The Division of Economic and Risk Analysis (DERA) of the Securities and Exchange Commission published a study recently that reviews, among other things, the performance of and the returns of investing in OTC stocks. The study notes that there have been many studies and there is a wealth of data relating to the performance of NYSE- and Nasdaq-listed securities. These securities tend to be held principally by institutional investors. By contrast, there has been less analysis undertaken relating to OTC stocks, which tend to be held principally by retail investors. While the data and analysis included in the study is on its own quite interesting, we find it particularly relevant in light of the many calls for the establishment of a venture exchange. The Financial CHOICE Act, for example, includes among its many provisions, a section that relates to the establishment of venture exchanges. The analysis also is relevant in evaluating whether the OTC markets provide a useful market for the securities of companies that undertake Regulation A offerings.

The study confirms that OTC stocks are less liquid than those listed on national securities exchanges. The study also confirms a correlation between the availability of information about listed companies and their liquidity—with greater liquidity seen for those companies as to which public disclosures are available. The study seems to indicate that the returns of OTC stocks are typically negative and that often these stocks are subject to alleged market manipulation efforts. The study notes that “up-listing,” or moving from the OTC markets to a national securities exchange is quite uncommon, with fewer than 9% of companies transitioning during the study period (2001 to 2010) and less than 1% from the Pink Sheets (now OTC Markets) to a national securities exchange.

The study is available here: https://www.sec.gov/dera/staff-papers/white-papers/White_OutcomesOTCinvesting.pdf.