New SEC White Paper: “Outcomes of Investing in OTC Stocks”


Last Friday, the SEC released a white paper covering the “Outcomes of Investing in OTC Stocks“.

This paper analyzes three aspects of over-the-counter (OTC) stocks:

1. the recent trends in the OTC stock market structure and size;

2. the documented properties of OTC stocks; and

3. the differences in returns based on investor and stock characteristics. Approximately 10,000 OTC stocks were quoted at the end of 2013 through 2015, generating a total trading volume of over $200 billion per year.

Academic studies find that OTC stocks tend to be highly illiquid; are frequent targets of alleged market manipulation; generate negative and volatile investment returns on average; and rarely grow into a large company or transition to listing on a stock exchange.

The author examines the relationship between OTC investor demographics and investment outcomes using a proprietary database of transaction-level OTC data with confidential investor information. Analysis of 1.8 million trades by over 200,000 individual investors confirms that the typical OTC investment return is severely negative. Investor outcomes worsen for OTC stocks that experience a promotional campaign or have weaker disclosure-related eligibility requirements.

Key Takeaways For MicroCap Professionals:

“While the stock of companies listed on exchanges are predominately held by institutional investors, OTC stocks are owned and traded almost exclusively by individual (“retail”) investors”

“in 2015,the trading volume of OTCBB stocks totaled just $9 billion and averaged fewer than 500 quoted
stocks. In contrast to the OTCBB, almost 10,000 stocks were quoted on OTC Markets at the end
of each year during 2013 to 2015, generating a total trading volume of more than $200 billion
per year.”

“Trading activity on OTC Markets has grown substantially in recent years, as dollar
volume traded in 2015 ($200 billion) is almost 50% higher than 2012 ($136 billion). Further
analysis reveals that the composition of OTC Markets has evolved towards more companies
quoted on the Pink Tier that has no SEC registration or reporting requirements. Currently, about
70% of quoted securities and 85% of dollar volume traded on the OTC Markets is concentrated
in the Pink Tier.”

“empirical evidence shows that OTC stocks rarely transition (“graduate”) to an exchange”

“growing size of OTC Markets suggests that investors’ demand for these stocks has grown in recent periods.”

“Investor outcomes worsen for OTC stocks that are promoted, and for companies with weaker disclosure-related eligibility requirements self-established by OTC Markets.”

“fewer than 20% of the investors in my sample use IRA accounts for OTC trades”

Check out the full white paper HERE.



Securities and Exchange Commission

OTC Stocks


OTC Markets





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