How to go public on the OTC market

To go public on the OTC market, a company raises capital privately from people who know the founder, has its financial statements audited by a PCAOB-registered firm, files a registration statement with the SEC and clears review, gets a transfer agent and DTC eligibility, has a market maker file Form 211 so the shares can be quoted, and applies to an OTC Markets tier, usually OTCQB. It takes about ten months and $300,000 to $500,000 in third-party costs, with no investment bank and no shell. This is the direct listing route we have used for 11 of our 17 listings, and it is the one we recommend to most private companies.

Joel Arberman, Meraki Partners. Based on 17 companies taken public: 11 by direct listing, 4 by reverse merger and 2 by IPO.

Why the OTC market?

Because it is the market a growing private company can actually reach. There is no revenue, profit or market cap test to be quoted on OTC Markets. OTCQB, the tier we aim for, asks for audited financials, current reporting, 50 shareholders holding at least 100 shares each and a 10% public float. Nasdaq and NYSE American now require $15 million of unrestricted public float and 300 to 400 public shareholders on day one, which almost no company without an underwritten offering has. Our view is that any company with the capital in place can go public on OTC, and then uplist when it is ready and qualified. See how big a company needs to be to go public.

The nine steps

1. Decide, plan and assemble the team. Settle why you want to be public and which of the four levers you will pull: capital, talent, opportunities or acquisitions. Engage a going-public adviser, a securities lawyer and a PCAOB-registered auditor. We do this in a 30-day planning program that ends with a written plan and a 90-day action list. About 3 to 5 weeks.
2. Get the company in shape. Convert to a C corporation if you are an LLC or S corporation, clean up the cap table, document related-party arrangements, and plan a board with independent directors. See can an LLC go public.
3. Raise capital privately. Typically $500,000 to $2 million from about 50 people who know you, in a private placement under Regulation D. This pays for going public, the first year of being public and growth, and the investors become your first shareholders of record, which OTCQB and your future float depend on. The raise runs alongside steps 4 and 5. See how to prepare your capital raise and what a private placement memorandum is.
4. Prepare the books and complete the audit. About six weeks of accounting preparation for an organized company, then about eight weeks for a PCAOB audit covering the last two fiscal years, or since inception if the company is younger. See do I need audited financials and choosing a PCAOB auditor.
5. File the registration statement. For most direct listings this is a Form S-1 registering the resale of the shares your private placement investors bought, which is what lets them trade and creates the public float. Some companies use a Form 10 to register the class of stock instead. The SEC reviews, sends comments, and the company amends; two or three rounds over a few months is normal. See S-1 versus Form 10.
6. Set up the transfer agent, CUSIP and DTC eligibility. The transfer agent keeps the shareholder register and issues shares. A CUSIP number identifies the security, and DTC eligibility lets shares move between brokerage accounts electronically. Without it, shares cannot trade in any practical sense. These run in parallel with the SEC review.
7. Have a market maker file Form 211. Once the registration is effective, a FINRA member market maker files Form 211 under SEC Rule 15c2-11 to begin quoting the stock. FINRA reviews the filing and clears it, usually within a few weeks. The company cannot file this itself. See how Form 211 and Rule 15c2-11 work.
8. Apply to an OTC Markets tier. Apply to OTCQB, confirm the shareholder and float tests, and go through OTC Markets' review. A company that skips this trades on the basic OTCID tier, which investors and brokers treat differently. See the requirements to list on OTCQB.
9. First trade, then report. The first trade is often at the private placement price. From then on the company files annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, holds board and shareholder meetings, and executes the plan. Trading volume builds as the shareholder base grows and results come in. See the first 100 days after listing.

How long does it take to go public on OTC?

About ten months from the first planning work to the first trade, with the audit and the SEC review as the long poles. A company with clean books and an organized founder can be faster; a company reconstructing its records will be slower. See how long it takes to go public.

What does it cost?

Third-party costs of $300,000 to $500,000: securities counsel and the registration statement, the audit and accounting preparation, SEC filing fees, the transfer agent, the market maker's Form 211 work, the OTC Markets application and the adviser's fees. Staying public costs an early-stage OTC company about $300,000 to $500,000 a year. The private placement is sized to cover both plus growth. See how much a direct listing costs.

Which OTC tier should you aim for?

What about Form 10 instead of an S-1?

A Form 10 registers a class of securities under the Exchange Act and makes the company a reporting company without registering any shares for sale. It is faster in some situations but does not by itself create tradable shares, so the shares still need to become free-trading under Rule 144 or another exemption. For a company whose float comes from a recent private placement, the resale S-1 is usually the cleaner path. Your securities lawyer will make the call based on your shareholder base and timing.

Common mistakes

• Treating the first trade as the goal. The listing is the start of a multi-year plan, not the end of a project.
• Raising too little. If the private placement does not cover the first year of being public, the company arrives on the market short of cash and starts issuing stock at the worst time.
• Buying a shell to save time. The shell's old shareholders keep part of your company and its old liabilities come with it. See publicly traded shell companies.
• Letting the financial statements go stale. Audited numbers in a registration statement have a shelf life, so the audit and the filing have to be sequenced.
• Starting the raise before the corporation and the cap table are clean, then re-papering every investor.
• Hiring promoters to create volume. It creates regulatory problems instead. See compliance traps for newly public founders.

Can you uplist later?

Yes, and that is the plan. A company that has traded on OTCQB, reported on time and grown into an exchange's financial, shareholder and governance standards applies to uplist to Nasdaq Capital Market or NYSE American. For most of our clients that is a few years after listing. See what it takes to uplist from OTC to Nasdaq.

Related questions

• How do you take a company public?
• How does a direct listing work?
• What are the requirements to list on OTCQB?
• Should I list on the OTC market or in Canada?
• How hard is it to take a company public?

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