. Each state has its own set of rules and regulations governing the sale and solicitation of securities as well as the distribution of research to retail investors. Blue Sky

laws were designed to help investors make informed decisions and reduce securities fraud by mandating that companies disclose accurate and current information when offering or marketing securities. The laws limit a broker’s ability to sell securities to investors if the security is not compliant with the laws in the state in which the investor resides.

WHy IS BLUE SKy COmPLIANCE ImPORTANT?

Blue Sky is important for companies as they embark on an investor relations strategy; this is especially true for small and mid-cap companies where retail investors make up a sizable portion of their investor base as well as for large cap companies that have a retail strategy. If a company is not compliant with an individual states’ securities laws, investors in those states will most likely be prohibited from buying their securities. This renders time and money spent on investor outreach wasted.

HOW DO BLUE SKy LAWS ImPACT BROKERS AND REgISTERED INvESTmENT ADvISORS?

While it is incumbent on the company to satisfy the requirements of each states’ laws, enforcement of these rules focuses on brokers and investment advisors. Blue Sky laws are part of the suitability requirements brokers must look at before distributing research or soliciting securities. If a security is not Blue Sky compliant, they will not be able to advise, trade or distribute information about the security. Additionally, while not limiting a broker’s ability to take non-solicited orders, many firms will prohibit these orders as well in order to limit potential liability and regulatory risk.

HOW DOES A COmPANy BECOmE BLUE SKy COmPLAINT?

Each state has its own laws and requirements for gaining Blue Sky compliance. In addition to the 50 states, there are also 4 jurisdictions (Guam, U.S. Virgin Islands, Puerto Rico and Samoa) that have their own set of rules. Many states provide a set of exemptions that make it easy to gain compliance, assuming you meet the requirements of the exemption, while others have their own individual rules that require a more complicated registration process. It is important for companies to look at the jurisdictions in which they want to market their security and examine how that state grants Blue Sky compliance.

WHAT TyPES OF ExEmPTIONS ExIST FOR COmPANIES?

The two most common exemptions are the Foreign Issuer exemption and the Manual Exemption. The Foreign Issuer exemption typically applies to foreign securities that are part of the FTSE All World Index. However, it should be noted that this exemption applies only to a Company’s Ordinary Shares and not their American Depositary Receipts (ADRs). The Manual Exemption is used by many states and simply grants Blue Sky status to a company so long as its most recent financial disclosure is published “in a recognized security manual.” There are however caveats, and they differ state by state. As an example, some states allow for a manual exemption, however they will not grant status based on certain financial criteria (net tangible assets, shareholder equity, etc). As financial information can change in real time, companies that are Blue Sky exempt on one day, could lose it the next based on changes in reported financials. It is important for companies to be able to monitor their status in real time to make sure they remain in good standing.

HOW DOES jOININg THE OTCqx OR OTCqB mARKETS HELP COmPANIES WITH BLUE SKy COmPLIANCE?

OTCQX and OTCQB are recognized as securities manuals by most of the states that have a securities manual exemption. This is based on the markets’ SEC recognition as established public markets and the nature of the disclosure requirements to be traded on those markets.

The OTCQX and OTCQB exemptions are based on the breadth of information that these companies make available on the www.otcmarkets.com website.

Both markets are widely used by investors, brokerdealers and regulators as a trusted source of bona fide, readily accessible issuer financial information, which distinguishes these markets from legacy manual providers and other respective online repositories of company information.

The OTCQX and OTCQB markets require a higher standard of disclosure, provide greater transparency and distribution of information, and have a recognized history of supporting regulatory enforcement efforts.

Key factors that differentiate OTCQX and OTCQB company disclosure from traditional securities manuals and online information sources:

Established and Transparent Rules: The OTCQX Rules and OTCQB Standards are posted publicly, giving investors a transparent view into exactly what is required of an OTCQX or OTCQB company. Similarly, we also publish Rule Amendments and maintain the entire history of changes to the Rules and Standards since the inception of each market.

Recognized Disclosure Standards: We publish the Reporting Standards applicable to each market, clearly outlining the type of disclosure required from each company.

Wide Distribution to Investors, Broker-Dealers and

Regulators: All OTCQX and OTCQB company information is available for free on the www.otcmarkets. com website. Our market data is distributed to over 43,000 professional and non-professional users, through data providers including Bloomberg, FactSet and Refinitiv.

Surveillance and Compliance Processes: Our Issuer Compliance team oversees each company’s initial and ongoing compliance with the OTCQX Rules and OTCQB Standards. In addition, this team designates certain securities as “Caveat Emptor” -placing a skull and crossbones icon next to the stock symbol when we become aware of a public interest concern.

37 states now recognize OTCQX and 33 recognize the OTCQB Market for meeting the manual exemption criteria. Importantly these states are not the only states where our issuers are compliant. The average OTCQX company is compliant in 43 states.

In addition to the manual exemption, recent SEC regulatory changes to Rule 15c2-11 have opened new states for international issuers on the OTCQX and OTCQB Markets, as OTC Markets now has regulatory responsibility for confirming a Company’s Foreign Private Issuer exemption in real-time. This meets requirements for certain states, for example Illinois, which does not have a manual exemption but allows for international companies in compliance with the new rule.

HOW DOES THE INDUSTRy ACCESS INFORmATION ON A COmPANy’S BLUE SKy STATUS?

OTC Markets Group feeds data directly to the broker-dealer community. Many firms add this data directly into their order entry systems. Which means if something is not Blue Sky eligible, brokers will see it flagged.

Following the acquisition of Blue Sky Data Corp, OTC Markets is now the main provider of Blue Sky secondary trading compliance data. We provide comprehensive data regarding state law compliance for over 100,000 equity and debt securities direct to broker-dealers. This additional information enhances issuer compliance, allows for greater automation from broker-dealers, and benefits investors.

IN CONCLUSION

Corporate Issuers need to think about Blue Sky compliance as critical component of their Investor Relations strategy and ensure the greatest number of investors can trade your stock.

To learn more about the Blue Sky compliance and how upgrading to OTCQX and OTCQB can help your company, reach out to andy@otcmarkets.com.

Andy Kyzyk Senior Vice President, Advisor Relations Andrew Kyzyk leads the Advisor Relations group at OTC Markets. Focused on outreach to the advisor community, Andy is dedicated to enhancing existing relationships and nurturing new contacts, all in an effort to raise awareness of OTC Markets’ core initiatives. Previously Andy ran International Business Development. Prior to OTC Markets, Andy served as Vice President/ Executive Director in the Equities division of Goldman Sachs and as Head of the American Depositary Receipts Group for the Goldman Sachs NYSE Specialist Division. Andy has an Executive MBA from the A.D. Little School of Management and a BA from NYU.

About OTC Markets Group Inc.

OTC Markets Group Inc. (OTCQX: OTCM) operates regulated markets for trading 12,000 U.S. and international securities. Our data-driven disclosure standards form the foundation of our three public markets: OTCQX® Best Market, OTCQB® Venture Market and Pink® Open Market.

Our OTC Link® Alternative Trading Systems (ATSs) provide critical market infrastructure that broker-dealers rely on to facilitate trading. Our innovative model offers companies more efficient access to the U.S. financial markets.

OTC Link ATS, OTC Link ECN and OTC Link NQB are each an SEC regulated ATS, operated by OTC Link LLC, a FINRA and SEC registered broker-dealer, member SIPC.

To learn more about how we create better informed and more efficient markets, visit www.otcmarkets.com.