OTC Markets Group Presentation at Heritage Foundation, 5/4/15

OTC MARKETS GROUP

May 2015

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Our Mission:

To create better informed and more efficient financial marketplaces

Who We Are:

OTC Markets Group Inc. (OTCQX: OTCM) operates the OTCQX® Best, OTCQB® Venture and OTC Pink® Open Marketplaces for 10,000 U.S. and global securities

Our OTC Link® ATS is an SEC Registered/FINRA Member Alternative Trading System that directly links a diverse network of broker-dealers providing liquidity and trade execution services

OTC Markets Group Inc.

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Global Leader in Exchange Graduations

In the past five years, more than 400 companies have graduated from our marketplaces to a U.S. exchange listing

Market 2014 Graduates to Main Boards

OTCQX, OTCQB and OTC Pink - US 83TSX Venture - Canada 22LSE AIM Market - UK 5

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Small Companies Need Liquidity

“On average, the smallest capitalization stocks have much less displayed size at all levels of the order book when compared to larger capitalization stocks.” 

Cumulative Average Order Book by Market Capitalization

“A Characterization of Market Quality for Small Capitalization US Equities,” Charles Colliver, SEC, September 2014 http://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf

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Individuals Own Small Companies

Percentage Ownership of Exchange-Listed Companies

Market Cap (millions)

Median Institutional Ownership

Median Individual Ownership

$0-50 10.9% 89.1%

$51-100 19.9% 80.1%

$101-250 31.3% 68.7%

$251-500 43.7% 56.3%

$501-1000 62.4% 37.6%

$1001+ 83.5% 16.5%

“The smaller the company, the lower the level of ownership by institutional investors.”

Senate Testimony on “Venture Exchanges and Small-Cap Companies”Stephen Luparello, Director, Division of Trading and Markets, March 10, 2015http://www.sec.gov/news/testimony/testimony-venture-exchanges.html#_ftn2

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Individuals Are Well Served By Online Brokers

“The Best Online Brokers of 2014,” Barron’s, March 15, 2014 http://online.barrons.com/articles/SB50001424053111904628504579433251867361162

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Market Makers Provide Liquidity

Retail Investor Orders ♥ Market Maker Trade Quality

“Like malls losing shoppers to nearby Costcos, exchanges lost out to market makers in the competition for retail market orders.”  

“The Little Guy Wins! - Forget Flash Boys - small investors actually get good stock prices from brokers like Fidelity and Market Makers like Citadel,” Barron's, March 2, 2015http://online.barrons.com/articles/SB51367578116875004693704580480163105061670

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Alternatives Expand Opportunities

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Alternatives Provide Innovation

http://www.sec.gov/news/testimony/testimony-venture-exchanges.html#_ftn2

SEC Registered Alternative Trading Systems (ATSs) are a natural platform for innovation in creating markets for SME and venture company shares  

• ATSs are regulated by FINRA and registered with the SEC

• ATS licenses and registration are more efficient to operate and allow for greater innovation than exchange licenses

• In Europe, the LSE AIM Market, NASDAQ First North and other venture and SME markets operate as Multilateral Trading Facilities (MTFs) - Europe’s version of the ATS

• U.S. ATSs are creating innovation in trading public and private venture companies

Broker-dealers, ATSs and exchanges should compete equally to provide secondary trading for small companies so that consumers can choose the most appropriate model for their needs.  The solution should be on a national level, and should not be limited to an exchange model.

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Efficient Markets are Interstate Commerce

http://www.sec.gov/news/testimony/testimony-venture-exchanges.html#_ftn2

We need a federally regulated disclosure regime that provides exemptions from state Blue Sky laws

• Blue Sky Preemption for Reg A+ Tier 2 Offerings DONE• Blue Sky Preemption for all SEC registered offerings to Qualified Purchasers• Blue Sky Preemption for Secondary Trading for:

• Secondary transactions in SEC registered and reporting companies, including Tier 2 of Regulation A+

• Secondary transactions in securities through an SEC registered broker-dealer, if adequate current information is available to investors

• Electronic broker-dealers that are SEC registered and FINRA regulated

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Broker-Dealer Ecosystem

http://www.sec.gov/news/testimony/testimony-venture-exchanges.html#_ftn2

We need small brokers, investment bankers & market makers to support small companies in the capital markets

• Support electronic brokers and market makers to provide efficient executions and liquidity to investors

• Update Reg SHO so Bona Fide Market Makers can provide two-sided liquidity• Improve the on-ramp for OTC Trading by allowing investment bankers to be paid to

file Form 211 with FINRA to take companies public• Expand Margin Eligibility

• Small company securities meeting certain qualitative thresholds of a “Ready Market” should be margin eligible

• The Federal Reserve formerly published an OTC Margin List, but ceased the practice when the NASDAQ stock market became a national securities exchange. The Fed should begin publishing the OTC Margin List to help support venture companies.

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Unleash Venture Companies

Enable Small / Growth / Entrepreneurial & Early Stage companies to efficiently access capital by removing restrictions and increasing transparency to attract self-directed individual investors & smaller institutions

• Finish JOBS Act Crowdfunding Rules• Establish a path to provide adequate current information for compliance with Rule 144

and exemption from state Blue Sky• Modernize the “Penny Stock” Definition - the definition of a Penny Stock under

Securities Act Rule 3a51-1 should be updated to account for:• SEC registered capital raises, including Regulation A offerings over $5 million, and

• The effect of bona fide research and development costs on Net Tangible Assets for

firms in R&D heavy industries, such as biotechnology• Improve Promoter Disclosure For Investors:

• Revise Securities Act Section 17(b) to require disclosure of and contact information for the promoter and the person(s) or entity paying the consideration

• In the case where the promoter or paying party is an entity, the required disclosure must include the name(s) of the person(s) controlling such entity

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A Venture Market Wants

• A federally regulated disclosure regime that provides national exemptions from state Blue Sky laws

• To let user choice define market structure - Broker Trades / Intermittent Auctions / Market Maker Networks / Centralized Exchange Matching Engines

• Inclusion of all stock trading business models - Broker-Dealer / ATS / Exchange

• A system of Transparency / Compliance / Governance that grows with a company

• Information and standards for active stock pickers, not passive index investors

• Suitability and Point of Sale Disclosure to handle Risky & Speculative securities

• The removal of unnecessary cost & complexity

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Steps to Investor Liquidity & Growth

Broker-Dealers 

Alternative Trading Systems

Exchanges

Companies can improve Trading, Transparency and Trust with each step up in Compliance, Complexity and Cost