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April 16, 2007

The Pink Sheets Launches New Listing Tier

OTC markets distinguish the wheat from the chaff

By Nina Mehta

For the first time in its 103-year history, the Pink Sheets now lists stocks-instead of just quoting them. Last month the Pink Sheets unveiled OTCQX, an ambitious new listing service for better-quality domestic and foreign companies quoted on the OTC Bulletin Board or Pink Sheets.

The platform launched with six companies, including Wal-Mart De Mexico. R. Cromwell Coulson, Pink Sheets' chairman and CEO, expects more than 200 companies to qualify for OTCQX listings by the end of the year. "Nasdaq wasn't built in a day," he says of his plans.

So why now? The Pink Sheets was built as a quotation service and for decades functioned as just that for the wild and woolly companies too small, too distressed or too questionable for the regulated U.S. markets that list companies' common stock. In recent years, many foreign companies listed on exchanges abroad have also been quoted on the Pinks.

But Coulson wanted more: more visibility and investor credibility for the Pinks and Bulletin Board companies traded on Pink Link, Pink Sheets' negotiation and execution platform. "Without a listing process, it's hard to separate out credible companies in a demand-driven market," Coulson says. "It's also imperative to create a listing process that's cost-efficient for smaller companies."

The Pink Sheets looked across the pond at the London Stock Exchange's successful AIM market and decided to offer "a U.S. answer to London's AIM," according to Coulson. That 12-year-old market lists more than 1,600 listed companies and is now the sixth-most-active global IPO market.

Institutional Interest

Market makers note that OTCQX listings could boost volume as they take off. "Overall this is very good for the marketplace. We could see more retail and potentially institutional trading interest," says Joe Mecane, head of broker services at UBS.

"Deeper liquidity, more readily available financial reports and more accepted listing standards-all these might make institutions more comfortable trading certain names," Mecane adds. UBS makes markets in most of the currently listed stocks.

Greater transparency through the listing process "could spark increased trading interest by dealers and investors as more detailed information becomes readily available," says Nick DeMaria, managing director for trading at Hill, Thompson, Magid & Co., a primarily over-the-counter and Nasdaq market maker.

DeMaria adds that access to this information will also put investors on a more equal footing with dealers.

Aiming Higher

As AIM did with its listings, the Pink Sheets

has outsourced the listing process for OTCQX. Instead of the Pink Sheets giving companies a yea or nay, one of the Pink Sheets' authorized DADs and PALs will perform that function. The Designated Advisers for Disclosure and Principal American Liaisons, which must be investment banks or securities attorneys, guide firms through the listing and disclosure process.

"OTCQX is a community of professional advisers on top of a community of quality market makers. As investor confidence in these companies increases, liquidity should increase," says Stephen Nash, vice president for capital markets at investment bank Merriman Curhan Ford & Co. In addition to Pinks and Bullies, he says, Merriman has heard from foreign companies looking for PALS, American Stock Exchange-listed firms, and venture-backed companies interested in listing but concerned about Sarbanes-Oxley compliance.

Mitch Truelock, a managing director at investment bank ROTH Capital Partners, an approved DAD and PAL, says ROTH expects to sign up companies that "we would want to pick up research coverage on, raise capital for and get in front of U.S. investors." Ultimately, he hopes ROTH-sponsored OTCQX-listed companies "could move on to Nasdaq."

That would suit Coulson. "I'd love the OTCQX market tiers to be a feeder market for Nasdaq," he says.