When someone refers to a company as being “publicly traded” we normally understand that to mean that it has sold shares to the public through an initial public offering (or “IPO”) and is listed on a national securities exchange (like the NYSE or Nasdaq) and makes periodic filings with the SEC. However, some smaller companies that are not listed on a national exchange and that have never filed any documents with the SEC are coming to find out that they may in fact be “publicly traded” and may not even realize it. Moreover, being classified as “publicly traded,” under certain circumstances, can impose requirements on the company to provide notice for certain corporate events and pay associated fees.

Rule 10b-17 and FINRA Rule 6490

Section 10(b) of the 1934 Securities and Exchange Act (the “Exchange Act”) is one of the anti-fraud provisions of the Exchange Act and imposes liability on persons engaged in the use of “manipulative or deceptive devices or contrivances”  in connection with the purchase or sale of a security. Pursuant to its rule making authority, the SEC has enacted a number of rules (the most well-known of which is Rule 10b-5) which regulate these manipulative and deceptive devices and contrivances in order to protect investors.

Less well-known among these rules is Rule 10b-17 which relates to untimely announcements of record dates. Specifically, Rule 10b-17 states that failure by an issuer of a class of securities publicly traded to give 10-days’ prior notice to FINRA of the establishment of record dates relating to dividends, distributions, stock splits, or rights or other subscription offerings, constitutes a “manipulative or deceptive device or contrivance” for Section 10(b) purposes.

FINRA Rule 6490 (effective as of September 27, 2010) codified the Rule 10b-17 notification requirements and requires issuers subject to the rule to pay the applicable fees in connection with their submission of the required notice. Most notably, notifications which are late can trigger a late fee of up to $5,000.

Our company is privately-held so why should we care?

At first glance, the rules above seem to only apply to companies who have securities which are publicly traded. In fact, the rule explicitly says this. However, there’s more to the story. While technically privately-held, a company’s shares may be deemed to be “publicly traded” within FINRA’s interpretation of both rules if its shares are traded over-the-counter on the OTCBB or other similar market (e.g., the OTC Markets formerly known as the “Pink Sheets”).

Unlike the Nasdaq and NYSE, the OTCBB does not have any listing requirements and therefore, any company can potentially be quoted on the OTCBB. If a broker-dealer decides to become a market-maker in a company’s common stock, it can apply to have the stock quoted on the OTCBB. The information required to commence trading is very minimal. Interestingly (and maybe surprisingly) a company’s stock can be quoted and traded on the OTCBB without its knowledge or consent. Thus, it is possible that a company could, involuntarily and unknowingly, become subject to the notification requirements of Rule 10b-17 and Rule 6490. In fact, this has happened and OTCBB-listed companies have received correspondence from FINRA requesting that they file a late notice as well as pay the $5,000 late filing fee.

What can be done to protect the company?

Aside from manually checking the OTCBB prior to establishing a record date to verify that a company’s stock is not being quoted, there is not much that can be done to reduce the risk of Rule 10b-17 and Rule 6490 violations. A company could request an exemption from the SEC pursuant to Rule 10b-17(b)(2), however, there is no guarantee that such request would be approved. Moreover, the SEC might approve an exemption but condition its approval on certain specified terms. Therefore, privately-held companies may need to actively monitor the OTCBB to minimize the risk of violating these SEC and FINRA rules.