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OTCBB
(Over the Counter Bulletin Board))
www.otcbb.com

 

INTRODUCTION
There are two trading systems that are separate from the National Market: the Over the Counter Bulletin Board (OTCBB) and the National Quotation Service Bureau (NQS), commonly known as the Pink Sheets. Together, the OTCBB and Pink Sheets make up the OTC market in the United States. The OTCBB and the Pink Sheets are quotation mediums, rather than stock exchanges. OTC securities are traded by a community of market makers who enter quotes and trade reports through a sophisticated, closed computer network. In the last ten years, there has been a dramatic increase in trading using the OTCBB as a critical “stepping stone” to create capital structure and maximize the companies market cap value creating improved business metrics that are worthy of an outstanding NASDAQ or AMEX listing. In this paper, the significance of trading on the OTC Bulletin Board, its potential to move companies into greater exchange possibilities and the fluidity of this process will be explored.

Some Chinese Companies and the OTCBB
(for a full list please contact us)

CHINA AGRITECH INC (CAGC.OB), CHINA BAK BATTERY (CBBT.OB), CHINA DIGITAL COMM (OTC BB:CHID.OB), CHINA DIGITAL WIRELS (OTC BB:CHDW.OB), China Finance, Inc. (OTC BB: CHFI), CHINA MEDIA1 CORP (OTC BB:CMDA.OB), CHINA MOBILITY SOLUT (CHMS.OB), CHINA NATURAL GAS (CHNG.OB), CHINA TECH GLOBAL CP (CTGLF.OB), Dark Dynamite Inc. (DKDY.OB), FORLINK SOFTWARE (OTC BB:FRLK.OB), HENDRX CORP (OTC BB:HDRX.OB), HQ SUSTAINABLE MARTM (OTC BB:HQSM.OB), HUIFENG BIO-PHARM TH (OTC BB:HFGB.OB), INTERMOST CORP (OTC BB:IMOT.OB), MINGHUA GRP INTL HLD (MGHA.OB), PINGCHUAN PHARMACEUT (PGCN.OB), PUDA COAL NEW (OTC BB:PUDC.OB), SKYSTAR BIO PHARMA (OTC BB:SKBI.OB), SUNRISE REAL EST DEV(SRRE.OB), SUNWIN INTL NEUTRACL (OTC BB:SUWN.OB), TEDA TRAVEL GROUP (OTC BB:TTVL.OB), WINTECH DIGITAL SYS (WDSP.OB), XINHUA CHINA LTD (XHUA.OB)

The OTCBB:
• provides access to more than 3,300 securities;
• includes more than 230 participating Market Makers;
• electronically transmits real-time quote, price, and volume information in domestic securities, foreign securities and ADRs; and
• displays indications of interest and prior-day trading activity in DPPs.




WHAT IS THE OTCBB?

The OTC Bulletin Board (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices and volume information for approximately 3,800 companies. The OTCBB has grown from a daily volume of 29MM shares with $100MM market volume since its introduction in 1990 to more than 40MM shares and $400MM market volume today. Currently the 3,800 companies are traded by nearly 300 market makers, quoting an average of 39,000 positions daily. All Market Makers subscribing to NASDAQ Level 3 (more info later) service and in compliance with SEC Rule 15c2 -11 are eligible to “voluntarily” participate in the OTCBB and may enter or exit at will. A further breakdown shows 475 banks, 28 insurance companies and 3,265 companies trading; although 25% of the OTC companies have financial SIC codes.

The largest company on the OTCBB is Publix Super Markets with a $9B market cap and $15B in revenues. Heroes, Inc., as of November 2001, was the smallest, with a $302k market cap and revenues of $6.5m. Some 2,000 OTCBB companies have an average market cap of $1m or less. OTCBB data is now fed into more than 450,000 Level I terminals. Since 1993, all trades have been reported in real-time, and since January 1999, every company trading on the OTCBB must be a reporting entity. On Feb. 8, 2001, the SEC approved a proposal prohibiting member firms from trading ahead of customer limit orders. The new issues market in the U. S. is the largest in the world. As such, it has various sectors that appeal to many companies unsuccessful in attracting funds from other markets and/or sources. This is especially true of firms in high-technology industries. For example, a high-technology company in Asia often prefers to issue securities in the U.S. public markets rather than in its domestic market. There is a venue that even companies in relatively early stages of development can issue securities to the public: the Over-The-Counter Bulletin Board. Biotechnology firms and firms specializing in computers, communications, and related areas have actively participated in this market in the past few years.

Now, the attractiveness of the OTCBB market is causing momentum to build among development stage companies in other industries. Comparing the Bulletin Board with its larger NASDAQ counterparts, one can see the inherent magnetism. Although the OTCBB like NASDAQ does have real-time electronic quotes for domestic issues and does have requirements for issuers to remain listed, it is unlike the NASDAQ in the following important ways. It does not:
• impose listing standards therefore it has no• minimum quantitative listing requirements;
• assess listing and maintenance fees to issuers;
• maintain relationships with quoted issuers; and
• have the same obligations for Market Makers.•

Because of these material distinctions, the OTCBB is an alternative to venture capital or the traditional underwritten initial public offering of a private company.


HISTORICAL POSITION OF THE OTCBB

As good a fit as the OTCBB is for development stage companies, many issuers wonder why the technique is not more widely used. There are several reasons, chief among which are:

1. The OTCBB’s historic position among other trading platforms.
2. The pervading misconception within the corporate finance community.
3. The media focuses on sound bite size sensationalism.

The OTCBB “step-child” image has led to a lack of understanding among issuers and some investors. An important reason why this venue is not more often utilized is simply a lack of education among executives about the process and its benefits. The pervading viewpoint among executives is probably that the OTC market is simply composed of the Bulletin Board and Pink Sheets, the latter still burdened with a less than sterling reputation as an obscure corner of the securities market. This however, is not true.

It’s important to realize what the over-the-counter market really is and just how prevalent it is in the mainstream investment community. The financial definition of over -the-counter securities refers to securities, which are not traded on an exchange. For such securities , broker/dealers negotiate directly with one another over computer networks and by phone, and the NASD monitors their activities.


The OTC Environment
The Bulletin Board is but a small part of the OTC environment; there are several components of the OTC widely used by institutions as well as individuals:

• Pink Sheets: A daily listing of bid and ask prices for over-the-counter stocks not included in the daily NASDAQ over-the-counter listings, published by the National Quotation Bureau and used by brokerages.
• Forex: An over-the-counter market where buyers and sellers conduct foreign exchange transactions.
• Intrastate Offering: An over-the-counter securities offering limited to investors residing within one specific state.
• Third Market: Over-the-counter trading of listed securities among institutional investors and broker/dealers for their own accounts, rather than as agents for investors.
• Corporate Bonds: High yield and corporate bonds have always traded on OTC although there is a push to automate the process coming from inside as well as outside of the industry.

The over-the-counter equity market actually consists of four tiers. The first three tiers -- the NASDAQ National Market, the NASDAQ Small Cap Market and the OTC Bulletin Board -- have automated quotation. They also have execution systems that are owned and operated by the NASDAQ Stock Market, Inc. NASDAQ, in turn, is owned by the NASD, a self -regulated body under the supervision of the SEC. If it sounds incestuous, that’s because it is.

The fourth tier of the over-the-counter equities market has no automated distribution of quotes, although one is in the making. Trading information for companies that trade at the fourth level can be found only in a publication known as the Pink Sheets, giving rise to the name “the Pink Sheet market.” The origins of the Pink Sheets go back to 1904, when the National Quotation Bureau began as a paper-based, inter-dealer quotation service linking competing market makers in OTC securities across the country. Since that time, the Pink Sheets and the Yellow Sheets (another version of same) have been a central resource for trading information in non-NASDAQ OTC stocks and bonds. Recently, Pink Sheets has been transformed to utilize the power of the Internet and the advances in web based technology to increase the timeliness of information. In September of 1999, Pink Sheets introduced the Electronic Quotation Service, an Internet based, real-time quotation service for OTC equities and bonds for market makers and brokers but the Pink Sheets remain outside the view of the NASDAQ primarily because they are owned and operated by Pink Sheets LLC, a privately owned company.


Opportunities for Smaller Companies
The opportunity that the Bulletin Board offers smaller companies is much maligned or even ignored by the media in favor of more “exciting” market activity. For example the traditional underwritten initial public offering (IPO) market has hypnotized media and masses alike due in large part to valuation hype and trading volatility. For example, IPOs have historically enjoyed first -day gains averaging around 16%. However, from April through June of 1999, 33% of IPOs posed first-day gains of more that 100%. During the first three months of 2000, the percentage of companies with 100% gains raced to over 40% (the average first-day gain was a little over 112%) and fully 16% of deals exceeded 200% gains on day one! These spectacular first day advances attracted an enormous amount of media attention. Unfortunately for the issuing companies, this type of “branding event” is arguably the most expensive marketing a company could ever endure. However, the high initial valuation doesn’often last, a quick look at the tape now reveals that many of these “high flyers are either no longer in existence or have floundered leaving their management teams and founders with virtually worthless equity and sometime stratospheric tax bills related to options exercise strategies gone awry.

Market Volatility
A second factor that attracts headlines is market volatility. The media loves a sound bite and it’s hard to ignore events like the more than $300 billion in wealth that evaporated during the week of April 14 due to the big board nosedive. In addition, this downturn stimulated extensive margin calls that supplied even more fodder for reporters. Although first-day runs and wide swings contribute to the notoriety of select companies, it can also produce the potential for unhappy shareholders. OTCBB companies do not have the market cap to attract the kind of attention that companies trading on exchanges do, which can be advantageous during periods of extreme volatility prevalent in today’s market environment. Although listing on the OTCBB hasn’t been a popular strategy in the past, it probably w ill be more broadly utilized in the near future because of the changing dynamics of the securities business and the advent of the BBXSM (more about that in a later section).

Chinese Companies that Moved from OTCBB

Company Name

Entry Ticker

Entry Exchange

Current Ticker

Current Exchange

Up or Down

Harbin Electric, Inc.

HRBN.OB

OTCBB

HRBN

NGM

Up

HQ Sustainable Maritime Industries, Inc

HQSM.OB

OTCBB

HQS

Amex

Up

Yucheng Technologies Ltd.

YCHTF.OB

OTCBB

YTEC

NASDAQ

Up

Synutra International, Inc.

SYUT.OB

OTCBB

SYUT

NASDAQ

Up

Shengda Tech, Inc.

SGAT.OB

OTCBB

SDTH

NASDAQ

Up

China BAK Battery, Inc.

CBBT.OB

OTCBB

CBAK

NASDAQ

Up

China Fire & Security Group, Inc.

CFSG.OB

OTCBB

CFSG

NASDAQ

Up

China Medicine Corp.

CHME.PK

Pink Sheets

CHME.OB

OTCBB

Up

China Titanium & Chemical Corp.

CTPJA.PK

Pink Sheets

CTPJA.OB

OTCBB

Up

American Oriental Bioengineering, Inc.

AOBO.OB

OTCBB

AOB

NYSE

Up

China Automotive Systems, Inc.

CAAS.OB

OTCBB

CAAS

NASDAQ

Up

AXM Pharma, Inc.

AXMA.OB

OTCBB

AXJ

AMEX

Up

American Dairy Inc.

ADIY.OB

OTCBB

ADY

PCX:

Up

Tiens Biotech Group

TBGU.OB

OTCBB

TBGU

AMEX

Up

Sinovac Biotech Limited

SNVBF.OB

OTCBB

SVA

AMEX

Up

China Energy Savings Technology Inc.

CESV.OB

OTCBB

CESV

NASDAQ

Up

Comtech Group Inc.

COGO.OB

OTCBB

COGO

NASDAQ

Up

Telestone Technologies Corporation

TESN.OB

OTCBB

TST

AMEX

Up

Intac International Inc.

INTN.OB

OTCBB

INTN

NASDAQ

Up


 

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