On May 10, 2005, the National Association of Securities Dealers, Inc., now known as the Financial Industry Regulatory Authority (“FINRA”), through its subsidiary, Nasdaq Stock Market, Inc. (“Nasdaq” ), filed with the Securities and Exchange Commission (the “Commission”) has proposed a rule change to limit the eligibility for listing on the OTCBB of the securities of an issuer that is repeatedly late in filing periodic reports required. This is known as the “three strikes rule.”
On November 16, 2005, the Commission approved the change to Rule 6530 (the “Eligibility Rule”).
The rule change makes OTCBB issuers that are in default three times in a 24-month period, and OTCBB issuers that are removed for non-filing twice in a 24-month period, ineligible for OTCBB listing. for a period of one year following his removal. Reports filed within the extension period allowed by SEC Rule 12b-25 are considered timely filed.
Historically, NASDAQ has reported that approximately 80% of issuers achieve compliance within the grace period, but 20% of issuers fail to comply and are eventually delisted.
Once delisted, the issuer cannot relist on the OTCBB for a period of at least one year and must file at least one Form 10-K and three Form 10-Qs. If at any time before re-listing, the issuer is late in filing a periodic report, the one-year period restarts.
If a submitter falls behind with more than one submission in a row, the sequence of late submissions will only count as a “miss” until such time as the submitter is back on track with their submissions. Because of this, there is some strategy on how to get back on track once you have become delinquent on a filing. For example, if an issuer has missed a filing and an “e” has been added to their stock symbol, there will be a temptation to file the delinquent filing as soon as possible to remove the “e”. However, if the next filing is also likely to be delayed, the issuer could consider waiting and making both filings at the same time in order to incur a single “default” under this new rule amendment. This strategy must be weighed against the possibility that, after the “e” period, the issuer will need to file a new Form 211 to return to the OTCBB from Pink Sheets.
NASDAQ implemented the proposed rule regarding filings for periods ending on or after October 1, 2005. Delinquent filings prior to that period do not count toward the new rule.